The Petroleum Industry Bill is now law – is Nigeria open for business?

President Buhari yesterday (August 16) signed into law the much-delayed Petroleum Industry Bill (PIB), now called the Petroleum Industry Act (PIA).

We consider this a watershed moment for Nigeria’s oil and gas sector. While questions remain over some of the detail, we believe this legislation is positive and can breathe new life into an upstream sector that had been trading on past glories for too long. 

The industry has waited over 13 years for this day, since the first draft of the bill in 2008. The uncertainties this wait created, along with industry opposition to early versions, adversely impacted investment. In our March report, we highlighted concerns that the punitive terms in the previous version would harm the deepwater sector. But initial analysis of the revised terms show they are competitive for shallow water and deepwater projects. The PIA also starts a long overdue effort to transform state oil company NNPC, plus the regulatory agencies. 

Nigeria’s offshore production outlook: 2021-2030 
So what are the implications for Nigeria’s offshore industry? The improved deepwater fiscal terms should allow projects like Shell’s Bonga Southwest and TotalEnergies’ Preowei to progress. But NNPC’s transformation into a commercial entity could be a stumbling block for developing Joint Venture (JV) related projects. We don’t expect IOCs to take FID until there is line of sight on how NNPC will clear its outstanding liabilities with them. 

Uncertainties over these JV projects will slow the pace of the government’s ‘decade of gas’ initiative. NNPC’s transition will also be a sticking point for new entrants looking to acquire JV assets that are up for grabs, such as Shell’s onshore and shallow water assets.  

While there are still plenty of above-ground challenges in Nigeria, we believe the PIA has surprised the industry to the upside. With a shrinking pool of companies active offshore and growing scrutiny around carbon emissions, it is a positive move and indicates that the government has acknowledged the need to compete in a changing global industry. 

Transforming NNPC into a commercial entity 
We consider the conversion of NNPC into a commercial entity to be the key governance highlight (see appendix for other changes). The NOC will be expected to operate as a standalone entity, independent of government funding. Ultimately, the new-look NNPC Ltd. will be expected to voluntarily enter incorporated joint venture (IJV) partnerships with IOCs. 
These IJVs are meant to replicate the hugely successful Nigeria LNG model, which is run as a bona fide commercial entity. But a key difference is that NLNG started with a blank sheet of paper. NNPC has outstanding liabilities with its joint venture partners running into billions of dollars. We therefore don’t expect any of the IOCs to be quick to commit to new projects or consider setting up IJVs until there is line of sight on how this debt will be paid. 

Will regulatory reform streamline or cause new bottlenecks? 
The PIA is intended to overhaul and improve the efficiency and oversight functions of government agencies. This will involve the establishment of two separate upstream and midstream/downstream regulatory agencies. But operators understandably worry that the creation of new entities may increase the bureaucratic burden and therefore lead times. Project cycle time for deepwater projects in Nigeria are already amongst the highest globally. 

Benchmarking lead times for standalone deepwater projects 
Shell and TotalEnergies will press ahead with deepwater projects, but JV projects will be on hold There are two deepwater projects we see progressing in the short-term, with the potential to add around 200,000 bbl/d to the country’s production by the end of the decade. However, joint ventures between IOCs and NNPC will likely remain on hold until the NOC is seen as being strong enough to support itself financially and lays out a timeline on how to pay its outstanding liabilities.

Bonga Southwest and Preowei will progress: Shell and partners have locked in commercial terms for the Bonga SW field. Although close to 80% of the reserves are located on OML 118, the structure straddles OMLs 132 and 140 (where it is called Aparo). The licenses for OMLs 132 and 140 are due to expire in 2025 and 2027 respectively. It is unclear if the partners on the two blocks have started license extensions.

TotalEnergies is expected to extend the license for its OML 130 and develop Preowei as a tie-back to the Egina FPSO. With the PIB now passed, we expect the company to conclude the contract negotiations and take FID on the project. 

