Nigeria's
fiscal system in the oil and gas industry is one of the five fiscal
regimes with the highest Effective Royalty Rate, along with Indonesia's
Production Sharing Contract, China's PSC, Kazakhastan and the area of
the United Sates where royalty is payable to land owners on negotiated
rates and on federal and state lands on regulated rates, a new study by
Wood Mackenzie has revealed.
The report further
indicates that Nigeria is also among the 12 oil producing countries
where the fiscal system is targeted on revenues, rather than profits.
The other 11
countries include: Russia, Indonesia, Egypt, Venezuela, Iraq,
Kazakhastan, Angola, China, Canada, Brazil and the oil-producing area of
Alaska in the United States.
According to the
report, while the fiscal system in the United Kingdom, Norway and
offshore Australia is targeted purely on profits, Nigeria's fiscal
system and those of the 12 other countries are based on revenues.
"Fiscal terms are a
key differentiator in companies' strategic positioning geographically
and in investment decisions. While prospectivity is invariably the
number one driver for investment decisions, the potential value of
discoveries is heavily influenced by the fiscal regime. And with capital
scarce, the level and form of the government's share of project value
comes to the fore. Terms must be competitive if the government is to
have any success in attracting new investment," the report said.
The report noted
that the global upstream investment is at low ebb with conventional
projects being challenged by low oil prices, high costs and weak
economics.
With these
challenges, Wood Mackenzie argued that finances are stretched with only a
limited capital available for growth investment.
"Companies are
preserving capital and high grading opportunities as they work to reduce
break evens on new projects. Only the lowest cost and highest return
investments, whether short or long term, will get the green light in
this environment. And nervous investors are looking for projects that
will recover their costs quickly," the report added.
"But generating
profits at current prices is not simply down to a company's ability to
keep costs below current prices. Governments have a role to play too. If
the fiscal system is targeted on revenues, rather than profits then,
for the investor, a $50 per barrel price could mean as little as $25 per
barrel is available to cover costs and make a return on investment,"
the report added.
"One of the first
challenges for a government wanting to establish if its terms are
competitive or not, is to identify who its competitors are. What is the
peer group of opportunities that investors will be considering for
investment as well as the blocks in your round? And this could be very
different, depending on the investor, who may be focused on: a region,
and compare opportunities only with those on offer in neighbouring
countries; maturity of basin, focusing on frontier, emerging or mature
basin opportunities; specific types of investment, for example, gas or
deepwater opportunities; all global opportunities equally," the report
explained.
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