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As more oil majors move operations into deep waters and offshore oil production surpasses joint venture arrangement, Nigeria’s crude oil earnings will be impacted negatively, unless Production Sharing Contracts (PSCs) fiscal terms are addressed as a matter of necessity.
A report released by the Nigeria Extractive Industries Transparency Initiative (NEITI) on December 21, states that production from PSCs consistently outstripped that from Joint Ventures (JVs) between January 2015 and September 2016.
“Production from PSCs has been relatively stable- between 25 million and 28.7 million barrels per month. On the other hand, production from JVs has fluctuated a great deal- between 14.4 million and 24.2 million barrels per month,” the report states.
NEITI says militancy and divestment of federation equity in some Oil Mining Leases (OMLs), notably from Nigerian Agip Oil Company (NAOC) and Shell Petroleum Development Company (SPDC) JVs from which NNPC lifted crude oil on behalf of the Nigerian Petroleum Development Company (NPDC) instead of Federation Account, has significantly reduced NNPC’s JV production.
The report states that PSCs contributed between 40 per cent and 53 per cent of total crude oil production. JV’s contribution ranged between 27 per cent and 35 per cent, while Alternative Financing’s (AF) contribution was between 11 and 18 per cent.
NPDC’s contribution was between 2 per cent and 7 per cent, while marginal fields contributed between percent and 7 percent. Thus, for some months (May – September, 2016), production from PSCs outstripped total production from all the other production arrangements combined.
The revenue implication for Nigeria, is that government’s take will fall further, as it exits the JVs and retains unfavourable PSCs terms which give the bulk of crude earnings to IOCs who assume production risk in deep waters.
Under Nigeria’s PSCs terms, the Federal Government owns concession areas through the NNPC but the operator has funding obligations for cost of exploration, drilling, development and production, if it finds oil in commercial quantity.
Royalty applicable to PSCs range from zero for the deep offshore fields to a high of 16.67% for water depth up to 200 meters but the irony is that oil majors have been finding crude in deep waters with depths over 1,200 meters which means zero royalty to government.
“Considering the fact that these rates regulate deep water drilling, it was not particularly prudent on Nigeria’s part to have based the royalty rates on drilling depth, ignoring indices like production levels, and oil prices. Even more alarming is the fact that deep offshore reserves are more prolific than land based reserves,” said Olufola Wusu an oil and gas lawyer based in Lagos.
Bonga, Nigeria’s first deep-water oil field started production in 2005 with about 200,000 barrels per day capacity at depths of more than 1,000m which means that Nigeria has not benefited much from this field, based on the PSC model which guides the operation of the field.
This also applies to the Erha deep-water development, including the Erha field and Erha North satellite field, which was completed in 2006.The fields are located approximately 97km offshore Nigeria, in water depths ranging from 1,000m to 1,200m.
The effect of militancy on oil and gas infrastructure in the Niger Delta and the uncertainties associated with joint venture cash-call funding are forcing more operators to move into deep waters, where governments take is low, on account of poorly thought-out fiscal terms.
“Government will be wise to hasten work on fiscal reforms which will make it a little bit beneficial to it,” says Wunmi Illedare,
Illedare further says, “Government having zero per cent royalty on deep water production of 1,000m will decrease direct revenues to the government, it will be wise to put in place cost management strategies,” he said.
Other issues which require urgent resolution include the interpretation of the measurement point of crude oil for royalty purpose. While the DPR insists that the measurement point is the wellhead, the oil companies file self-assessment returns on the basis of export volume at the Terminal.
ISAAC ANYAOGU
