Energy analyst Kelvin Emmanuel has raised concerns that the recent executive directives introduced by the Nigerian government to enhance cost efficiency in the upstream oil sector may not fully address the underlying operational challenges. In a recent interview on Arise TV’s Business Week, Emmanuel pointed out that while these new measures, such as the Cost Efficiency Incentive (CEI), could benefit offshore fields, they might not be sufficient for onshore operations where issues like high costs and inefficiencies persist.
Emmanuel explained,
“The Cost Efficiency Incentive (CEI) calculates savings based on the difference between targeted and actual operating costs multiplied by annualized crude oil sales. While this methodology could prove effective for offshore fields with production costs ranging from $20 to $40 per barrel, it falls short in addressing the complexities faced by onshore operations.”
He emphasized that a fundamental transformation is needed within Nigeria’s oil industry, particularly urging the Nigerian National Petroleum Corporation (NNPC) to shift from a government-owned entity to a beneficial owner model. He outlined a comprehensive process involving evaluation, classification, valuation, audits, and pricing before NNPC can potentially go public. However, he cautioned that this transition would require at least two years to materialize.
Despite acknowledging the positive aspects of the new directives, Emmanuel highlighted crucial factors that investors consider when evaluating opportunities in Nigeria’s oil sector. He stressed the importance of post-tax internal rate of return (IRR) exceeding 10% to mitigate risks associated with emerging markets. Without adequate incentives to achieve favorable returns, attracting capital investment becomes challenging.
Moreover, Emmanuel drew attention to Nigeria’s tax regime following the enactment of the Petroleum Industry Act (PIA), which combines hydrocarbon tax and corporate income tax resulting in an overall tax rate of approximately 67%. This places Nigeria ahead of countries like Guyana (55%) and Senegal (64%), albeit slightly below Norway (93%), known for its stable and mature market conditions.
Further emphasizing transparency and accountability improvements within the sector, Emmanuel recommended amendments to Section 65 of PIA permitting Incorporated Joint Venture Companies (IJVCs). This modification would facilitate collaborative decision-making among partners and streamline joint venture arrangements for more efficient operations.
In May 2024, President Bola Ahmed Tinubu issued a set of Executive Orders aimed at enhancing Nigeria’s upstream petroleum sector landscape. The directives seek to boost competitiveness in attracting oil and gas investments, reduce operational costs and bureaucratic delays while fostering transparency and predictability in field activities.
As stakeholders navigate these changes within Nigeria’s oil industry landscape post-PIA implementation, experts like Kelvin Emmanuel underscore the significance of holistic reforms beyond surface-level directives towards achieving sustainable growth and attractiveness for investments.
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