PETROLEUM INDUSTRY REFORM IN NIGERIA: SIMULATION ANALYSIS OF ITS IMPACT ON DEEPWATER E&P ECONOMICS OMOWUNMI O. ILEDARE, PH.D. PROFESSOR OF PETROLEUM ECONOMICS & POLICY RESEARCH DIRECTOR, ENERGY INFORMATION & DATA DIVISION BATON ROUGE, LA 70803, USA 29 th USAEE/IAEE NORTH AMERICAN CONFERENCE ON ENERGY & THE ENVIRONMENT: Conventional and Unconventional Solutions 14 16 OCT 2010, CALGARY CANADA 1
Presentation Outline Nigeria s petroleum economy overview Nigeria petroleum industry reform objectives Fiscal & non fiscal reform legislative instruments Diagnosis of fiscal legislative instruments Impact deepwater project economics Concluding remarks and questions 2
Petroleum Industry in Nigeria Nigeria ranks among the top 10 nations in proved oil and natural gas reserves worldwide. The largest oil producer in Africa; 7 th in OPEC; but fifth largest economy in OPEC. As of January 1, 2010, the estimated crude oil and natural gas reserves are 37.2 billion barrels and 185.4 trillion cubic feet (TCF). The target to expand its proven oil reserves to 40.0 billion barrels and increase its production capacity to 4 million barrels per day by 2010 is impracticable with less than three months to go. 3
Reform Legislation in Nigeria Describes the legislative, tax, contractual and fiscal elements under which petroleum operations are conducted in a petroleum province, region on nation. Defines the relationship between federal government of Nigeria and the oil and gas companies (IOC, NOC, & DOC). Explains how costs are to be recovered and profits are to be shared between firms, the host governments, and the host communities 4
Broad Objectives of the Reform Provides petroleum industry operational strategies and guidelines. Proffers solutions to petroleum fiscal problems and community issues affecting oil and gas operations in the upstream, midstream, and downstream sectors of the Nigerian petroleum economy. Aligns the oil and gas industry in Nigeria with international best practices in order to facilitate good governance and transparency in the industry. Assigns separate functional responsibilities to institutional structures in order to manage the commercial and operational aspects of the oil and gas sector as well as the policy making and regulatory aspects effectively. 5
Broad Objectives of the Ongoing Reform Revamps the petroleum revenue system in terms of revenue collection, revenue enhancement, and wealth creation and restructures the taxation system for the oil and gas industry in Nigeria. Repositions the national oil company to a level comparable to the status of other prominent national oil corporations (NOCs) Defines a new joint venture structure to address the funding problems of industry projects with a new indsutry structure termed incorporated joint ventures (IJV). 6
Fiscal System Instruments Nigeria Sliding Royalty Scales Royalty B4 Reform Legislation Water Depth 0 100 100 200 201 500 501 800 801 1000m >1000m Onshore: 20% Swamp/ Shallow water 18.5% Shelf PSC 16.67% Deep Offshore PSC 12% 8% 4% 0 7 7
Fiscal Instruments for Deepwater PSC: Nigeria Taxation Examples Pre Reform for 1000m Water Depth 8 8
Proposed Fiscal Instruments for Nigeria Taxation Examples All Deepwater PSC in Nigeria 9 9
Proposed Fiscal Instruments Sliding Royalty Scales by Volume in the PIB Sliding Scale Royalty by Volume OIL Natural Gas Area/Royalty 5% 12.5% 25% 5% 12.5% Onshore 0 2M b/d 2 5Mb/d >5Mb/d 0 100MMcf/d >100 MMcf/d Shallow Water 0 5M b/d 5 20Mb/d >20Mb/d 0 200 MMcf/d >200 MMcf/d Deep Water 0 50M b/d 50 100Mb/d >100Mb/d 0 500MMcf/d >500 MMcf/d 10 12
Proposed Example Fiscal of Instruments Nigeria Sliding Royalty Scales by Value in the PIB Sliding Royalty Scales by Value Sliding Scale Royalty by Value Oil Price Per Bbl Royalty % Gas Price per MMBtu Royalty % $0 $70 0 $0 $2 0 $70 $100 0.4 per $ $2 $7 0.20/10cents $100 $140 12 + 0.2 /$ $7 $13 10 + 0.15/10cents $140 $190 20 + 0.1/$ $13 $19 19 + 0.10/10cents 11 11
Modeling Reform Legislation Impact on Deepwater Economics DCF Approach Where: NCF t = After tax net cash flow in year t, GRR t = Gross revenue in year t, ROY t = Total royalty paid in year t, CPX t = Total capital expenditures in year t, OPX t = Total operating expenditures in year t, BNS t = Bonus paid in year t, PO/G t = Government profit oil in year t, TAX t = Total taxes paid in year t, OTH t = Other costs or taxes paid in year t. 12
Modeling Deepwater Economics DCF Modeling Output Indicators HGT: PV = = k t = 1 (1 NCF + D ) t t 1 IRR (f, F) = { D PV ( f,f) = 0} 13
