Nigeria is seeking to recover as much as $62 billion from international oil companies (IOCs) using a 2018 Supreme Court ruling it says enables it to increase its share of income from Production-Sharing Contracts (PSC).
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.
Under the PSC law, companies including Royal Dutch Shell plc, ExxonMobil Corp., Chevron Corp., Total SA and Eni SpA agreed to fund the exploration and production of deep-offshore oil fields on the basis that they would share profit with the government after recovering their costs.
According to documents seen by Bloomberg and verified by Nigeria’s Ministry of Justice, Nigeria is now seeking to recover as much as $62 billion from the IOCs.
The government is building its premise on a 17 October 2018 Supreme Court judgment in the case between the Attorney-General (AG) of Rivers State, and two others versus AG of the Federation.
The judgment mandates the Federal Government to increase its share of revenue under oil Production Sharing Contracts (PSC) whenever the price of crude oil exceeds $20 per barrel in line with Section 16 (1) of the Deep Offshore Inland Basin Production Sharing Contract Act (DOIBPSCA).
“There is no doubt that section 16 of the Act provides for a periodic review of the Act and a review of the provisions if the price of crude oil exceeds $20 per barrel. It, however, did not prescribe how it should be done whether by a regulation or by order. The absence of a mode of review created ambiguity and a lacuna in the Act,” said Taiwo Ogunleye of the Department of Business Law, Faculty of Law, Obafemi Awolowo University, Ile-Ife.
Andersen Tax, an independent tax firm with a worldwide presence, said it is still unclear how such lost revenue would be recovered by the Federal Government from contractors in the PSC arrangement as it appears this judgment seeks to retrospectively apply a new fiscal term on previous sharing arrangements.
“More so, the Federal Government failed to exercise its right to upwardly review its revenue share when the price of crude oil exceeded $20 per barrel,” Andersen Tax said.
But analysts say the IOCs operating in Nigeria’s oil and gas sector will be looking at options available to them.
“The IOCs will definitely go to court of arbitration which will drag for a long time. The Federal Government cannot blame the International Oil Companies (IOCs) for exploiting a weakness in Nigeria’s legislative structure,” Ademola Henry, team leader at the Facility for Oil Sector Transformation (FOSTER), told BusinessDay.
According to stakeholders, the PSC had attracted IOCs due to its favourable fiscal and legal regimes, which offer a higher profit share for the more marginal and high-risk projects offshore.
“I saw a letter from the president directed to the minister of justice not to pursue the arrears, so I am not sure where this is coming from. Maybe it’s a shakedown by those close to power who are seriously looking to shake money out from anybody,” a source very familiar with the matter told BusinessDay.
All efforts to get a statement from Bamidele Odugbesan, media relations manager of Shell Nigeria, one of the major IOCs affected, proved abortive as at close of business on Wednesday.
Other experts also said for a country in dire need of foreign investments, the directive from the Presidency was damaging to Nigeria’s business climate and could chase away potential investors or even discourage some existing ones.
“Going public with what seems like a power display is bad for the industry; it scares away investors and should not be encouraged,” said a Lagos-based oil and gas expert who craved anonymity because of his closeness to the issue.
Kelvin Atafiri, CEO at Cavazanni Human Capital Limited, an investment firm with operations in the oil and gas sector, said the directive was a bad decision at a time when “the economy is unstable and seriously looking for funds”.
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 say 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.
“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,” said Adeola Adenikinju, director, Centre for Petroleum and Law, University of Ibadan.
Latest Nigeria National Petroleum Corporation (NNPC) financials showed PSCs had the highest production with 45.40 percent over the three-year period, while Joint Ventures (JVs) came second with 28.99 percent. Alternative Financing (AFs) had the third highest production with 10.77 percent. Nigerian Petroleum Development Company (NPDC), the upstream company owned 100 percent by NNPC, had the fourth highest with 8.12 percent production, while marginal fields (Independents) had the lowest production contributing just 6.71 percent to total production.
“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, but that is now outdated allowing majority of the companies benefits from current higher oil prices than Nigeria itself,” Adenikinju told BusinessDay.
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, 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.
DIPO OLADEHINDE
