International oil companies, which entered into Production Sharing Contracts with the Federal Government more than two decades ago, are still enjoying the generous terms they got as talks of re-negotiation over the past few years have yet to materialise, ’FEMI ASU writes
The delay of the much-talked about re-negotiation of the terms of the 1993 Production Sharing Contracts between the Federal Government and international oil companies is not only depriving the government of additional oil revenue, but also creating uncertainty in the nation’s oil and gas industry, our correspondent has learnt.
Industry operators and experts, who spoke with our correspondent in separate interviews, noted that the contracts were long overdue for re-negotiation.
The nation’s oil and gas production structure is mainly split between joint ventures, with the Nigerian National Petroleum Corporation onshore and in shallow water, and the PSCs in deep-water offshore.
Under the PSCs, the NNPC is the oil licence holder but engages oil firms as contractors that bear all risks and recover costs through a share of production at a tax rate of 50 per cent.
In September 2015, the then Group Managing Director of the NNPC, Dr. Ibe Kachikwu, who was the Vice Chairman and General Counsel of ExxonMobil Nigeria, one of the IOCs, said the corporation was set to revisit the fiscal terms of the existing PSCs entered into by the corporation with some IOCs with a view to seeking favourable benefits for Nigeria based on prevailing realities in the industry.
He said in the weeks and months ahead, the corporation would be re-negotiating the contracts as it “is allowed to make use of the window, which creates space for re-negotiation.”
“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,” he added.
But more than two years after, the contracts have yet to be re-negotiated.
Last week, the International Monetary Fund said it supported the authorities’ objective to ensure that the government’s take from oil exploration is appropriate.
“To that end, it welcomes the minimum royalty payment on all oil and gas production but notes that the proposed combination of price-based and production-based royalties is overly complicated and risks posing an unnecessary barrier to investment,” it stated.
Prior to the President Muhammadu Buhari administration, a former Minister of Petroleum and Presidential Chief Economic Adviser, Philip Asiodu, noted that the PSCs executed in 1993 had three re-opener conditions for re-negotiating the fiscal terms.
Highlighting the conditions, he said, “If the price of oil rose to $20 per barrel, this became a reality by 2000. If discoveries of reserves above 500 million barrels were made, this was achieved within seven years by a few consortia. In any case, after 10 years, this date was reached in 2003.”
Asiodu 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 the Petroleum Industry Bill, while waiting for it to become a law.
In 1993, the PSC was widely introduced to address some of the issues faced by the Joint Operating Agreement and to provide a suitable agreement structure for encouraging foreign investments in offshore acreage.
The Chief Executive Officer, Gacmork Nigeria Limited and ex-Chevron executive, Mr. Alex Neyin, said the contracts were lopsided in favour of the oil majors and “allow them to carry away more money.”
He said, “So, if they allow the re-negotiation to happen now, they will lose money. So why don’t you bribe and keep pushing it forward? That’s what is going on. It’s corruption. The previous PSCs were really bad agreements. I don’t know who agreed to such things.
“The bottom line is corruption. They know what is right. Everybody in the system knows what is right. But what is happening is that there is money moving under the table. So, on the basis of that, that creates inaction or delay for more money to be made by them. There is nowhere you have the sort of contracts. This is a corrupt package they call the PSCs.”
A petroleum expert, Mr. Bala Zakka, said Nigeria needed to appreciate the few oil majors that ventured to take the risk of exploring the nation’s deep-water.
He noted, “There is nothing wrong in re-negotiating the contracts but the government should not strangulate the IOCs by charging them so high. All the government needs to do is to see if there will be a little adjustment because at the end of the day, it is going to be a win-win situation.
“Over the years, some of us have noticed that some of the leaders we have, who are running the oil and gas industry, have not been consistent. They will make pronouncements about licensing round for oil fields, nothing will happen. They will say something about the turnaround maintenance of refineries, nothing will happen.”
An energy law expert and Partner, Bloomfied Law Practice, Mr. Ayodele Oni, added, “Anything that has to do with petroleum, because that is the mainstay of the Nigerian economy, is usually very controversial and is always filled with vested interests.
“In amending such statutory contracts, you need to carry along all stakeholders, and I am sure that’s part of the reason it is being delayed.”
He said the drop in oil prices had also been a challenge, and that the government should be careful not to scare away the oil majors.
A former Chairman, Society of Petroleum Engineers, Nigeria Council, Dr. Saka Matemilola, said there had been a lot of discussions between the IOCs and the government on the matter.
“We also need to realise that because of the uncertainty around this issue, there has been a lot of investments that have been put on hold for about 15 years now. If you look at the number of final investment decisions taken in the upstream over the last 15 years, it has been very few,” he added.
An energy expert and associate professor, University of Lagos, Dr. Ayoade Adedayo, said the government gave the IOCs generous terms to entice them to go into the deep-water space.
He noted that the re-negotiation should have been done when crude oil prices were very high.
Adedayo stated, “The government does not seem to have the political will to re-negotiate the contracts. When oil price was quite high, you refused to force them to the negotiation table. Is it now that the prices are just trying to recover that you now want to do this?
“When you say you want to re-negotiate and you don’t and nothing happens for years, you create uncertainty. It is better not to say you want to re-negotiate than to say you want to re-negotiate and fail to do it. If you want to re-negotiate and you announce it, what’s stopping you from re-negotiating?”
Last month, the Minister of State for Petroleum Resources, Kachikwu, lamented that the country had lost a lot of money to many PSCs.
Kachikwu, who stated this in Lagos during a visit to the Egina Floating Production, Storage and Offloading vessel at LADOL Free Zone, said, “We are going to begin to look at what is the net value for the country in this huge project. We are not as a country very impressed with a lot of the PSCs that we have put together. We lose a lot of money in the process.”
“This kind of thing will not happen anymore. So, the terms will change; the basis upon which we proceed will change. But Nigeria will continue to be a prolific economic return model for any country in the world in terms of oil production,” the minister added.
Source: Punch
