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A comparative analysis of the oil fiscal terms of Organisation of Petroleum Exporting Countries (OPEC) has shown that Nigeria’s Production Sharing Contract (PSCs) gives the best concession to oil firms in the country.
This highlights the importance of resolving disputes over Production Sharing Contracts (PSCs) with deep-water operators.
Nigeria’s PSCs is the only oil fiscal term in the world that awards zero royalty to government for drilling in deep offshore fields with depths of over 1,000km.
While in most of the PSCs, changes in international oil prices or production rate affect the company’s share of production; Nigeria’s terms have remained constant. Countries like Saudi Arabia and the United Arab Emirates set their terms according to the capacity of the acreages and prevailing economic indicators, such as oil price and output.
Crafted in 1993 when scant knowledge about deep offshore production existed, Nigeria’s PSCs were based on less than $20 oil price per barrel, with anticipated drilling depths of below 1,000metres. Two decades later, Nigeria’s biggest production is around depths of over 1,000metres and oil prices have risen above $100 per barrel within the period.
“The trigger for the decision to go all the way to Production Sharing Agreements came in the form of the Nigerian National Petroleum Corporation’s (NNPC) consistent inability to pay the cash calls,” writes Toyin Akinosho, publisher, African Oil and Gas Reports, citing a conversation with Funsho Kupolokun, a retired Group Managing Director of the NNPC who was also a group executive director of the corporation in 1993.
Kupolokun said the issue ballooned into a crisis for the first time in 1993, when the NNPC owed about $1.2 billion.
Nigeria’s PSCs however inserted clauses that mandated a re-examination of the fiscal terms, if oil prices reach $20, a re-examination and re-negotiation of the fiscal terms, for more equity in favour of government, should there be discoveries above 500 million barrels and an overall review of the contract, after 15 years.
It is the alleged unwillingness of the IOCs to sit down and discuss these terms that has been blamed for the dispute between Nigeria and the IOCs.
“Like every major energy contract, the PSCs that Nigeria signed contain possible renegotiation clauses in case the project dynamics change for better or worse. In Nigeria’s case, the project dynamics have changed for better, deep water fields have proven to be quite prolific, a fact the IOCs, based on their vast deep water experience, may have known from the word go,” said Olufola Wusu an oil and gas lawyer based in Lagos.
According to Wusu, not only are the royalty rates unfavourable, the petroleum tax payable under the PSC arrangement was fixed at 50% flat rate of chargeable profits for the duration of the production sharing contracts against the rate of 85%, prescribed by the Petroleum Profit Tax Act operable in the Joint Venture arrangement.
The unfavourable PSC terms may get worse as the Nigeria Extractive Industries Transparency Initiative (NEITI) says that production from PSCs consistently outstripped production 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.
Nigeria’s crude oil exports in recent times are being sustained by huge production from prolific deep offshore fields such as Shell’s Bonga, ExxonMobil’s Erha, Total’s Akpo and Usan; and Chevron’s Agbami, which are all under PSCs with unfavourable terms.
The latest push to revisit PSC terms is coming at a painful time for oil companies, which are slashing spending budgets to shore up their balance sheets faced with low oil prices.
“What the government needs to do now is to increase its monitoring of expenditures and oil lifting by the companies to cut costs that may be claimed by the operators and also to ensure appropriate royalties are paid,” Mayowa Afe, managing director of Danvic Petroleum International Corp told Platts.
“The government also needs to ensure that there is a favorable overall environment, especially security.”
ISAAC ANYAOGU
