The economics and profitability of Petroleum Industry Bill (PIB)on oil and gas investments in Nigeria


Petroleum has been the mainstay of the Nigerian Economy accounting for over 30% of the GDP and 80% of government revenue. The government with the intention to make the Petroleum Industry generate the kind of economic development it ought to, has sent a Petroleum Industry Bill(PIB) which seeks to restructure the Petroleum Industry to the National Assembly.

The Fiscal Provisions of the PIB gives government a greater access to gross revenue and this consequently has an impact on the economics and profitability of oil and gas investments especially for deepwater which is already very capital intensive.

A fiscal model is developed using an Excel spreadsheet. The spreadsheet is coded by converting the texts of the PIB into mathematics. The fiscal model developed is an integration of the elements of the fiscal provisions of the PIB.

With the investment profile and expected production profile, the model generates a cash flow and profitability indices (PIs) for both investor and government.

Sensitivities are also carried out to establish the relationships between these indices and key decision variables. This understanding of the fiscal instruments would help the IOCs improve profitability.

Results from the model show that royalty rates and the Nigerian Hydrocarbon Tax (NHT) have great impact on company’s profitability. However, the sliding scale royalty system of the PIB ensures profitability for both the marginal producer and giant producer. It is also discovered that government surrenders part of its take at low oil prices while its take increases with increase in the price of oil. If IOCs can greatly reduce CAPEX especially those incurred abroad, the fiscal incentives in the PIB and the volume of hydrocarbon contained in deepwater Nigeria would make investment in deepwater remain attractive.

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