• Thursday, March 28, 2024
businessday logo

BusinessDay

FG’s impending revenue challenges present opportunity to review PSCs

5 ways oil sector can jumpstart Nigeria’s economy in 2020

Concerns over Nigeria’s revenue and budget implementation challenges are deepening and some analysts have said that the sale of and proceeds from the government’s Joint Venture (JV) assets with the International Oil Companies (IOCs) cannot clear the country’s long-term revenue challenges.

The major short-term source of Nigeria’s revenue shocks is the fall in Brent crude, international benchmark for the oil price, which fell to its lowest level in three months on Wednesday to $60.43 (as at 12:41 pm) as gathered from the Bloomberg terminal. The oil market has maintained a downward trend. It has plunged by 13.8 percent from $70.11 as at May 28, 2019.
Nigeria can hedge against volatility in oil prices, which has a direct impact on its revenue streams, by reviewing its production sharing contracts (PSCs) with IOCs.

With falling crude oil prices narrowing and approaching the Nigerian Federal Government crude oil benchmark of $60 in the 2019 budget, Nigeria’s budget assumptions of an average price of $60 may be unrealistic and could threaten revenue projections.

Review of Nigeria’s Production Sharing Contracts (PSC) with IOCs has been seen as a way to shore up revenue. Africa’s biggest crude oil producer first adopted the PSC model in 1973. It was reviewed in 1999 but backdated to apply to oil prospecting licences (OPLs) of 1993. Since then, the PSCs were amended in 1986, 1993, 2000 and 2005. Another round of amendment is due, experts have said, if Nigeria is to shore up revenue accruing from upstream oil and gas activities.
“We are a mature field and the certainty of striking oil is high. With this, we can get tougher in our contractual arrangements, unlike countries just starting out,” Ibe Kachikwu, former minister of state for Petroleum Resources, said in a recent interview with BusinessDay and other journalists.

A study conducted by the Nigeria Extractive Industries Transparency Initiative (NEITI) in March 2019 showed that Nigeria has lost at least $16 billion (N2.87 trillion at an average exchange rate of N179.65/$1 during the period) in 10 years due to non-review of the 1993 Production Sharing Contracts that still apply to some upstream oil projects. The losses were recorded between 2008 and 2017.

“It would be difficult to recoup what has been described as lost by NEITI. The focus has to be on achieving a fair balance going forward,” Adeoye Adefulu, energy partner, Odujinrin & Adefulu, told BusinessDay.

NEITI’s report stated that total production by PSC projects was below 100 million barrels per year between 1998 and 2005, while JV projects produced over 650 million barrels per year.
However, the total production by PSC projects increased to 305.8 million barrels in 2017, representing 44.32 percent of total production and JV projects production stood at 212.85 million barrels, representing 30.84 percent.

To review the PSCs should see the Federal Government accumulate more revenue from deep-waters crude production and exploration.

“A number of 1993 PSCs are already coming to the end of their term and, therefore, present the government a golden opportunity to renegotiate the terms of the PSCs,” Adefulu said.
“I believe the government can both sell off its JV assets and also review the PSCs with IOCs,” he added.

While the JV remained the principal contract model introduced in 1986, which typically govern onshore/shallow water projects for the purpose of exploration and production of resources, the inability of the Nigerian National Petroleum Corporation (NNPC) to fund its equity participation in the JV led the arrangement to be increasingly unmanageable.

This, however, gave birth to the PSCs introduced in 1993 to address some of the issues faced by the Joint Operating Agreement (JOA) and also to provide a suitable agreement structure for encouraging foreign investment in the offshore domain.

The Nigerian Federal Government recently announced a move to reduce stakes in JV oil assets to 40 percent agreements with IOCs, which is thought to be the best hope to shore up revenue.
Udo Udoma, minister of Budget and National Planning, last week unveiled details of efforts to boost the nation’s revenue while giving a breakdown of the 2019 budget. He said the president had also directed the Ministry of Finance to liaise with relevant authorities to liquidate all recovered ‘unencumbered’ assets.

The NNPC, which manages Nigeria’s oil sector, owns a 55 percent interest in its joint venture with Royal Dutch Shell and 60 percent stakes in IOC-operated projects including Chevron and ExxonMobil.

However, analysts are of the opinion that this move by the government is a one-off strategy which may leave the country with the challenge of shoring up revenue going forward.

Oil price fell as an economic slowdown started to dent energy demand, according to a report by Reuters, but markets won some support after Saudi Arabia said a consensus was emerging with other producers about extending supply cuts.

Amid growing concerns about the outlook for the world economy in the throes of the trade war between the United States and China, financial traders sold out energy markets.

 

STEPHEN ONYEKWELU & DAVID IBIDAPO