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Nigeria begins production sharing contract negotiations with Shell -Kachikwu

Nigeria has begun renegotiating oil contracts with Royal Dutch Shell that could lead to major energy companies generating billions of dollars less in revenues from lucrative offshore blocks in Africa’s largest producer.

“We’ll be looking to better terms than the previous [production-sharing contracts],” Emmanuel Ibe Kachikwu, minister of state for petroleum, said.

“We would like to get better packages.” Nigeria has several types of contracts with energy majors including joint ventures for onshore blocks, in which the government has an equity stake, and production-sharing agreements for the deepwater ones.

The state signed production sharing contracts in the early 1990s with companies including Shell, France’s Total, Norway’s Equinor, Italy’s Eni and ExxonMobil of the US. Nigeria produces 1.8m barrels a day of oil.

Mr. Kachikwu said the old agreements favoured the foreign companies, giving them as much as 80 per cent of the oil that was produced after costs — known as profit oil — against the 20 per cent for the state.

“That is a non-starter,” Mr Kachikwu said. “It’s got to be better.” He said the new contracts should start at 60 per cent or lower in the company’s favour.

Under these types of contracts, the companies take the greater share in the initial stages of operation, before gradually shifting in favour of the state as the companies recover their investments.

Gail Anderson, at consultancy WoodMackenzie, said: “Nigeria just doesn’t want to have to wait until these blocks are producing huge amounts of oil to generate the profits they believe they are owed.”

Mr Kachikwu said the state energy company, the Nigeria National Petroleum Corporation, had already entered into renegotiations with Shell, which in 2023 will be the first company to see a contract expire. Others will expire by 2028.

“The Shell model, when they finish, will then be the basis of what we do with all other PSC contractors,” he said.

New terms will affect Shell’s final investment decision on developing the new $10bn Bonga Southwest deepwater project, for which it issued a tender for contractors in February.

Bayo Ojulari, managing director at Shell Nigeria Exploration and Production Company, said at the time the development would be subject to a “revised commercial framework”.

Nigeria has for years sought to overhaul these contracts and stem the huge revenue shortfall for the state of up to $28.6bn over the decade to 2017, according to a recent report by the Nigeria Extractive Industries Transparency Initiative.

“At the time of renewal, you have an opportunity to review it, and we’ll be looking at it in terms of have you recovered your investment, have you made money out of it?” Mr Kachikwu said.

Nigeria ‘needs structural reform’ to escape low-growth trapCurrent contracts will be honoured, and renegotiations “must be done [as] partners trying to find solutions and not government holding a big stick,” he said.

The original production-sharing contracts stipulated that they had to be renegotiated likely in terms more favourable to Nigeria, once oil passed $20 a barrel, which the government did not do.

Brent crude has been above this mark since the early 2000s.Last year, Nigeria’s Supreme Court ruled in favour of a group of oil-producing states that had sued the federal government for not collecting enough of the proceeds from the country’s oil wealth, which the lawsuit estimated at about $20bn.

Mr Kachikwu said the government did not plan seek to collect that money from the oil companies. “What’s done is done. We need to go forward and avoid that happening again,” he said.

But he said he hoped it would give it leverage in settling another lawsuit, in which the court ruled that Nigeria owed the oil companies roughly $6bn for over-collecting oil from the joint ventures.

The minister said he hoped the national assembly would soon pass a slate of decades-in-the-making reforms that are widely expected to bolster investment in the industry, and which are also thought to be key to negotiations over the production-sharing contracts.