Expert Opinion

Nigeria LNG, ‘Sell or No-Sale?’

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The economics of the JV assets would be greatly enhanced if the state ownership were reduced well below the statutory 55%, to between 10-20% depending on the specific economic conditions of individual fields. The optimal operation of these fields would provide requisite revenue through other means including Petroleum Profit Tax, Equity Oil (without cash calls based on 10-20% carry and cost recovery models), Royalty, etc. Any strategy that optimizes production from Nigerian fields would generate more revenues for the FG, better so if the NNPC is removed from the equation.

Amongst Nigeria’s deep-water blocks, there are a few with oil and gas discoveries but are considered non-commercial for development under current economic terms. In a couple of these fields, a reduction in the state’s statutory interest of 50% held by the NNPC, has the potential to tip the economics of scale towards commercial viability even under current oil prices.

Developing just two (2) of these fields would add approximately one hundred and fifty thousand barrels per day (150K bpd) of secure Crude oil production within the next 4-5 years.

The Capital and operating expenditure required for the development of two of these fields exceed $10billion. While the NNPC owns 50% of these undeveloped blocks, it is unable to contribute its share of 50% of the required investment for development. Developing these fields require the investors or operators to fund 100% of the investment up to first oil, and depend on long-term production cost recovery fiscal-terms, invariably condemning these fields to non-commercial status.

In the cases mentioned above in deep-water assets, the NNPC owns 50% of the blocks that do not generate income or economic activity. Thus the economic benefit to the state is 0. In these blocks, NNPC divestment, applied along with strategic incentives could lead to commercial viability. Development of these fields would generate billions of dollars in economic activity for local businesses, providing a multiplier effect and increase taxable income from service providers. As long as the assets are operational, there are several avenues for revenues to flow into government coffers from these fields; these include Petroleum Tax, Equity Oil, and Corporate Income tax for all associated service providers to business activities deriving from the operations of the fields.

As for state interests in Pipeline Infrastructure, one wonders why the state retains these assets. Selling these assets would free the state of scarce resources expended in maintaining them. To optimize the benefit from relinquishing these assets through sales, legislation would be required to make oil and gas companies account for production at the wellhead rather than at export terminals.

If oil and gas companies were made accountable to pay Petroleum Tax, Equity Oil and Royalties on the volume of oil produced at the wellhead, companies would be more responsible towards eliminating pipeline breach and its accompanying oil theft. With the availability of modern pipeline technology, it is curious that Nigeria still grapples with crude oil theft from pipelines, a lot of which is intertwined and explained away as part of the actions of vandals and militant attacks.

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