DEEPWATER PETROLEUM EXPLORATION AND PRODUCTION IN THE GULF OF GUINEA: Comparative Analysis of Petroleum Fiscal Systems Performance

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ABSTRACT

Petroleum Fiscal System (PFS) is a major determinant of investment decision in the exploration and production of oil and gas in any country. It basically describes the profitability relationship between the host government of the producing community and the International Oil Companies (IOCs). The comparative analysis of the performance of the fiscal regimes becomes imperative as it affects the interest of the investor and the production of oil and gas. During the formulation of any fiscal regime a premium is placed on its outcome.

In this study, Petroleum Fiscal System (PFS) deepwater economic model is developed for the Gulf of Guinea. The approach incorporates a dynamic multipurpose input data page that automatically considers fiscal laws, taxation and stochastic analysis. Monte Carlo simulation using @risk software is used to account for risk and uncertainties in decision making.

This study addresses the industry structure, conduct and performance of fiscal regimes of countries in the Gulf of Guinea. Comparison of the effects of production delay, front ended government take, front loading index, and taxation show that the Gulf of Guinea is internationally competitive in all ramifications. A wide range of profitability indicators were used in the economic evaluation decision of this work such as Government Take (GTake), Contractor Take (CTake), Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), Savings Index (SI), Return on Investment (ROI), Payout Time (POT), Effective Royalty Rate (ERR), Growth Rate of Return (GRR), Discounted Net Cash Flow (DNCF), Front Loading Index (FLI). This avails investors, governments, petroleum economists, and so on great options of economic performance indicators in decision making. It is also found that as the risk in deepwater investment increases with water depth, return on investment rises significantly too in the Gulf of Guinea.

Analysis  of  all  terms  contained  in  the  deep    water  economic  model  formulated

(stochastic and deterministic) presents a useful tool to guide in investment decision making in

the Gulf of Guinea. Recommendations on how the variations would give government equal

take on any Petroleum Fiscal System are made. Usually the aim of the host government is to


get as much economic rent as possible.


CHAPTER ONE

1.0         INTRODUCTION

1.1.        OVERVIEW

Deepwater offshore exploration as much as it is a breakthrough in Petroleum Exploration and Production as it offers significant benefits over onshore production, still poses challenges to the oil and gas industry. The Gulf of Guinea (GOG) is an attractive place for investment in the oil and gas sector, opportunities abounds for petroleum exploration and production. Exploration and production in deepwater offshore have been proven to produce more oil and gas, add to proven reserves and generate more income for such producing nations. In the long run, production in deep waters will help the growing economies hence the demand for oil and gas globally.
The analysis of fiscal regimes which is one of the determinants of investment decision in the exploration and production of oil and gas is imperative for the Gulf of Guinea as it affects the interest of the investor and the production of crude oil. Several authors such as Temmy D. and Tumbur P. (2002), Costa Lima G.A. et al (2010) due to its significance, analyzed profitability of Fiscal regimes in the Asia Pacific countries and Brazil respectively, however, risk and uncertainties were not accounted for.

The Gulf of Guinea is the arm of the Atlantic Ocean, western Africa, between Cape Palmas, at the south-eastern tip of Liberia, and Cape Lopez, Gabon. Among the many rivers that drain into the Gulf of Guinea are the Niger and the Volta. The coastline on the gulf includes the Bight of Benin and the Bight of Bonny. The Niger River in particular deposited organic sediments out to sea over millions of years which became crude oil. This region is now regarded as one of the world's top oil and gas exploration hotspots and most promising petroleum provinces (Microsoft Encarta, 2009). The countries of the Gulf of Guinea, an area in the West and Central Africa coast are made up of Nigeria, Equatorial Guinea, Gabon, Ghana, Liberia, Togo, Cameroon, Benin, Ivory Coast, Angola, Congo, Guinea, and the islands of Sao Tome and Principe. Islands in the GOG that are part of Equatorial Guinea are Annobon, Bioko, Corisco, Elobey Grande and Elobey Chico (Wikipedia, 2011). Some countries like Nigeria and Angola are already producing from offshore areas in the GOG, while others are starting to conduct exploration activities. By some estimates, West Africa already has up to 547 major offshore oil and gas structures.
Currently, offshore production accounts for up to 30% of the world's oil and gas production. That percentage is expected to rise in the future. Estimates indicate that the GOG and African countries already supplies about 11% of world’s oil and gas needs and holds about 10% of the world’s proven reserves (PWC, 2010). However, this number is expected to grow, given that exploration is only now commencing in some offshore areas.


1.2.        STATEMENT OF THE PROBLEM

Several studies have been done on the comparative competitiveness of Petroleum Fiscal Systems (PFS) in the Gulf of Mexico (GOM), Brazil, Australia, Malaysia, etc., but none has been done for the GOG. Though Merak Projects PEEP has fiscal models for some GOG countries, they are in isolation for commercial purposes. Therefore, in this study, an integrated PFS of various fiscal regimes in the GOG will be modelled; implemented and proposed PFS in countries in the GOG will be analyzed as well as the uniqueness of each country. The same field data (hypothetical or real) will be used to forecast production and costs. The major types of fiscal regimes in the GOG will be discussed. Elements of each country’s fiscal regime will be captured not leaving out recent developments of the regime. Detailed economic analysis of each regime....

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