Evaluation of true government take under fixed and sliding royalty scales in Nigerian oil industry

Abstract

Fiscal regimes are very important in the global Petroleum Exploration and Production (E&P) industry. They sharpen policies, management strategies and revenue (take) by governments while defining the attractiveness of the industry to investors. One of the major parameters in fiscal regimes is royalty oil, which could be fixed or adjustable on a sliding scale. Nigeria, which has used fixed royalty scale since the first oil in 1958, is now proposing a change to the sliding royalty scale method within a general review of the country's fiscal regime terms. This study investigated the impact on Government take of a change to sliding royalty in both Joint Ventures (JV) and Production Sharing Contract (PSC) arrangements. Generalised cash flow models to evaluate true government take were developed under conditions of royalty scales based on either or both oil price and volume of production. The results show that government take under sliding royalty scale rates compared favourably with take under fixed royalty rates. However, sliding royalty rates calculated based on both oil price and volume of production yield higher government take than those based on either volume of production or price of oil alone.