DESIGN AND ECONOMIC EVALUATION OF FISCAL REGIME FOR ASSOCIATED GAS DEVELOPMENT UNDER PRODUCTION SHARING CONTRACTS IN NIGERIA’S DEEP OFFSHORE

Abstract

Petroleum resources production is always based on fiscal regimes, to allocate responsibilities and benefits between parties in contracts. However, clear-cut Nigerian petroleum fiscal regimes only exist for crude oil without equal consideration for natural gas development under Production Sharing Contracts (PSCs). This trend is responsible in part, for continued gas flaring, which leads to economic losses and environmental degradation. Previous studies focused largely on crude oil development, with little attention paid to natural gas development under PSCs. This study, therefore, explored the economic impact of a stand-alone fiscal regime for Deep Offshore Associated Gas (DOAG) under PSCs, with a view to extending the evaluation of the economic viability to non-associated gas projects currently unexplored in the Niger-Delta basin. Irving Fischer’s Capital Budgeting methodology served as the framework, while the Discounted Cash Flow (DCF) model was adopted. A sample of on-stream fields under PSCs in Nigeria was taken with arithmetic average of reserves-in-place and production volumes used as criteria. Data ranged from 2005 and projected till 2027 (the economic life of the asset). Data collected included production volumes, natural gas price, capital and operating expenditures, companies’ income tax and Niger-Delta Development Commission (NDDC) levy. Economic indicators such as Net Present Value (NPV), Internal Rate of Returns (IRRs) and payback period of the gas asset were evaluated using the provisions in the Petroleum Industry Act (PIA) 2021 and the proposed fiscal regime for comparison. The NPVs at 10.0% were $105.21 and $122.13 (in millions) under the PIA and the proposed fiscal regime, respectively. The IRRs were 18.0% under the PIA and 20.0% under the proposed fiscal regime. The payback period was 6.0years for the project under both regimes. The savings indices were 24.8% and 31.2% under the PIA and the proposed fiscal regime, respectively. Natural gas price input (454.07) and production volumes input (421.51) were the most sensitive variables to the project’s profitability as compared to NDDC levy (247.17), royalty (242.92) and capital expenditure (241.73). The economic performance indicators, such as NPV, IRR and savings index were higher under the proposed regime than under those of the PIA (2021). The design and economic evaluation of fiscal regime guaranteed a competitive economic return to investors from natural gas development in Nigeria’s deep offshore. The federal government of Nigeria should adopt the stand-alone fiscal regime for exploitation of Deep Offshore Associated Gas under the production sharing contracts for increased investments and economic wellbeing of Nigerians and diminished environmental degradation as a result of reduced gas flaring.