Industry Trend Analysis - O&G Investment Offers Mixed Prospects For Return - DEC 2017

BMI View : Congo-Brazzaville, Gabon and Nigeria pose varied investment climates which underscore many of the risks to entry in the West and Central Africa region. While there exist s some considerable opportunities below ground, challenging operating environments can often mar the rewards.

High Risks And Patchy Rewards
SSA Upstream - Risk/Reward Index Heat Map
Scores out of 100. Higher score = better risk/reward profile. Source: BMI Risk/Reward Index

Comparing the investment climates of Nigeria, Gabon and Congo-Brazzaville signals many of the risks and rewards characteristic of the wider West and Central African region. Based on BMI's proprietary Risk/Reward Indices (RRIs), Nigeria boasts the most attractive investment profile upstream, with an RRI of 55.8, significantly above the regional average of 41.3. However, below the headline RRI, the profile is highly skewed, with strong reward indices dragged down by a weak profile for risk.

BMI Upstream RRI
RRI Industry Rewards Country Rewards REWARDS Industry Risks Country Risks RISKs RRI Regional Rank
Scores out of 100. Higher score = better risk/reward profile. Source: BMI Risk/Reward Index
Nigeria 88.7 40.2 69.3 22.3 26.1 24.2 55.8 2
Congo (Brazzaville) 66.9 48.9 59.7 26.6 14.7 20.6 48.0 5
Gabon 40.2 46.2 42.6 32.5 30.9 31.7 39.3 10
Regional Average 50.9 41.4 47.1 34.7 20.9 27.8 41.3 ~

Nigeria's rewards are crowded below ground, with high scores for production and production growth, reserves and discovery rates. The market is mature, with a developed infrastructure base, which offers opportunities for infrastructural tiebacks and lower development costs. However, a heavy state dominance in the sector somewhat limits the opportunities open to foreign and private investors and this is reflected in the lower scores for state ownership of assets and competitive landscape.

Rewards Outweighing Heavy Risks
Nigeria & SSA Regional Average Upstream RRIs
Source: BMI Upstream Risk/Reward Index

In general, where Nigeria falters is in the environment above ground. The country suffers from unattractive fiscal and licensing terms and a punitive tax structure. A weighty bureaucracy and pervasive corruption further add to risk and cost. The country scores above the regional average in terms of operational risks, although based on our indices Sub-Saharan Africa is the riskiest of any region globally.

Congo-Brazzaville holds a significantly smaller reserves base, but its discovery rate and production growth indices are, respectively, on par and above that of Nigeria. This signals attractive opportunities for expansion in the sector. The diversity of its competitive landscape is scored as average for the region, but it outperforms in regards to the level of state ownership of assets. The state-owned oil company has being playing an increasingly active role over recent years, but given its low level of experience and both financial and technological constraints on its activities, it is unlikely to crowd out private players in the near term.

A Balanced Profile
Congo-Brazzaville & SSA Regional Upstream RRIs
Source: BMI Risk/Reward Index

At 4.6, Congo-Brazzaville scores well below the regional average for Operational Risks. This reflects a number of factors. Its bureaucratic processes are hard to navigate and further complicated by pervasive corruption in the country. Political risks are elevated in both the short and long term, which is a concern should this lead to change in the direction of legal, fiscal or licensing policy. Currently, the country boasts an attractive licensing structure and a low tax burden and any erosion of this would risk undermining broadly positive sentiment from within the oil sector.

Gabon has the weakest rewards profile. It has a large oil reserves base but little gas reserves. Of more concern to investors, it scores poorly on both the discovery rate and production growth indices, with is indicative of a market in terminal decline.

Lower Risks But Muted Rewards
Gabon & SSA Regional Upstream RRIs
Source: BMI Risk/Reward Index

The risk profile is relatively stronger than the regional average, but as indicated earlier, the regional average is weak in a global context. There are significant operational risks to operating in the country, not least a convoluted and opaque bureaucratic system and elevated legal risk. While the licensing framework is relatively attractive and has been somewhat improved in recent years, fiscal terms are quite prohibitive. In addition, the lack of policy continuity has begun to raise some red flags for the sector.

