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Nigeria Could Shoot Itself In The Foot With New Oil Revenue Plans

Nigeria Could Shoot Itself In The Foot With New Oil Revenue Plans

Oil majors operating in Nigeria are growing concerned about the possibility that the government alters the terms of their production-sharing contracts in order to raise more revenues.

The new government of Muhammadu Buhari is scrambling to find ways to plug budget holes. Between July 2014 and September 2015, receipts for the state-owned National Nigerian Petroleum Corporation (NNPC) from selling oil dropped by two-thirds. Nigeria is overwhelmingly dependent on oil for government revenues, and with oil prices down by half from a year ago, fiscal pressure is forcing public officials to take action. Related: This State Just Became The World's Greatest Renewables Market

Buhari’s government has said it is interested in renegotiating contracts with oil majors, with some of the contracts dating back to the 1990s. The intention is to tweak the terms in order to boost the government’s take.

There are several majors operating in Nigeria, including ExxonMobil, Chevron, Eni, and most importantly, Royal Dutch Shell. Shell has been operating in Nigeria for decades. On October 5, Shell announced that it had started up the third phase of its offshore Bonga facility, which will have peak production of 50,000 barrels per day. Related: Can Tesla Deliver A Self-Driving Electric Car Before 2020?

But a change in the terms of the production-sharing contracts could slow or derail investment in new ventures. The FT reports that there are eight offshore projects, which could add a combined 1 million barrels per day in new production by 2020, that could be deferred because of both low oil prices as well as the uncertain regulatory environment. Shell has already put off its final investment decision on another expansion of the Bonga South West. Related: Russia’s Move In Syria Threatens Energy Deals With Turkey

In response to the possibility of changing the contracts, an executive from one of the international oil majors reportedly said to the FT: “Don’t mess with the fiscal terms.”

International companies are already slashing spending on new projects as they try to shore up their balance sheets. But the unfolding drama in Nigeria represents a new challenge. Oil-producing countries are also struggling, so battles over how to slice up the revenues from oil fields could proliferate.

By Charles Kennedy of Oilprice.com

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