Crude oil fields governed by Production Sharing Contracts (PSC) now make up a sizable chunk of Nigeria’s oil output leading to less government take in the form of royalties and taxes as a result of obsolete laws that have not changed in more than 25 years.
Data from Nigeria’s national oil company NNPC from January 2015 to December 2017 showed that PSCs had the highest share of the 2.126 billion barrels of crude oil and condensate produced between January 2015 and December 2017 or an average of 1.94 million barrels per day.
“A lot of production activities have moved towards deep offshore which was very attractive for PSCs since 2003; the idea was that as oil prices go up the contracts will be reviewed however successive Nigerian Federal governments have failed to do so,” Adeola Adenikinju, gas policy analyst for the World Bank and professor of Economics at University of Ibadan said.
The PSC is a form of joint agreement for exploration, development and production of oil resources, that makes extractive companies bear the cost of production, unlike the joint venture agreement where government is indebted with cash calls.
According to stakeholders, the PSC had attracted International Oil Company’s (IOC) due to its favourable fiscal and legal regimes, which offer a higher profit share for the more marginal and high-risk projects offshore.
“The fiscal regime that underscores the administration of offshore activities were so generously drawn up for the PSC’s when oil prices were very low which is now currently out-dated allowing majority of the companies benefits from current higher oil prices than Nigeria itself,” Adenikinju told BusinessDay.
NNPC financials showed PSCs had the highest production with 44.87 percent over the three year period while Joint Ventures (JVs) came second with 31.35 percent, Alternative Financing (AFs) had the third highest production with 14.14 percent, Marginal Fields (Independents) came in fourth highest with 4.52 percent production, while the Nigerian Petroleum Development Company (NPDC), the upstream company owned 100 percent by NNPC, had the lowest production contributing just 4.11 percent to total production.
Ibe Kachikwu, Nigeria’s minister of state for petroleum, recently bemoaned the loss of “close to $21 billion” extra revenue for the country due to the non-review of the Act. “From 1993 to now, we have lost a total of $21 billion just because government did not act. We did not exercise it,” the Reuters news agency quoted Kachikwu as saying. The lack of passage of the Petroleum Industry Bill (PIB), for many years has added to the problem.
Adenikinju added, “The PIB would have been an opportunity to bring the system to international standard and make it more competitive which will benefit the government more.”
Nigeria has been on a perpetual voyage with PIB which is one of its most important bills ever to be contemplated in its history in a journey that began sixteen years ago with a lot of anticipation and promises. The bill is still stuttering through legislation after passing through four presidents, five presidential terms and five legislative tenures yet there is little or no results to show.
Ademola Henry team leader at the Facility for Oil Sector Transformation (FOSTER) said the increase in PSC production is because onshore activities of joint ventures are more prone to militant’s attacks compared to offshore fields where most PSC operates.
The Nigeria Extractive Industries Transparency Initiative (NEITI), the agency mandated by law to promote transparency and accountability in the management of Nigeria’s oil and gas revenue, early last month declared that the old agreement used in computation of revenues to be shared between the government and oil companies is outdated, calling for urgent review.
NEITI said the loopholes in the Deep Offshore and Inland Basin Production Sharing Agreement (PSC) between Nigeria and oil companies meant the nation’s total share of oil revenues between 2015 and 2017 was $35.893 billion against the oil majors who earned about $68.591 billion.
“The fact that PSC productions now account for almost 50 percent of total oil production makes an urgent case for a review of the terms as stipulated by the Act,” NEITI said. The agency noted that delay or failure to review and renew the agreement means that payment of royalty on oil production under PSCs would not be made while computation of taxes would be based on the old rates.
“The significance of this shift is more in the revenue implication for the Federation as government’s take from PSCs are considerably lower on account of incentives put in place 25 years ago, incentives which are long overdue for review,” NETI said in its Occasional Paper series.
Crude oil prices averaged $16.33 in 1993 and had risen to $17.44 by 1999 which was the last time efforts were made to amend the decree to reflect that if crude oil exceeds $20 to a barrel or 15 years after the initial contracts were signed, the agreement should be renegotiated in a manner that will be favourable to Nigeria.
Experts says the 1993 Deep Offshore contract was entered into at a time Nigeria, under the late dictator Sani Abacha, was burdened by sanctions and needed money for key infrastructure projects.
“There is an amendment act of PSC already with the national assembly which if passed will allow Nigeria benefit more from its oil,” Henry team leader at FOSTER told BusinessDay.
There are at least, four bills to amend the Deep Offshore and Inland Basin Production Sharing Contracts before the National Assembly.
One of them sponsored by Chairman of the House Committee on Petroleum Resources (Upstream), Victor Nwokolo (PDP Delta) seeks to extend Nigeria’s royalty regime for petroleum and gas to areas in excess of 1,000 metres water depth.
The lawmaker proposed a three per cent royalty on explorations beyond 1,000 metres.
The inability of Nigerian government to collect royalty payments from deep-water oil operations has seen the country miss out on key sources of revenue even as it struggles to fund its annual budget.
In contrast India, for instance collects five per cent royalty on deep-water offshore production for the first five years of commercial operation and ten per cent thereafter while Egyptian national oil company, Egyptian General Petroleum Corporation (EGPC) pays royalties of ten per cent, from its share of production to the state.
In Kuwait, the government collects 15 per cent royalty on all deep-water explorations and productions.
