President Muhammadu Buhari on Monday assented to the bill amending the Deep Offshore (and Inland Basin Production Sharing Contract) Act, a move the government hopes will help it raise over $1.5 billion in royalties this year which will help fund the 2020 budget.
“This afternoon I assented to the Bill amending the Deep Offshore (and Inland Basin Production Sharing Contract) Act,” Buhari said in a statement by the one of his media aides.
Buhari is in London on a private visit and aides say the law was signed in the presence of Abba Kyari, his chief of staff.
“Nigeria will now receive its fair, rightful and equitable share of income from our own natural resources for the first time since 2003,” Buhari said.
“In that year oil prices began a steep increase to double – and at times – triple over the following decade. All this time Nigeria has failed to secure its equitable share of the proceeds of oil production, for all attempts to amend the law on the distribution of income have failed,” he said.
The president blamed the inability to review the law on “a combination of complicity by Nigerian politicians and feet-dragging by oil companies” which he said “for more than a quarter-century, conspired to keep taxes to the barest minimum above $20 per barrel – even as now the price is some three times the value”.
The Federal Government and the oil companies are in court fighting over contract terms.
Nigeria’s production sharing contracts or PSCs offer investors the cheapest rates among OPEC peers and drilling in depths below 1,000 metres did not attract royalty, though it is responsible for about 40 percent of Nigeria’s production. The government said cumulative losses have reached over $21 billion.
Legal analysts say Nigeria has been unable to review the PSCs because the law did not provide clear guidance on how to implement a review. It did not specify whether individual contracts or the Act will be amended, how often it will happen, and what will happen to fields with peculiar characteristics such as irregular production volume or even due to crisis. The section does not also provide a specific sharing ratio to which a review of the PSC Act must conform.
Wale Ajayi, partner at KPMG, said it would have made more sense if Nigeria had undertaken a holistic review of the issues of fiscal and overall governance of the oil sector.
“As it is, this law only addresses how much the government can take under the Production Sharing Contract and we are still left with considerable uncertainty in the sector,” Ajayi said.
“While the law ensures significant rise in government take, it is unlikely that it would make Nigeria any more attractive, especially given that we no longer compete just against Angola but also Mozambique especially in the area of gas. The trend around the world today is that governments are improving incentives aimed at attracting more investments into their oil sector,” he said.
But the All Progressives Congress-led government with control of both National Assembly and the presidency has amended the law anyway.
“Today this changes. For the first time under our amended law, 200 million Nigerians will start to receive a fair return on the surfeit of resources of our lands. Increased income will allow for new hospitals, schools, infrastructure and jobs,” Buhari said.
Lawmakers passed the bill last month. Under the new law, oil companies will no longer pay graduated rates for deep offshore production sharing contracts but will now pay a flat rate of 10 percent for finds in fields deeper than 200 metres.
The new law also requires the minister of petroleum to call for a review of PSCs by the NNPC every eight years and introduces offences and penalties for violating the law, such as a minimum fine of N500 million or minimum of five years imprisonment or both upon conviction.
The amended law also introduces specific price reflective royalty rates. The previous law required a review of royalty rates where crude oil price exceeds $20 per barrel to ensure additional revenue for government, but this was not effected for over two decades.
Now the amended law provides for review of royalty rates where crude oil and condensates price exceeds $20 per barrel using different rates according to price benchmarks. For example, when oil prices rise to $60, a royalty rate of 2.5 percent will be charged and above $150, oil companies will fork over 10 percent as royalty rate.
The president during the 2020 budget presentation to the National Assembly noted that amendment of the contracts law was one of the priorities of the Federal Government of Nigeria as it has the capacity to generate additional revenue of at least $500 million which will aid the government in achieving the proposed 2020 budgeted revenue.
However, International Oil Companies have kicked against the amended law, saying it would constrain new investment.
Oil Producers Trade Section (OPTS), which represents oil companies responsible for 90 percent of Nigeria’s oil and gas, said the proposed law change, and the regulatory uncertainty it will create, could significantly undermine profitability for the projects, including large fields such as Shell-operated Bonga and Total’s Egina.
The industry group expects the changes to the law to slash future offshore production by 27 percent to 2023, cut $55.5 billion from investment over the lifetime of deepwater projects, and remove some $10.4 billion in potential government revenue by 2030.
“This is not in line with FGN’s objective to grow the economy,” OPTS said in a detailed analysis of the measure sent to Nigerian lawmakers.
It added that the changes would be “almost equivalent to no new (deepwater) projects being viable”.
ISAAC ANYAOGU, Lagos, & TONY AILEMEN, Abuja
