• Monday, March 04, 2024
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How opening contracts could avert loss of billions in oil revenue

Oil firm brings succour to host community as thousands receive free medical service

There has been sustained global effort to make public, oil and gas contracts involving governments of oil-rich nations and oil companies through the open contracting data standards (OCDS), in order to drive accountability and transparency, preventing oil block OPL-245-type situations.

Governments around the world spend an estimated US$9.50 trillion through contracts every year. Yet, contracting information is often unavailable for public scrutiny.

The OCDS enables disclosure of data and documents at all stages of the contracting process by defining a common data model. It was created to support organisations to increase contracting transparency, and allow deeper analysis of contracting data by a wide range of users.

Emmanuel IbeKachikwu, former minister of state for petroleum resources, said: “contracts will be made open to the public.” In 2017, Nigeria formally joined the Open Government Partnership, a multilateral initiative to strengthen governance. But in President MuhammaduBuhari’s first four years in office, Nigeria was yet to publish its petroleum contracts. This is a critical requirement to promote transparency and end corruption in the sector.

In Nigeria, the rules governing petroleum projects are contained in a range of official documents including the constitution, legislation, regulations, and contracts. But while the constitution and laws are publicly available, petroleum contracts and some regulations are not.

Petroleum contracts are fundamental documents that set out the legal framework for oil and gas projects. Rob Pitman and Anne Chinweze, analysts at the Natural Resource Governance Institute’s review of 23 upstream and downstream contracts in Nigeria, including 10 model contracts, shows that contracts in Nigeria contain several terms for which a strong public interest case can be made for disclosure.

To drive the point home, oil prospecting licence (OPL) 245, oil block, has attracted contentious attention in the last three years after the Milan Public Prosecutor office notified Shell, Eni, 11 other defendants and the Federal Republic of Nigeria, the victim as to the completion of its investigations and possible charges thereof. This resurfaced June 25 as parties to the case re-appeared in court, in Milan, Italy.

Italian prosecutors allege that the $1.1bn paid by Shell and Eni for the OPL 245 licence was used to pay former Nigerian oil minister Dan Etete and “intended for payment to President Jonathan, members of the government, and other Nigerian public officials.”  Shell, Eni and some of their senior managers are now standing trial, charged with international corruption, with prosecution pending in other countries.

The Nigerian Department of Petroleum Resources currently lists the OPL 245 license as a Sole Risk type contract in its annual report. Sole risk contracts are another alternative to the PSC in Nigeria. Under these arrangements, the government and company involved do not share physical production according to an agreed formula. Rather, the company assumes all the risk of exploration and production, keeps all of the oil produced for itself and is responsible for making statutory payments, including royalties and taxes to the government in cash.

Nigeria’s most senior civil servant in the DPR objected strongly to the terms of the deal at the time, calling it “highly prejudicial to the interests of the Federal Government”, a Global Witness report stated. But Nigerian ministers appeared to have ignored or overruled these concerns. Shell managers had been briefed that the ministers who overruled civil servants to approve the deal were likely to receive bribes.

An analysis carried out by Resources for Development an expert oil consultancy firm commissioned by non-governmental organisations Global Witness, HEDA, Re:Common and The Corner House using publicly available documents including Shell and Eni’s valuations of the oil block has shown that the terms of the contract could reduce the Nigerian Government’s revenue from the fields by $5.86bn over the lifetime of the project when compared to the standard Production Sharing Contract (PSC) terms in place in Nigeria since 2005, assuming an oil price of $70 per barrel.

The International Monetary Fund (IMF) recommends that mature oil producing countries should receive 65 percent to 85 percent of oil revenues with the remainder going to oil companies. The current OPL 245 deal is projected to result in Nigeria receiving just 41 percent of revenues, while Nigeria’s standard PSC terms or the terms Shell agreed with Nigeria in 2003 would earn Nigeria 65 or 60 percent of revenues respectively.

Publishing these contracts will create space for rigorous public scrutiny of deals that can be worth billions of dollars to the people of Nigeria. It also provides an important opportunity for the government and companies to build public trust in the petroleum industry.