By Abisola THOMPSON
Stakeholders in the Nigerian oil and gas sector have called for a review of the Production Sharing Contract (PSCs). PSCs are a common type of contract signed between a government and a resource extractioncompanies (simply put as oil companies) concerning how much of the resources (crude oil) extracted from the country each will receive.
Prior to 1993, the predominant contract model for the purpose of exploration, development, and production of Nigerian oil resources was the joint venture arrangement, under which the Government of Nigeria,
acting through the Nigerian National Petroleum Corporation (NNPC), had to contribute substantial counterpart funding (cash calls) to meet equity participation in the joint ventures (JVs), in which the
government invariably had majority shares.
Consistent inability of the Nigerian government to adequately meet its financial (cash call) obligations under the JV arrangements led it to explore other modes of developing the nation’s vast oil resources.
The PSC arrangement provided a ready solution for both government and the operators. While government no longer needs to meet its periodic cash call obligation to JV programs, the operators on the other hand readily embraced the varying degree of fiscal incentives and convenient work programs offered by the PSC law.
However, leading the call for the review is the Nigeria Extractive Industries Transparency Initiative (NEITI) which claimed that Nigeria has lost at least $16 billion in 10 years due to non-review of the
1993 Production Sharing Contracts (PSCs) with oil companies.
This was contained in NEITI’s latest report titled “The Steep Cost of Inaction” released in Abuja at the weekend. It said that the losses were recorded between 2008 and 2017.
The study done in conjunction with Open Oil, a Berlin-based extractive sector transparency group, found that the losses could be up to $28 billion if, after the review, the Federation were allowed to share
profit from two additional licenses.
NEITI, therefore, called for an urgent review of the PSCs to stem the huge revenue losses to the Federation.
It added that the review was particularly important for Nigeria because oil production from PSCs had surpassed production from Joint Ventures (JV) with PSCs now contributing the largest share to
federation revenue.
“Between 1998 and 2005, total production by PSC companies was below 100 million barrels per year while JV companies produced over 650 million barrels per year. By 2017, total production by PSC companies was 305.800 million barrels, which was 44.32 per cent of total production. Total production by JV companies was 212.850 million barrels, representing 30.84 per cent of total production,” It said.
NEITI stated that the Deep Offshore and Inland Basin Production Sharing Contracts provided for a review of the terms on two conditions.
“The first review was to be triggered, if oil prices exceeded $20 per barrel. Section 16 (1) of the Deep Offshore and Inland Basin Production Sharing Contracts specifies that: The provisions of the Act
shall be subject to review to ensure that if the price of crude oil at any time exceeds $20 per barrel, real terms, the share of the Government of the Federation in the additional revenue shall be
adjusted under the Production Sharing Contracts to such extent that the Production Sharing Contracts shall be economically beneficial to the Government of the Federation.”
NEITI observed that this review should have been activated in 2004 when oil prices exceeded the $20 per barrel mark.
NEITI said the Supreme Court judgement in 2018 had mandated the Attorney General of the Federation to work together with the governments of Akwa Ibom, Rivers and Bayelsa States to recover all
lost revenues accruable to the Federation with effect from the respective times when the price of crude oil exceeded $20 per barrel.
It further stated that the second review was to be activated 15 years following commencement of the PSC Act, where Section 16 (2) states that “Notwithstanding the provisions of subsection (1) of this
section, the provisions of this Decree shall be liable to review after a period of 15 years from the date of commencement and every 5 years thereafter”.
“Thus the PSC contracts were supposedly more beneficial to the companies. However, the Law anticipates that the companies would have recouped their investments when oil price increases and after many years of operations, hence the two trigger clauses in the Act. Since the Supreme Court judgement has addressed the condition for the first review, this second review was the focus of NEITI’s Policy Brief.
“This second review should have happened in 2008 and informed why it chose 2008 as the the start date for commencement of estimated losses in the model,” NEITI noted.
According to Engr. Micheal Adenegan, an oil and gas expert, “the review of the PSCs signed by military government in 1993 is due for a review. The judgement of the Supreme Court in October 2018 has made it clear that the oil companies will refund the Nigerian government because crude oil price rose above $20 per barrel mark in 2004. By implications, it means the oil companies will pay any excess crude oil
per barrel above $20 to the government.
The affected seven producing fields of the 1993 PSCs are Abo (OML 125) operated by Eni; Agbami-Ekoli (OML 127 & OML 128) operated by Chevron; Akpo & Egina (OML 130) operated by Total and South Atlantic Petroleum and Bonga (OML 118) operated by Shell.
Others are Erha (OML 133) operated by ExxonMobil; Okwori & Nda (OML 126) operated by Addax and Usan (OML 133) operated by ExxonMobil.
