Tax reform, policy uncertainties to cause oil drop in Nigeria, WoodMac warns

A new report by a research and consultancy group, Wood Mackenzie, has disclosed that Nigeria’s crucial energy sector could experience a 35% decline in oil output, as international oil companies delay their investment in the nation’s oilfield due to changes in her economic climate.

Wood Mackenzie, also known as WoodMac, explained that the 35% decline would occur over 10 years and added that the three deep offshore fields would experience a delay as companies would prefer to invest their money in regions with better and clearer terms, than Nigeria.

The three oil projects, which are Shell’s Bonga Southwest Aparo, Total’s Preowei, and ExxonMobil’s Owowo, are projected to start by 2027, 2025 and 2029, respectively, although, Reuter reported that Total’s Preowei would likely receive a final investment decision by 2020 and 2021, as it is currently under study. The deepwater fields hold an estimated 1.5 billion barrels of oil and could add 300,000 bpd of oil.

“Nigeria is going to enter quite a steep decline in production,” the principal analyst of sub-Saharan Africa upstream for Wood Mackenzie, Lennert Koch, said.

He added that, “In order to keep its revenue up…it needs to develop additional fields.” In spite of the fact that offshore oil projects are expensive and time-consuming, to maintain output, as fields naturally decline, Nigeria needs continuous investment. Currently, Nigeria has about 780,000 bpd.

Some of the economic factors discouraging the companies include tax reforms, which have resulted in an increase in the cost of operations, part of which is the increase in the VAT rate from 5% to 7.5%.

Another factor is the royalty laws and uncertainty over oil reform. The government plans to pass a bill, which will overhaul the oil sector this year, so companies are unsure if terms of development will change.

[READ MORE: Oil drops below $80, contradicting initial forecasts)

Also, it was reported that under the current economy in Nigeria and with oil under $60 per barrel, the three projects are “not economically viable”. However, at peak production, the three deep offshore fields could generate $2.7 billion a year for the Nigerian government.

On why they are looking at other regions, Koch said, “What makes some of the other regions more attractive is just higher returns (from) lower costs and less regulatory uncertainty.”

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