Govt Fails to Review Oil Contract Despite $21 Billion Loss

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.

Revelation made in 2015 by the Minister of State for Petroleum Resources, Ibe Kachikwu, who was then the Group Managing Director of NNPC, had pointed to the need for the review to create a fair pact. But necessary actions have not been taken in about three years.

While speaking on the need for a review in 2015, Kachikwu said: "We intend to begin the process of the re-negotiation of the PSCs, to see what value chain and improvements we can have from these contracts. Some of the contracts were negotiated over 20 years ago, and they have since been overtaken by new realities in the industry."

His media team, headed by Idang Alibi and Uche Adighibe, is yet to respond on the reason the minister has not taken action, though the Federal Executive Commission has asked for a renegotiation of the contract.

The House of Representatives, which had pledged to take action over the issue, has probably swept investigation into the matter under the carpet in the face of the need for an amendment on royalty rates in the contract.

The Chairman of the ad-hoc committee investigating the issues, Daniel Reyenieju (PDP, Delta) had said: "We are expected to investigate the operations of the deep offshore and Inland Basin Production Sharing Contracts Act, as it concerns the NNPC and IOCs towards determining the reasons for the loss of $21 billion, and enquire why appropriate steps were not taken promptly and over an inordinately long period to remedy the situation which led to the loss, and possibly recover the revenue."

The Director, Emerald Energy Institute, University of Port Harcourt, Prof. Wumi Iledare, said the contract has disparity like the 1999 constitution and requires the passage of the Petroleum Industry Bill (PIB) to become favourable.

"The PSC of 1993 is a military baby, just like the 1999 constitution. The Inland and Deep Offshore Act, which gave legal backing to PSC 1993, retroactively perhaps, came after. I also understand a $20 dollars per barrel threshold that could have triggered the review of PSC terms was not done for certain intimidating conjectural reasons. Here is where proper fiscal regime, looking forward, is so critical. And implementing the PIGB appropriately with skilled workforce is also essential," he said.

Though the contract will end by 2023 and open up the opportunity for review, Iledare insisted that the country might fall victim, because dealing with the IOCs requires competent workforce, which Nigeria might not have, due to recruitment that is "purely driven by Federal Character Commission and the 'man knows man' phenomenon or 'This is Nigeria' mentality."

The Chairman/Chief Executive Officer (CEO) of International Energy Services Limited, Dr. Diran Fawibe, said government might still suffer losses unless the PIB becomes law.

Indeed, if the National Assembly falls for the lobbying currently going on by IOCs to soften the terms and conditions in the draft fiscal regime, the country could continue to get a small share of its own resources, Fawibe said.