International oil companies have warned that an unfavourable fiscal regime will discourage deepwater projects in the country amid expectations of a new Production Sharing Contracts with the Federal Government this year.

The Federal Government, in its 2019 approved budget public presentation, said it was targeting N320bn from the revision of the PSC legislation/terms this year.

The nation’s oil and gas production structure is majorly split between joint ventures onshore and in shallow water with foreign and local companies and PSC in deepwater offshore, to which many IOCs have shifted their focus in recent years.

Under the PSCs, the Nigerian National Petroleum Corporation holds the concessions, and the contractors fund the development of the deepwater offshore blocks and recover their costs from the production after royalty payments.

The NNPC had said in 2016 that it was reviewing existing PSCs “to negotiate more favourable terms and improve the revenue base of the federation.”

The Managing Director, Shell Nigeria Exploration and Production Company, Mr Bayo Ojulari, noted that negotiation of the PSC terms commenced in 2017 “after almost 10 years of stagnation.”

Speaking at the Nigerian Oil and Gas Conference and Exhibition on Tuesday in Abuja, he said the IOCs signed the heads of term with the NNPC in February this year.

He said, “What that meant is that we agreed on the principles around how we will resolve the disputes. We also agreed on the principles on which a new PSC will be put in place and we will then unlock the rest of the deepwater in Nigeria, hopefully starting with Bonga South West.

“Our expectation is that we should sign those dispute resolution agreements this year and we also expect that we should sign the new PSC this year.”

Ojulari said this would make the Nigerian deepwater space to become very active.

He said, “The other side of the puzzle for most of us who are aware is the whole fiscal condition. Some of us may have been monitoring the debate around the bill that has gone to the National Assembly on the whole adjustment to the PSC in terms of royalty.

“We are currently involved in those discussions but those discussions will make or mar the projects. If the discussions go the wrong way, I am sorry to say that Bonga South West or all the other seven FPSOs that are lined up to be developed in Nigeria will be frozen for some time.

For those who attended the public debate which talked about royalties at about 50 per cent, I can tell you we will all pack our bags and go; it is just not possible.”

Ojulari said confidence was building that parties would agree on commercial and fiscal terms and project costs that would enable Bonga South West Aparo to open a new chapter of deepwater growth in Nigeria.

According to the SNEPCo boss, to make the Nigerian deepwater to work, it is important to make sure that whatever legislation that is being put in place is what will unlock the resource volume in the country.

He said, “If we get the fiscal regime right and we make sure that the bill that is passed is the bill that enables business and investment, on my count, I expect another six FPSOs behind Bonga South West.

“Just imagine an environment where there are six FPSOs; there is continuity of work and activities. It is going to be a different place, and I think that is where we should put our minds in terms of what the impact of these is going to be on the economy.”

Stressing the need to unlock the Nigerian deepwater, he said, “With the delays we have had for more than a year of negotiation, a lot of capital has gone to Mexico; some have gone to Brazil.”

The Energy Information Administration, the statistical arm of the US Energy Department, noted that several planned deepwater projects in Nigeria had been repeatedly pushed back because of regulatory uncertainty.

The EIA said, “Deepwater projects have typically included more favourable fiscal terms than onshore/shallow water projects, but the PIB, if passed into law, it’s expected to increase the government’s share of production revenue coming from deepwater projects.

“As a result of the uncertainty, IOCs have sanctioned (reached a final investment decision) on only one of eight planned deepwater oil projects.”

According to the EIA, both sanctioned and unsanctioned deepwater oil projects in the country have the potential to bring online almost 1.1 million barrels per day of new production in coming years, however, only 200,000 bpd has reached the critical development milestone.

Projects without FID are Shell’s Bonga South West Aparo (225,000 barrels per day) and Bonga North (100,000bpd), Eni’s Zabazaba-Etan (120,000bpd), Chevron’s Nsiko (100,000bpd) and ExxonMobil’s Bosi (140,000bpd), Satellite Field Development Phase 2 (80,000bpd) and Uge (110,000).

The acting Director, Department of Petroleum Resources, Mr Ahmad Shakur, said the Federal Government had reiterated the importance of reducing approval cycle, entry barriers and regulatory transaction costs as necessary ingredients for creating conducive business environment and optimising government take from hydrocarbon resources and value creation to all stakeholders.