Key Fiscal Terms
Corporate Income Tax Royalties Fees and Bonuses Resource Tax Export Duties Import Duties Other Key Fiscal Terms
Source: BMI, E&Y, National sources
Congo-Brazzaville 30% Rates depend on the terms established in the PSCs. Latest petroleum code cites a rate of 12% for oil and 5% for gas. Bonuses - Amounts specified in the government decree that grants the exploration and/or exploitation permit. 15% to be paid in cash or in oil equivalent. Exported goods taxed at a rate of 0 to 13% plus DAS of 2% of the good's value. Goods and materials for oil exploration/exploitation exempt from import duties. Surface rent (applicable to PSC holders): Exploration permit of XAF3,000/sq km; Exploitation permit of USD800/sq km.Immediate write-offs of exploration costs.
Losses can be carried forward for three years.Cost Oil for reimbursement of expenses up to 60% of total annual production.
Gabon 35-40% for holders of exploitation and production sharing contract (service contracts - CEPP) Between 6-12% of total production Production bonuses and Signature bonuses None Materials and equipments destined to be re-exported at end of utilisation exempt from export duties. Exploration equipments, products exempt from import duties. Contribution to Petroleum Support Fund - Exploration USD200,000/year
73% for concession contracts Exploration Annual Surface Rent USD3 to USD6/sq kmProduction Annual Surface Rent USD4 to USD8/hectare Production equipments, products taxed at reduced rate of 5% for first five years of production. Contribution to Petroleum Support Fund - Production USD0.05/barrelContribution to reconstruction of deposits fundTraining contributionsCost recovery of 65%-75% depending on profitability.No VAT on explorationLosses can be carried forward for five years
Nigeria First Five Years (New entrants) - 65.75%First Five Years (existing companies) - 85%Subsequent Years (all companies) - 85% Monthly Payments: Between 0-20%Onshore production - 20%Offshore up to 100m - 18.5%Offshore over 100m - 16.67% (Maximum amount - decreasing the rate the deeper the water) Signature bonus paid for awarding concessions NGN5,000 per sq km of an oil exploration licence.USD10 per sq km of OML or OPLUSD20 per sq km of producing OML NA Exempt from import duties. VAT is not payable on supplies for downstream gas operations.
Key Licensing Terms
Main Contract Type State Participation Local Content Requirement Domestic Supply Requirements Stabilisation Clause Arbitration
Source: BMI, E&Y, National sources
Congo-Brazzaville Concessions and production sharing contracts. PSCs are the most common types of contracts in the country. Companies must reserve a 15% stake for private Congolese companies. That stake is 25% for projects aiming to re-launch production from old fields. Preference to local service providers if price, quality and terms of delivery are similar to that of foreign contractors. Ensure 25% of development and production costs are of local origin. Employing Congolese nationals in priority to others if possible. As all major operators in Congo have signed PSAs, approximately a third of the oil produced goes directly to the government and is sold by SNPC on behalf of the state. --
Gabon Historically both concessions and Production Sharing Contracts. But PSCs remain the main model to be followed since 1963. Under the new PSC terms, the State participates at 20% minimum in all PSCs.The SNHG has an option for participation of 15% maximum in PSCs, at market value. Priority given to subcontractors in Gabon. 80% national participation is expected. The new law highlights that 'local needs must be met'. Contribute to domestic market needs by delivering a portion of oil production to the State with a discount on fixed price of 15%. On a contract by contract basis Under PSC terms, disputes settled through the International Chamber of Commerce (ICC) arbitration. Can also be settled through the OHADA court in Abidjan.Gabon ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Nigeria Production Sharing Contract- normally 10 years exploration, 20 years production Yes - NNPC is the holder of the concession while the IOC is the contractor Yes - provide technology transfer and train local employees in accordance to the Nigerian Oil and Gas Industry Content Development Act 2010 Preference for local supplies Yes Yes - In accordance with Arbitration and Conciliation Act 1990 Chapter 19