Nigeria Extractive Industries Transparency Initiative (NEITI) in its latest study and report has revealed that Nigeria lost at least $16 billion over a ten-year period (2008 – 2017) due to non-review of the 1993 Production Sharing Contracts (PSCs) with oil companies.
The study, which was done in conjunction with Open Oil (a Berlin-based extractive sector transparency group), indicates that the losses could be up to $28 billion if, after the review, the Federation was allowed to share profit from two additional licences.
In its latest publication titled, ‘‘1993 PSCs: The Steep Cost of Inaction,” NEITI called for an urgent review of the PSCs to stem the huge revenue losses to the Federation. Such a review it said is particularly important for the federation because oil production from PSCs has surpassed production from JVs.
The report obtained by BusinessDay on Sunday states that: “Between 1998 and 2005, total production by PSC companies was below 100,000,000 barrels per year while JV companies produced over 650,000,000 barrels per year.”
By 2017, total production by PSC companies was 305,800,000 barrels, which was 44.32% of total production. Total production by JV companies was 212,850,000 barrels, representing 30.84% of total production.”
NEITI in the policy brief stated that the Deep Offshore and Inland Basin Production Sharing Contracts provided for a review of the terms on two conditions:
The first review was to be triggered if oil prices exceeded $20 per barrel. Section 16 (1) of the Deep Offshore and Inland Basin Production Sharing Contracts specifies that:
“The provisions of the Act shall be subject to review to ensure that if the price of crude oil at any time exceeds $ 20 per barrel, real terms, the share of the Government of the Federation in the additional revenue shall be adjusted under the Production Sharing Contracts to such extent that the Production Sharing Contracts shall be economically beneficial to the Government of the Federation.”
NEITI observed that this review should have been activated in 2004 when oil prices exceeded the $20 per barrel mark. Although the review was not done in 2004, the judgment of the Supreme Court in October 2018 had mandated the Attorney General of the Federation to work together with the governments of Akwa Ibom, Rivers and Bayelsa States to recover all lost revenues accruable to the Federation with effect from the respective times when the price of crude oil exceeded $20 per barrel.
The second review was to be activated 15 years following commencement of the PSC Act. Section 16 (2) states that:
“Notwithstanding the provisions of subsection (1) of this section, the provisions of this Decree shall be liable to review after a period of 15 years from the date of commencement and every 5 years thereafter.”
At inception in 1993, the PSC terms were drawn up to incentivise and attract oil and gas companies to invest in the exploration and production of offshore fields considering the risks involved coupled with low oil prices.
Thus the PSC contracts were supposedly more beneficial to the companies. However, the Law anticipates that the companies would have recouped their investments when oil price increases and after many years of operations, hence the two trigger clauses in the Act.
Since the Supreme Court judgement has addressed the condition for the first review, this second review was the focus of NEITI’s Policy Brief. According to NEITI, this second review should have happened in 2008 and informed why it chose 2008 as the start date for commencement of estimated losses in the model.