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Uncertainty Hits Oil Industry after Deep Offshore Act Amendment by Buhari

-By Fred Ojiegbe

Decades of clamour for the review of government’s share of revenue under the Production Sharing Contracts (PSCs) between the various oil companies operating in Nigeria and the Nigerian National Petroleum Corporation (NNPC) yielded fruits recently following the signing of the Deep Offshore and Inland Basin Production Sharing Contract (DOIBPSC) Amendment Bill into law by President Muhammadu Buhari.

The signing of the law on November 4 was sequel to its approval by the National Assembly and subsequent transmission to President Buhari for assent.

Under the Act, a contractor (oil companies) undertakes all the financial, technical and operational risks associated with oil extraction in return for a share of profit in the oil (with the government) after payment of royalty, cost, and taxes.

The new amendment introduced key changes including the incremental royalty rate based on the price of oil.

It also mandated a periodic review of the PSC arrangement every eight years with the government estimating that the move would help Nigeria generate an additional $500 million revenue in 2020 and over $1 billion yearly after 2021.

President Muhammadu Buhari

How the PSCs started
Joint venture (JV) and PSCs are the two main oil production arrangements in Nigeria. In these two arrangements, the national oil company – the NNPC represents Nigeria’s interests. The JV arrangement started when oil and gas production was mainly from land, swamp, and shallow water. In the JVs, the government and oil companies have direct stakes according to funding interests. The founder of the oil field oftentimes is the operator of such an asset. In most of the JVs, the government’s equity holding is 60 percent except in Shell-operated fields where the government holds 55 percent.

However, when the search for oil and gas started advancing into the deepwater, which required more advanced technology, bigger funding and technical expertise, the government introduced the PSCs to encourage investors to search for oil and gas in deepwater, which eventually turned to be prolific.

In the PSCs arrangement unlike the JVs, the Federal Government through the NNPC holds 100 percent of the licenses and then contracts the oil companies to prospect and eventually produce oil and gas on its behalf.

In 1993, the NNPC entered into PSC agreements with eight IOCs. The Deep Offshore and Inland Basin Production Sharing Contracts Decree of 1993 which later became an Act in 1999 gave life to the PSC agreements signed by the NNPC with the IOCs. At the time the agreements were signed, crude oil price was very low and it was agreed that the fiscal terms in the contract would be reviewed under certain conditions.

Fruitless efforts to Review Deals
Two clauses of the Deep Offshore and Inland Basin Production Sharing Contracts gave conditions upon which the PSC terms could be reviewed.

The first is Section 16 (1) which provided for a review of the terms 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.” This review should have been activated in 2004 when oil prices exceeded the $20 per barrel mark but it was not done in 2004.

Section 16 (2) provided for the second review to be activated 15 years following commencement of the PSC Act. Section 16 (2) states: “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”.

Shettima Abba-Gana Acting Chairman of RMAFC

This second review should have happened in 2008. Though there was a letter dated July 2007, by DPR to the companies that the government intended to review the 1993 PSCs, the review was not carried out.

Years of Lost Revenues

The federal government responded to the clamour for a review in late 2017, with then Minister of State for Petroleum Resources Ibe Kachikwu disclosing, after the Federal Executive Council (FEC) meeting of 14 December 2017, that the federal government was looking to amend the PSCs to ensure it achieves the objectives of section 16 of the PSC Act.

For years the powerful multinationals and their allies inside and outside the country were said to have worked against change in the Deep Offshore Act thus depriving Nigeria several billions of dollars rightfully due to the country.
Nigeria has lost huge revenues for over a decade that the Act had failed to be reviewed.

Kachikwu stated at the time that the government had lost about $21 billion over a period of 20 years due to the failure to review the PSC Act as provided under section 16.

A March 2019 report done by the Nigeria Extractive Industries Transparency Initiative (NEITI) and open oil found that failure to review the PSC terms, as demanded by the law, cost the country between $16.03 billion and $28.61 billion within 10 years (2008 and 2017).

That was a loss of between $1.6 billion and $2.86 billion on the average per year within that period. Such a review, NEITI said was particularly important for the federation because oil production from PSCs had surpassed production from JVs.

Acting chairman of the Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC), Shettima Abba-Gana estimated losses to the non-review of the PSC for the past 11years at about $60bn.

Uncertainty, anxiety trail review
The signing of the PSC Act has elicited mixed reactions and anxiety in the oil and gas industry at large.

Group Managing Director of the NNPC, Malam Mele Kyari, said at a recent event that the amendment of the Deep Offshore (and Inland Basin Production Sharing Contract) Act was long overdue and there was no cause for the anxiety.

Speaking at the opening of the 37th Annual International Conference and Exhibition of the Nigerian Association of Petroleum Explorationists (NAPE) in Lagos, the NNPC GMD said: “We have noticed the level of anxiety caused by the amendment but we believe that there is room for commercial conversation.

“As an industry, we must rally round the government to ensure the passage of legislatures that will put the industry forward.’’ Kyari said and maintained that investing in Nigeria remains a viable option for oil majors as the chances of finding oil was very high, especially in the Niger Delta region.

The consolatory statement by the GMD comes after heightened fears that several deepwater oil projects that have not been sanctioned by international oil companies (IOCs) operating in Nigeria may suffer a further setback following the amendment of the Deep Offshore (and Inland Basin Production Sharing Contract).
In the last 10 years, only three new deepwater projects – Usan, Aje and Egina – have come on stream in the country.

International oil companies and their local counterparts under the aegis of the Oil Producers Trade Section (OPTS), a private industry group under the umbrella of the Lagos Chamber of Commerce and Industry, had earlier said the amendment of the PSCs would worsen Nigeria’s competitiveness and make its $15bn planned deepwater investments economically unviable.

The OPTS, had in a presentation to the Senate, said the Deep Offshore and Inland Basin Production Sharing Contracts (Amendment) Bill (now an Act) said, “The industry is burdened by a plethora of other taxes, fees, levies and other tariffs. This rate increase would result in future deep water projects becoming economically unviable and leading to at least a $15bn reduction in planned near-term investments.”

Projects without final investment decisions are Shell’s Bonga South-West Aparo (with a capacity of 225,000 barrels per day) and Bonga North (100,000bpd), Eni’s Zabazaba-Etan (120,000bpd), Chevron’s Nsiko (100,000bpd) and ExxonMobil’s Bosi (140,000bpd), Satellite Field Development Phase 2 (80,000bpd) and Uge (110,000).

“As the bill stands, we have concerns about it not being the ideal for the country in terms of foreign direct investment. Of course, the government has the right to do whatever it wants to do. We have not seen the signed bill by the President. When we get a hold of it, we will be able to make a comment on it,” the group said.