Goldman Sachs advises Nigeria to lower oil taxes to compete with shale producers

Goldman Sachs, a leading global investment firm has called on Nigeria to lower oil production taxes to remain competitive in a world where shale producers with 50 percent of their projects now short-cycle, marked by lower costs and fallen break-even costs have ramped production by 190 billion barrels in 17 years.

Shale producers are upsetting the global oil market order with speed to market advantages and outstanding production volumes expected to peak at 13 million barrels per day by 2030. Breakeven costs are now at $54 from $90 per barrel five years ago according to a Goldman Sachs top projects report, which is an annual review of the world’s top energy assets, obtained by BusinessDay.

Analysts at Goldman Sachs say low-cost countries may become ever more important for International Oil Companies in the medium term due to huge costs involved in shale production in comparison to declining costs in deepwater production on account of project simplification, cost reduction and cost deflation.

“A number of countries such as Angola and Nigeria have lower costs than US Shale, but show higher breakevens. This is predominantly down to higher rates of tax. Consequently, we think these countries have a lot to gain by lowering taxes to make them cost competitive with shale. We have seen early signs of this, but think there is much further to go should prices remain in the US$50-60 range,” said the report.

Global oil production has seen an extraordinary evolution of the global cost curve as result of the industry’s race to make projects competitive with shale.

“Today even select projects in the Arctic (albeit not ice-covered Arctic) can compete with shale and display breakevens of below US$50/bl. The scale of the shale resource, potentially yielding 20mn b/d of liquid production (and 75% economic at below US$60/bl), dwarfs all else. Even global deepwater projects “only” get to 12.5mn b/d, with only 54% economic at US$50/bl, and 4mn b/d uneconomic at US$60/bl,” said the report.

But this is hardly a new counsel. Dolapo Oni, head of energy research at Eco Bank earlier posted thread of on the internet through the Twitter platform urging the Federal Government to cut down royalty rates and taxes to attract investments in a low oil price environment.

Nigeria’s upper parliamentary chamber, the Senate, passed the Petroleum Industry Governance Bill on May 25 after 17 years when the idea was first mooted. While industry stakeholders commend the move, they called for quick action on the fiscal portion of the bill which has the most capacity to attract investments.

Goldman Sachs also highlighted the imperative of fiscal reform calling it a key for countries to remain competitive, as investment shifts towards short-cycle production, an area shale producers have a competitive advantage.

“The shale revolution has altered the capex make-up of the oil & gas industry. We have seen short-cycle capex (up to two years from Final Investment Decision (FID) to first oil, and unconventional) double since 2010, while long-cycle capex has risen only 40% in the same timeframe.

“With the oil price increases, we have seen a huge rise in rig usage and activity is recovering at a rate which may push the market into oversupply in 2018.”

Goldman Sachs analysts expect investments towards unconventional projects to increase from 10% of global capex to around 35% based on their analysis of top projects in the industry.

 

“The primary driver of shale-well productivity is service intensity, driven by increases in well lateral lengths and a rise in frac stages. Since 2014, a single horizontal rig is drilling 15% more wells per year, and generating 106% higher demand for pressure pumping and 152% increased demand for frac sand. This increase in service intensity has driven an 88% increase in liquids production per rig,” says the report.

However, Nigerian oil industry experts say it is important for the government to focus on incentives that will attract investment dollars into oil production.

“In Ghana, the field was given free. They tell you to commit to a minimum size work of certain numbers of well, unlike ours that we typically attach a signature bonus to licensing rounds, they don’t do that,” said Abiodun Adesanya, president of the National Association of Petroleum Explorationists (NAPE) in an interview.

Nigeria currently plans to amend royalty regimes of deep offshore and inland basin Production Sharing Contracts to for terrains beyond 1,000 metres, from zero percent to three percent.

Calculation of government take would now be based on production and price to guarantee fairness and balance between PSC contractors and government according to an NNPC statement in January.

 

ISAAC ANYAOGU