Abstract: The Effect of Fiscal Incentives on the Profitability of Petroleum Reservoirs with Case Histories from the Niger Delta

Ayorinde Olusegun Idowu

A regular review of the Host Government's fiscal system combined with exploration investment incentives is essential for sustaining a high level of exploration and development in spite of the oil glut. Government's legislative policies should be very responsive to changes in the industry and aimed at not only government's maximization of its proceeds from the industry but also at protecting the industry and encouraging its growth.

An evaluation of the Nigerian Government's fiscal system from 1967 to date reveals that high and low levels of exploration and production activity correlate with high and low pricing periods respectively, while the Government's profit incentives given to operating companies in 1977, 1979, 1986 and 1991 tend to gear up exploration and production activities in these years.

Case histories involving the economic evaluation of smaller and larger field developments in the Niger Delta reveal that a medium-cost field with reserves of about 70 million barrels of oil under the royalty/tax system would be difficult to develop under the fiscal system operated before 1985 since it rendered the venture marginal and unattractive to investors, particularly when located in a more difficult offshore environment.

The scenario was virtually reversed starting January, 1986, as these marginal prospects became attractive due to the signing of a memorandum of understanding (M0U) between the Government and operating companies for guarantee of a fixed profit margin for production and lifting of Nigerian equity crude oil regardless of market prices. All in all, the current tax system incorporating the M0U provides an incentive for multinationals to explore in Nigeria relative to other countries. The tax rate itself is very high compared to other countries, but the key is that a return is currently allowed that is reasonable and that rewards a risk. This is due to incentives provided by consolidation of operations, relatively quick tax write-offs, investment tax credits, market-based pricing for tax pu poses, reasonable margins and the reserves-addition bonus. This new package of incentives consequently rendered prospects economically viable which hitherto were unattractive.

AAPG Search and Discovery Article #90986©1994 AAPG Annual Convention, Denver, Colorado, June 12-15, 1994