THE BIG PICTURE – Nigeria set for not-too taxing rise in oil
THE BIG PICTURE – Nigeria set for not-too taxing rise in oil output
By John HarringtonMarch 21 2014, 1:27pm
Nigeria is one of the biggest oil producing nations in the world, but it recently revealed that its reserves have fallen to a “mere” 35bn barrels.
For a nation massively dependent on oil revenues, its problems are exacerbated by the well-known problems of theft and sabotage that cost the country and estimated 300,000 barrels of oil per day in 2013, according to the Nigerian National Petroleum Corporation’s group managing director, Andrew Yakubu.
When the level of the bathwater is going down because of a leaky plug, one solution is to open up the tap a bit more and the country has set itself a target of increasing oil output by almost a third by 2020.
Hitting that target is going to prove a challenge unless the country gets a grip on the disappearing oil problem, but the country is clearly doing what it can to encourage the rapid ramp-up of oil production through favourable tax deals.
Both
Heritage Oil (
LON:HOIL) and
Afren (
LON:AFR) have recently concluded discussions in Nigeria over their tax status and both expect to see a boost to their bottom lines as a result.
Last week another operator in Nigeria,
Eland Oil & Gas (
LON:ELA), said its joint venture company, Elcrest Exploration and Production Nigeria, has also been having words with the relevant government departments in Nigeria about its tax status.
“Good progress has been made and Elcrest expects to benefit from a significant reduction in underlying tax rates,” the company revealed.
If the special tax status is awarded to Eland then it could be worth 93p a share, according to stockbroker Canaccord Genuity, which rates the shares a ‘buy’ and has a 190p price target on the stock.
For
Heritage Oil, the unrisked benefit is estimated at 241p a share by Canaccord Genuity while for
Afren it is calculated to be worth 27p a share.
“The new tax position of
Afren (on Ebok), Heritage (on OML 30), and potentially Eland (on OML 40) is that of Pioneer Status. This is granted to many companies across a wide range of industries in Nigeria to encourage investment.
At least one western public listed company, Mart Resources (CVE:MMT), has received this tax treatment for oil development, and so this revised tax status for the oil industry is not entirely ground-breaking but until recently has been quite unusual,” Canaccord Genuity said.
The key for each company to unlock the full potential of the tax benefit is to increase production as quickly as possible, the broker explains, but the operational environment in Nigeria and the lack of visibility on longer-term production profiles remains a key uncertainty.
That uncertainty was underlined by
Royal Dutch Shell’s (
LON:RDSB) recent fourth quarter update in which I revealed the deteriorating security situation in Nigeria cost the company some 40,000 barrels of oil equivalent per day (boepd).
Shell is selling its 30% stake in four oil blocks in Nigeria, and is also offloading the 60 mile Nembe Creek oil pipeline, which has been the repeated target of oil thieves.
While Shell seems to be souring on its long involvement in Nigeria, the soon to list Seplat Petroleum Development Company claims to not have experienced any “shrinkage” last year, according to a report by news agency Bloomberg.
Seplat is a company that has previously acquired Nigerian assets offloaded by Shell; in July 2010 it bought three onshore licences in the Niger Delta from the Anglo-Dutch giant and is bidding for two more.
Seplat puts great store in engaging with local communities and employing locals to provide oilfield services, which is sure to inspire a more sympathetic attitude in a country where, for all of the wealth generated by the oil industry, poverty is still rife.
Then again, Shell reportedly contributed more than US100mln in community projects last year, and that does not seem to have stopped opportunists from ripping off the company.
Despite all of the acknowledged problems, Canaccord Genuity says Nigerian exploration and production companies are an increasingly ‘hot’ investment story.
“The combination of generally strong subsurface performance, extensive (though admittedly sometimes problematic) infrastructure, reasonable costs and fiscal regime (even before the recent tax status changes) is attractive,” it opined.