PETROLEUM INDUSTRY REFORM IN NIGERIA: SIMULATION ...

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
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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
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USAEE 2010, Calgary, Canada

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.
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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
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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.
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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).
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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
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Fiscal Instruments for Deepwater PSC:
Nigeria Taxation Examples
Pre‐Reform for 1000m Water Depth
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Proposed Fiscal Instruments for
Nigeria Taxation Examples
All Deepwater PSC in Nigeria
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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
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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 ‐ $19 19 + 0.10/10cents
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Modeling Reform Legislation Impact
on Deepwater Economics—DCF Approach
Where:
‣NCF t = After‐tax net cash flow in year t,
‣GRR t = Gross revenue in year t,
‣ROY t = Total royalty paid in year t,
‣CPX t = Total capital expenditures in year t,
‣OPX t = Total operating expenditures in year t,
‣BNS t = Bonus paid in year t,
‣PO/G t = Government profit oil in year t,
‣TAX t = Total taxes paid in year t,
‣OTH t = Other costs or taxes paid in year t.
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Modeling Deepwater Economics
—DCF Modeling Output Indicators
HGT:
PV =
=
k
∑
t = 1
(1
NCF
+ D
)
t
t
− 1
IRR (f, F) = { D | PV ( f ,F) = 0}
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Production Sharing Contract Model
Stochastic Variable Assumptions
Instruments
Real Oil Price,
2010$/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
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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, $/Bbl
80
80
30
30
Min (7, 0.3*P)
P=real oil price
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Standalone Deepwater Project :
100 MMB Deterministic Model Results
Metric Systems Measures (Nominal$)
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%
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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%
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Sensitivity of Nominal IRR vs. HGT
to Stochastic Variables‐‐Standalone
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Sensitivity of Nominal IRR vs. HGT
to Decision Variables‐‐Standalone
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Sensitivity of Nominal IRR vs. HGT
to Stochastic Variables‐‐Standalone
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Sensitivity of Nominal IRR vs. HGT
to Decision Variables‐‐Standalone
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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
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Internal Rate of Return:
Fifty Percent Certainty—Standalone
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Government Take Statistic
Fifty Percent Certainty Range—Standalone
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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.
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USAEE 2010, Calgary, Canada
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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
OOILEDARE 26