Nigeria: Govt Fails to Review Oil Contract Despite $21 Billion Loss
By Kingsley Jeremiah
Abuja — The Federal Government has remained docile over the need to review the Production Sharing Contract (PSC) signed about 25 years ago between the Nigerian National Petroleum Corporation (NNPC) and International Oil Companies (IOCs).
While losses of over $21 billion have already been recorded since threshold for review of the contract was reached in 2000, experts are expecting the losses to triple as the price of crude oil increases and more deepwater projects come on board.
With over $7.2 billion spending going into Nigeria’s ultra-deep offshore blocks between 2018 and 2020, according to statistics from Global Data, the IOCs will by implication smile home daily at the detriment of Nigerians, especially as the price of crude oil moves up and cost of oil production drops.
Had the Federal Government been proactive, the 1993 contract would have been reviewed since 2000, using the three opportunities that allowed for a re-negotiation of the contract.
The threshold for review provided in the Deep Offshore Act stated that there would be re-negotiation should oil price move to $20 per barrel. This was achieved in 2000. It also provided an opportunity, should discoveries climb above 500 million barrels per day. Again, this condition was achieved in 2003. A review was also expected after 15 years of a licence. This was achieved in 2008 for the 1993 licences, and 2015 for the licences offered in 2000.
The PSC, a form of joint agreement for exploration, development and production of oil resources, makes extractive companies bear the cost of production, unlike the joint venture agreement where government is indebted with cash call.
The PSC arrangement has the NNPC as holder of the concession for the government, while the IOCs are the contractors. The agreement started with eight IOCs in 1993.
According to stakeholders, the PSC had attracted IOCs due to its favourable fiscal and legal regimes, which offer a higher profit share for the more marginal and high-risk projects offshore.
With a mild review in 2000, eight new deepwater licences were offered. Also, in 2005, 14 deepwater licences were reportedly offered.
The PSC provided for the recovery of the cost of exploration of crude oil in the event of commercial find, with provisions made for tax oil, cost oil, and profit oil, following which the balance, after deductions are made, is shared between the NNPC and the contractor in an agreed proportion.