• Friday, March 29, 2024
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BusinessDay

Landmines dot Malami’s quest to force a review of PSC terms

Abubakar Malami

The Federal Government is in court to compel international oil companies to increase payments under the Production Sharing Contracts, but limitations in the law and the Federal Government’s unilateral, cavalier approach towards its partners could derail plans.

Section 16 of the Deep Offshore and Inland Basin Production Sharing Contracts Act provides that where the price of crude oil exceeds US$20 per barrel, the PSC Act will be reviewed to ensure higher revenue for the Federal Government. It also provides that the PSC Act may be reviewed after 15 years from its commencement and every five years thereafter.

Since 2003 when the Act became operational, Nigeria has been unable to activate these provisions. The Revenue Mobilisation, Allocation and Fiscal Commission says Nigeria lost $21 billion for failing to review the law, and four years of trying by the Muhammadu Buhari presidency has not had an impact. Suasion, threats and even a Supreme Court ruling have not had an effect.

Legal analysts say the biggest challenge is that the PSC Act did not provide clear guidance on how to implement a review.

“The formula for crude oil share between the Federal Government (through the NNPC) and its PSC contractors is provided in the PSCs themselves, rather than in any provision of the PSC Act,” said analysts at Lagos-based Templars Law firm, led by Adewale Atake, partner & head, dispute resolution, in a commentary.

Therefore, the assumption, that the Federal Government could simply increase its share of crude oil revenues unilaterally, by amending the PSC Act to allocate higher quantities to itself, can hardly be said to be well thought-out, the analysts said.

The Act 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 crises. The section does not also provide a specific sharing ratio to which a review of the PSC Act must conform.

To seek legal clarification, the attorneys-general of Akwa Ibom, Bayelsa and Rivers State approached the Supreme Court in 2016 to compel the Federal Government to review the PSC Act as stipulated in section 16 and to recover arrears of revenue which would have accrued to the FGN and by extension their states, based on the principle of derivation, for the years that the provisions of section 16 were supposedly not implemented.

However, the parties to the case reached an “out-of-court” settlement on April 5, 2018 and the Supreme Court adopted the terms of settlement of the parties and granted them consent judgment on October 17, 2018.

Analysts say this was ‘complicated intervention’. The Supreme Court ordered the attorney-general of the federation to set up a body along with the plaintiffs to draw up a way to achieving the review envisaged in section 16 of the PSC Act. Then the body should recover previous revenues from August 2003 after oil prices passed $20 per barrel.

“By implication, an increase in the Federal Government’s share of revenue under PSCs should result in a reduction of IOCs’ share of revenue under PSCs,” said analysts at Andersen Tax.
But the Federal Government has no contractual right under the PSCs to apply retroactively any revised sharing formula it may agree with the PSC contractor.

“As a matter of elementary principles of law, statutory impositions of pecuniary burden do not operate retroactively,” analysts at Templars said.

So, if the Federal Government without recourse to the partners unilaterally amend the PSC Act to compel payments by the PSC contractors based on a retroactive assessment of what the FGN’s take should have been from August 2003 or any date that precedes the amendment, the operators will challenge it in court.

The Supreme Court judgment does not also provide a specific sharing ratio, nor does it define at what level revenue will be ‘economically beneficial’ for the Federal Government.

Even though there are different parties to the PSCs besides the government, they were not included in the suit and the Supreme Court was silent about their fate, a factor legal analysts say could threaten peaceful resolutions.

BusinessDay checks confirm that the Federal Government is in court seeking to compel the IOCs to pay back over $25 billion calculated from when oil prices rose above $20 a barrel in August 2003.

Bamidele Odugbesan, media relations manager, Shell Nigeria, confirmed the case is in court but could not comment on the case. He, however, insisted Shell has a legal basis to validate its claim.
Nigeria introduced the Deep Offshore and Inland Basin Production Sharing Contracts (Amendment) Bill, 2018 in the National Assembly which has crawled through the second reading.

The Bill specifically seeks to amend section 16 of the Deep Offshore and Inland Basin Production Sharing Contracts Act, 1999 by inserting a new subsection (3).

The Bill in its section 16(3) provides that a royalty rate of 50 percent shall apply for the additional revenue generated in the contract area of Production Sharing Contracts. The Bill further provides that the criteria to determine “additional revenue” under PSCs will be by the product of the volume of crude oil or condensate sold, and the difference between the actual nominal sales price of the oil or condensate and the nominal value of $20 per barrel (1993 real terms) at the time of sales.

The Bill also provides that the value of $20 per barrel (1993 real terms) shall be determined based on the United States all items Consumer Price Index (CPI) as published by the US Bureau of Labor Statistics.

Analysts say a quick way to derive value for Nigeria is for the Federal Government to reach a negotiated settlement with the oil companies seeing it failed to tidy its legal end.

 

ISAAC ANYAOGU