Greenfield Joint Venture projects will be on hold: We don’t expect any progress on new JV projects until the industry gets clarity on how outstanding liabilities will be treated, as NNPC transitions into a commercial entity. Furthermore, with the likes of Shell and ExxonMobil looking to scale back their JV operations, the option of transitioning into IJVs will likely not be pursued by them. 

With the JVs accounting for a significant proportion of gas production, we believe this will impact government ambitions to increase domestic gas supply, despite incentives. For example, operators developing integrated gas projects for the domestic market can offset midstream gas liability from upstream for corporate income tax purposes. In addition, royalty rates for gas supply into the domestic market is set at 2.5% vs. 5% for export projects. Despite these incentives, we don’t expect to movement on big-ticket JV gas projects in the short-term. 

Asides from the uncertainty around NNPC, supplying offshore gas into the domestic market without addressing the infrastructure challenge will not be feasible in the short term. For example, monetising the gas resources on OML 52 (Tubu), a JV between Amni and NNPC, is key to unlocking value. With stringent domestic supply obligation requirements and minimal incentives for gas to export projects, we expect operators like Amni to push for waivers to supply part of its gas through the offshore gas gathering system (OGGS) to NLNG. 

The corporate landscape is set for a shake-up 
The Majors are high-grading their businesses globally, and like every country, Nigeria is under scrutiny. For example, Shell plans to offload the onshore and shallow-water parts of its portfolio. The clarity and improved fiscal terms provided by the PIB can provide an impetus for deal-making. As an additional incentive, acquisition costs are eligible for an annual allowance at the rate of 20%, incentivising deal-making. 

The new deepwater terms have improved the economics of deepwater fields like OMLs 131/135 (Bolia/Chota), OML 140 (Nsiko and Aparo), OML 145 (Uge) and OML 154 (Owowo), which had been deemed non-core in the portfolios of the Majors. But despite the improved economics, we do not expect to see near-term development moves – in fact, we believe the likes of TotalEnergies, Shell and ExxonMobil will look to divest stakes, and this could present an opportunity for the African focused independents looking to enter Nigeria’s offshore space. 

Undeveloped reserves – shallow water and deepwater fields 
M&A across the JVs will be slower burn, particularly offshore. The key ones to watch are the ExxonMobil and Shell JVs. The revised shallow water terms have improved the economics, making the assets more attractive and could draw the attention of mature field specialists like Trident and Perenco. Nigerian independents like Seplat will also be in the frame. 

But we expect new entrants will want to see how NNPC’s transition unfolds before pulling the trigger on JV-related deals. The carbon emissions of the mature assets will also be a stumbling block, particularly for listed independents who are increasingly under pressure to disclose carbon reduction targets*. 

*Welligence will be launching its greenhouse gas emissions tool in the coming weeks, which will allow clients to benchmark, analyse and forecast emissions at an asset/portfolio level.

Is exploration set for a comeback? 
Nigeria needs to reinvigorate exploration, and with the PIB’s improved fiscal terms, a licensing round could be in the cards. The country’s last official round was in 2007 and few material discoveries have been made in recent years. The offshore Niger Delta still holds strong exploration potential, but the pool of pure exploration-focused E&Ps is shrinking. 

With most of the Majors dialling back from the country, we anticipate limited interest from this peer group, with TotalEnergies the most likely participant. However, globally, there are just a few independents remaining with an exploration function, and they will remain wary of jurisdictions with above-ground challenges. 

To fully exploit Nigeria’s exploration potential, the PIA states that 30% of NNPC Ltd’s profit oil and gas will be transferred into a frontier exploration account. We believe the target basins will be inland like Gongola, Benue, Bida and Sokoto. However, we also believe NNPC would be better off partnering with specialist explorers and focusing on the proven Niger Delta Basin. 

Welligence will be putting out a follow-up report with a deep-dive into the quantitative impact of the fiscal changes on offshore projects. 

Thank you to our partners Welligence for supply this article. Read more about them here.

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