How Nigeria’s Bid To Boost Oil Royalties Could Backfire

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What Happened

After years of unsuccessful efforts to change oil production regulation, Nigeria’s National Assembly has finally passed a bill to overhaul Abuja’s relationship with the globe’s major oil companies. On Oct. 29, the parliament voted to amend the Deep Offshore and Inland Basin Production Sharing Contract Act of 1999 with the aim of earning Nigeria a bigger share of the revenue from the country’s abundant natural resources. The bill is now headed for President Muhammadu Buhari, who is expected to sign it into law.
Why It Matters

With the legislation, Nigeria is hoping to swell its coffers after years of complaining that international oil companies have failed to pay their fair share of taxes. It’s estimated that since oil prices began to rise after 1999, Abuja has missed out on between $16 billion and $29 billion in revenue because it failed to update the terms of the production-sharing contract, the Nigeria Extractive Industries Transparency Initiative has noted.

Under the terms of the new bill, Nigeria will have the ability to modify and review the fiscal terms of production-sharing agreements, as well as receive a straight, 10 percent royalty on any deep-water offshore projects. The bill also stipulates an escalating royalty as oil prices rise: Abuja will receive 2.5 percent royalties from projects in the country if the price of a barrel of oil is between $20 and $60, 4 percent between $60 and $100 per barrel, 8 percent between $100 and $150 per barrel and a whopping 10 percent if the price exceeds $150 per barrel. What’s more, Nigeria will have the right to review the terms of the contracts every five years.

The stricter regulations could discourage deep-water investments by as much as $50 billion and decrease potential offshore production by almost 30 percent over the next four years.

Industry representatives, however, have sounded a note of caution. The organization representing many of the international oil companies in the country, the Oil Producers Trade Section, has estimated that the stricter regulations could discourage deep-water investments by as much as $50 billion and decrease potential offshore production by almost 30 percent over the next four years. Beyond that, the clause granting Abuja the ability to conduct reviews every five years will also inject uncertainty into the sector.
Background

International oil companies have long contended with regulatory uncertainty in Nigeria, as the country has been considering an overhaul to the 1999 act for more than a decade. The 1999 law encompassed the country’s inland basins and offshore production, most located around the Niger Delta, at a depth of more than 200 meters. At present, such areas produce close to 800,000 barrels per day, equaling approximately 40 percent of Nigeria’s total production. But just as Abuja hopes the new bill will get it a better bang for its buck from those riches, the opposite may occur.

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