A string of Western oil groups have sent out a warning to the Nigerian government over their plans to make radical alterations to the contracts that they hold regarding the nation’s deepwater fields.
The Nigerian National Petroleum Corporation, the publicly owned body, has stated that they want to start cleaning up the way that the oil industry functions in the country. It has expressed its intent to renegotiate the current agreements over production sharing in Nigeria.
Among the companies that will be affected are Chevron, ExxonMobil, Eni and Royal Dutch Shell. The move has caused many western industry executives to express their concerns about what the intricacies of the restructuring will be. Many of the officials asked stated that they had no idea what the terms of the renegotiations will be. One anonymous figure warned the NNPC not to “mess with the fiscal terms”.
An analyst at First Energy Capital, Stephane Foucaud, stated:
“If the PSCs [production-sharing contracts] start changing, that might seriously make people rethink their investment exposure to Nigeria. Companies don’t like uncertainty. In the context of the majors cutting capital spending, there are many more opportunities for capital deployment.”
It is still unknown what the scale of these changes will be and the news comes soon after Muhammadu Buhari won the presidential election. The NNPC have stated that they want to reassess all of the contracts that affect production sharing in the country, with the aim being to increase the government revenue after a global fall in oil prices.
Many are expecting the large oil companies to resist any alterations their existing contracts, the majority of which have been unchanged since the 1990s. There are eight new projects that are due to be put into place by 2020 and some are now fearing that these will be pushed back as a result.
Another industry official stated:
“With oil prices being about half what they were a year ago, there is less capital to go around. I think Nigeria is focused in the right place. Let’s make sure we have a stable environment, so when we do have a project that is competitive, those funds go to those projects.”
The head of Shell Nigeria, Osagie Okunbor, has claimed that neither the international oil groups or the NNPC wish for these renegotiations “to have an adverse impact on the investment in the country”. He went on to say: We’ll have a look at several clauses and then take a position”.
Shell have now delayed their decision on whether or not to make a multibillion dollar investment in the Bonga South West project due to the collapse in global oil prices. It has also stated that there will only be two investments that will be approved this year.
Market analysts see it as unlikely that Nigeria will be able to negotiate a deal with a higher government revenue in the current climate. This is because many large oil and gas groups are cutting their costs in attempts to improve their cash flow and protect the value of their dividends.
A solicitor with Nigerian law firm ACAS-Law, Felicia Kemi Segun, has stated that the NNPC was within its rights to begin a review of the current contracts, but also stated:
“There will no doubt be great resistance from the international oil companies to a renegotiation of fiscal terms that see their profits further shaved to the extent that the government is able to extract any additional commercial benefit.”