Production Sharing Contract Model Stochastic Variable Assumptions Instruments Real Oil Price, 2010$/Bbl OPEX, 2010$/Bbl Actual OPEX Abroad, % Actual CAPEX Abroad, % Capacity, Bbl/Day Inflation,% Distribution Assumptions Triangular (Min, Mode, Max) Triangular (Min, Mode, Max) Triangular (Min, Mode, Max) Triangular (Min, Mode, Max) Lognormal (Mode, Mean, Std) Triangular (Min, Mode, Max) Distribution Parameters 60.00 75.00 90.00 5.00 6.00 7.50 0 50 100 0 80 100 40,000 50,000 500 1.0 2.0 3.0 14
Production Sharing Contract Model Decision Variable Base Assumptions Decision Instruments Cost Recovery Limit, % Distribution Parameters Profit Oil Split/G,% 20 80 Eligible Foreign CAPEX, % Eligible Foreign OPEX, % Hydrocarbon Tax CITA Allowance Cap, $/Bbl 80 80 30 30 Min (7, 0.3*P) P=real oil price 15
Standalone Deepwater Project : 100 MMB Deterministic Model Results Metric Systems Measures (Nominal$) Host Govt. BIT $MM Contractor Host Govt. AIT BIT $MM $ MM Contractor AIT $MM Net Present Value @12.5% $ 751.46 $ 777.36 $ 1,065.83 $ 293.40 Internal Rate of Return 40.0% 27.5% Growth Rate of Return 16.3% 14.3% Undiscounted Take Statistics 45.1% 54.9% 72.4% 27.6% Discounted Take Statistics 49.2% 50.8% 78.4% 21.6% Metric Systems Measures (Real 2010$) Host Govt. BIT $MM Contractor Host Govt. AIT BIT $MM $ MM Contractor AIT $MM Net Present Value @12.5% $ 573.94 $ 597.06 $ 815.93 $ 220.95 Internal Rate of Return 37.6% 25.7% Growth Rate of Return 16.1% 14.1% Undiscounted Take Statistics 44.4% 55.6% 71.7% 28.3% Discounted Take Statistics 49.0% 51.0% 78.7% 21.3% 16
Incremental Deepwater Project: 100 MMB Deterministic Model Results Metric Systems Measures (Nominal$) Host Govt. BIT $MM Contractor Host Govt. AIT BIT $MM $ MM Contractor AIT $MM Net Present Value @12.5% $ 722.95 $ 805.87 $ 1,014.13 $ 345.09 Internal Rate of Return 44.9% 38.7% Growth Rate of Return 16.4% 14.5% Undiscounted Take Statistics 44.8% 55.2% 72.2% 27.8% Discounted Take Statistics 47.3% 52.7% 74.6% 25.4% Metric Systems Measures (Real 2010$) Host Govt. BIT $MM Contractor Host Govt. AIT BIT $MM $ MM Contractor AIT $MM Net Present Value @12.5% $ 547.20 $ 623.80 $ 768.10 $ 268.79 Internal Rate of Return 42.5% 36.7% Growth Rate of Return 16.2% 14.4% Undiscounted Take Statistics 44.0% 56.0% 71.4% 28.6% Discounted Take Statistics 46.7% 53.3% 74.1% 25.9% 17
Sensitivity of Nominal IRR vs. HGT to Stochastic Variables Standalone 18
Sensitivity of Nominal IRR vs. HGT to Decision Variables Standalone 19
Sensitivity of Nominal IRR vs. HGT to Stochastic Variables Standalone 20
Sensitivity of Nominal IRR vs. HGT to Decision Variables Standalone 21
Deepwater 100 MMB PSC Project: Simulation Model Output Standalone Economics System Output Measures Mean Minimum Most Likely Maximum NPV @12.5%, $Million 290.80 135.05 299.29 419.83 IRR, Percent 27.3 19.8 27.6 32.0 HGT, Percent 78.6 75.9 78.6 83.4 22
Internal Rate of Return: Fifty Percent Certainty Standalone 23
Government Take Statistic Fifty Percent Certainty Range Standalone 24
Conclusions Ongoing petroleum industry reform legislation in Nigeria has fiscal instruments and terms that enhance government access to gross revenue and still makes E&P operations profitable in Nigeria. There is a fifty percent likelihood that the legislation will give 78 79 percent of total profit from a 100 MMB deepwater oil project to the host government. Justification for this high government take is being tied to high hydrocarbon prospectivity in Nigeria, but undue fiscal burdens may also disenfranchise investors as evident in the sensitivity of IRR to selected decision variables. If contractors spend low proportion of its expenditures abroad, project profitability, ceteris paribus, tend to increase Allowing all CAPEX to be expensed in NHT and CITA calculations increases project profitability as expected. Deep water profitability is higher for existing operators in deepwater than new comers because CITA and NHT are allowed to be consolidated rather than being ringfenced. 25
PETROLEUM INDUSTRY REFORM IN NIGERIA: A SIMULATION ANALYSIS OF ITS IMPACT ON DEEPWATER E&P ECONOMICS OMOWUNMI O. ILEDARE, PH.D. PROFESSOR OF PETROLEUM ECONOMICS & POLICY RESEARCH DIRECTOR, ENERGY INFORMATION & DATA DIVISION BATON ROUGE, LA 70803, USA 29 th USAEE/IAEE NORTH AMERICAN CONFERENCE ON ENERGY & THE ENVIRONMENT: Conventional and Unconventional Solutions 14 16 OCT 2010, CALGARY CANADA 26