Energy analyst Kelvin Emmanuel has stated that the Nigerian government’s new executive directives aimed at improving cost efficiency in the upstream oil sector will not resolve deeper structural and economic challenges, particularly in onshore operations where high costs and inefficiencies persist.
This was made known during an interview on Arise TV’s Business Week on Saturday.
Emmanuel highlighted that while the new Cost Efficiency Incentive (CEI) may help offshore fields, significant challenges remain for onshore oil operations.
“The Cost Efficiency Incentive (CEI) calculates savings by multiplying the difference between targeted and actual operating costs by annualized crude oil sales. While this approach might work for offshore PSE fields, where production costs typically range between $20 and $40 per barrel, onshore operations remain problematic,” Emmanuel said.
He added, “The government isn’t addressing the core challenges operators face. Fundamentally, NNPC must transition from being a government-owned entity to a beneficial owner. This process will take at least two years before it can go public, as it requires thorough evaluation, classification, valuation, audits, and pricing before an IPO.
He noted that while offshore fields where production costs range between $20 and $40 per barrel may benefit from the new incentives, onshore operations face steeper challenges.
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According to him, the directives are encouraging, but investors focus on the post-tax internal rate of return (IRR). In Nigeria, the IRR must exceed 10% to justify the emerging market risk. Without incentives to deliver those returns, capital won’t come.
He also pointed out that Nigeria’s post-PIA tax regime, combining hydrocarbon tax and corporate income tax, amounts to roughly 67%, higher than Guyana (55%) and Senegal (64%), and only slightly below Norway (93%), a far more stable and mature market.
He further noted that the formula relies on accurate data for actual and targeted operating costs and annualized fiscal sales.
He added that to improve transparency and accountability, he recommended changing Section 65 of the Petroleum Industry Act (PIA) to allow Incorporated Joint Venture Companies (IJVCs). This change would enable partners to make investment decisions together and make joint venture dealings arrangements.
What You Should Know
In May 2024, President Bola Ahmed Tinubu signed a new set of Executive Orders aimed at improving the fiscal and regulatory landscape for Nigeria’s upstream petroleum sector, as reported by Nairametrics.
- The initiative is aimed at improving Nigeria’s competitiveness in attracting oil and gas investment, reducing high operation costs and bureaucratic delays, and promoting transparency and predictability in field operations.
