Against the backdrop of the recent call from the Central Bank of Nigeria (CBN) for the review of the terms around production sharing contracts (PSC) with international oil companies (IOCs), industry analysts have said that this should only happen if the contracts have expired or clauses for re-negotiation have been met.
The analysts stressed the need for the government to respect the sanctity of the contracts, adding that incentives should be put in place for the oil companies if the government must review the fiscal terms of unexpired contracts.
Nigeria’s oil production structure is majorly split between joint ventures (JV) with government-owned Nigerian National Petroleum Corporation (NNPC) onshore and in shallow water, and production-sharing contracts (PSC) in deepwater offshore. Under PSCs, NNPC is the oil licence holder, but engages oil firms as contractors that bear all risk and recover costs through a share of production at a tax rate of 50%.
Last week, the Monetary Policy Committee of the CBN, at the end of its first meeting for the year, expressed concern over the continued depletion of the Excess Crude Account (ECA), saying the excess crude savings needed to be pumped up. It urged government to review “terms around production sharing agreements with oil companies while awaiting the passage of the Petroleum Industry Bill (PIB).”
“A contract is a contract. You can’t just come in the middle of the contract and say you want to change the terms. The sanctity of the contracts must be obeyed. If the government must review the terms, it needs to give the contractors (IOCs) incentives to make them come to the re-negotiation table. But if the government tries to impose it on them, what it will gain by doing so would be lost in terms integrity and investments,” Wumi Iledare, president of International Association for Energy Economics and director, Emerald Energy Institute, University of Port Harcourt told BusinessDay.
Iledare, however, said that if the contracts had expired or there are conditions for renegotiation that have been met, then it is left for the government to set up a committee for the review of the PSCs.
“If the contracts have not expired or there are no clauses that allows for re-negotiation, then government can create incentives to make re-negotiation attractive to the contractors. Although government can go ahead to cancel the cancel, but this will damage the country’s credibility and hamper investments in the nation’s oil and gas industry,” he said.
Ayodele Oni, an energy law and policy expert and senior associate in top law firm, Banwo & Ighodalo, said if fiscal terms are changed, which is allowed by the Deep Offshore and Inland Basin Production Sharing Contract Act allows, it would boost government revenue in the short run but may hurt the nation in the mid to long run, “as several international oil and gas exploration and production companies are already complaining about the fiscal regime. Many are selling assets and going to invest the funds in other hydrocarbons rich countries.”
“It is important to note that the Deep Offshore and Inland Basin Act empowers the government to do that under certain circumstances which I know had since crystallised. These circumstances include an oil price of 20 dollars or more, amongst other factors.”
Adebayo Akinpelu, fellow, Nigerian Association of Petroleum Explorationists (NAPE) and managing director, Fixital Nigeria Limited, said: “You do not review existing laws or agreement just to get more money into the coffers. Unless in a situation of war or other catastrophes, negotiated terms of agreement should be preserved.”
He said agreements are supposed to be negotiated by all parties involved not one party calling the shot. “Of course, the consequences of this include the drying up of investment by the oil companies in further developing the fields, this will lead to drop in production and you can trace other bandwagon effects of this e.g. loss of employment and the withholding or now skeptical new direct investors.”
Last year, Philip Asiodu, former presidential chief economic adviser, had disclosed that the PSCs executed in 1993 had three re-opener conditions for re-negotiating fiscal terms. “If the price of oil rose to $20.00 per barrel. This became a reality by 2000. If discoveries of reserves above 500 million barrels were made. This was achieved within 7 years by a few consortia. In any case after 10 years; this date was reached in 2003.”
The former Federal minister of petroleum had, at the 6th annual Nigerian Association for Energy Economic (NAEE) international conference in Lagos, stated that he could see no rational explanation for not negotiating within the existing contracts to optimise the nation’s revenue up to the targets hoped for in PIB, while waiting for it to become law.
“In the end, whatever the wishes of a nation in global competition to attract investment and partners in progress, it can only conclude internationally competitive contracts and must demonstrate a habit of respecting such contracts,” he added.
In 1993, PSC was widely introduced to address some of the issues faced by the Joint Operating Agreement (JOA) and also to provide a suitable agreement structure for encouraging foreign investment in offshore acreage.
By: FEMI ASU
