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Deep Offshore Production Sharing Contract Act

The Deep Offshore and Inland Basin Production Sharing Contract bill earlier passed by the National Assembly was signed into law by President Muhammadu Buhari in London ten days ago. With the amendment, Nigeria is expected to earn an additional $1.4billion annually as royalty from oil production. Stakeholders in the oil and gas sectors have hailed this development, especially because a review of this law had been due for decades after oil prices picked up from less than $20 per barrel in the international market.

The Production Sharing Contract (PSC) has to do with an agreement between Nigerian government, which owns petroleum resources, and International Oil Companies, IoCs. Depending on the depth of water where crude oil is extracted, the IoCs pay 10 per cent as royalty to government on the quantities of crude oil they produce. The companies are given the leverage to recover the capital and operational costs before the profit made is shared between them and government.

Executive Secretary of the Nigeria Extractive Industries Transparency Initiative [NEITI] Waziri Adio explained it this way, “When oil is found, the contractor pays rent (royalty) on the right to extract, recoup its expenditure/costs, takes a major chunk of the profits over the life of the project and pays taxes due on its profits. The oil produced under PSCs is shared thus: royalty first (which goes to government), then the cost (which goes to the contractors), then profit (shared by the government and the contractors, but more to the contractors, as high as 80% in the early days), then tax on profit (paid to the government).”

Under the old Act enacted in 1993 and reviewed in 1999, oil companies that operate under PSC would pay no royalty to government if they explored oil in deep sea waters from 200 metres and above because of the huge costs involved in such productive activity. Incidentally, more and more Nigerian oil is now extracted from deep waters. IoCs who operate in Agbami, Akpo, Bonga and Erha, which are considered Nigeria’s most prolific oil fields, did not pay royalty because they explored crude oil from oil fields whose depths are beyond 1000 metres.

The new Act has eliminated zero percentage royalty under any circumstances. That is to say, all oil companies who operate PSC must now pay royalty. Secondly, instead of the previous provision in which the Act was reviewed every 15 years, the Act will now be reviewed every eight years.

In a report by NEITI in March 2019, the agency said that because of the failure to review the Act, Nigeria lost between $16.3 billion and $28.61 billion from 2008 to 2017. That is an average of $1.6 billion to $2.86 billion every year. Now that Buhari has signed the amendment into law, oil production in waters from 200 metres and above would attract 10 per cent royalty if oil price is below $20 per barrel and 20 per cent royalty when oil sells above $150 per barrel.

We commend government for summoning the political will to amend this Act. However, the case of the deep offshore and inland basin production sharing contract is a reminder of the fact that the country’s oil and gas laws are obsolete. Stakeholders in the sector are not unaware of this challenge. For over a decade now the Petroleum Industry Bill (PIB), which is supposed to have updated the country’s oil and gas law, has not been passed into law. The last Senate summoned a measure of courage, unbundled the law and began to pass it in bits, but it was not done to a logical conclusion.

It is high time government took a closer look at the PIB, adjust the gray areas and come up with a comprehensive law that would ensure Nigeria maximizes its oil revenue, instead of selective amendments. The Executive and Legislature should close ranks to ensure the PIB is passed before the end of Buhari’s second term.