How obsolete laws short-change Nigeria’s oil revenue


July 6, 2018 | 5:16 pm
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The Nigerian National Petroleum Corporation (NNPC) places Nigeria as the largest oil and gas producer in Africa and the sixth largest in the world. Nigeria also ranks 16th on the US Energy Information Association’s table for Total Petroleum and Other Liquids Production 2017.

With the current rate of oil price, Nigeria has no reason to succumb to the phenomenon called “Dutch Disease,” which has traditionally infected most natural resource dominated economies.

About fifty years after the Nigeria Petroleum Act 1969 was enacted, the country’s oil and gas industry is still running on laws that are no longer competitive and beneficial to the economy due to lackadaisical attitude of various arms of governments.

The Petroleum Act is the principal statute that governs petroleum operations, including exploration, production and use. It vests ownership and control of all petroleum exclusively in the government and the exercise of the powers consequent on this title in the minister of petroleum resources. Qualified persons wishing to carry out any form of petroleum operations can do so only on the basis of authorisation granted by the minister. The Petroleum Act and its subsidiary legislation, including the Petroleum (Drilling and Production) Regulations, the Petroleum Regulations and the Petroleum Refining Regulations, govern petroleum operations in Nigeria including, but not limited to, exploration, development, production, storage, transportation, refining and marketing.

The upstream oil sector is the single most important sector in the economy, accounting for over 90percent of the country’s exports and about 80percent of the Federal Government revenue as Crude Oil is currently produced from three different basins; the onshore Anambra, the offshore Benin/Dahomey (deepwater and ultra-deepwater) and the Niger Delta (shallow and deep offshore basins).

The Niger Delta and Benin basins are known to be the richest basins and hold the vast majority of reserves, and the source of a large portion of current production. During the late 1990s, exploration focus turned to high risk ventures in the frontier basins of deep water offshore, with encouraging success. These ventures are becoming increasingly attractive, with developments in deepwater exploration and production technology.

According to the NNPC’s from January 2015 to December 2017 Nigeria has an average daily production of 69.88 million bpd while total monthly gas production as at December 2017 stood at 234 million b.c.f.

Further Investigations into NNPC financials showed Production Sharing Contracts (PSCs) had the highest production with 44.87 percent of 954.34 million barrels produced over the three year period while Joint Ventures (JVs) came second with 31.35 percent of 666.7 million barrels produced, while Alternative Financing (AFs) had the third highest production with 14.14 percent of 300.72 million barrels produced. Marginal Fields (Independents) was fourth highest with 4.52 percent production of 117.45 million barrels, while the Nigerian Petroleum Development Company (NPDC), the upstream company owned 100 percent by NNPC, had the lowest production of 87.43 million barrels contributing just 4.11 percent to total production.

The implication of this to the economy is that there will not be complete accountability for sure, and it would definitely affect the finances of the government, this is because if the country says it produces and for example two million barrels of oil daily, and what indeed gets to the market is less than what is supposedly produced, then we would definitely have an accounting problem, and this has always resulted in inaccuracy in the calculation of the actual revenue from oil and gas resources.

Not knowing the actual production and sales of crude oil leaves room for inaccuracies and easy exploitation of the gap created by the inaccuracies. What that also means is that certain people would be able to capitalise on this for personal benefit.

Adeola Adenikinju, gas policy analyst for the World Bank and professor of Economics at University of Ibadan said many oil producing countries are moving towards the PSC  structure as it takes the pressure away from the government most especially the cash call obligations which Nigeria government have always been indebted to.

The PSC is 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.

As a result of the increasing funding pressure from the JVs, the Federal Government adopted the PSC model in 1993 as the preferred petroleum arrangement with MOCs. Apart from awards restricted exclusively to indigenous companies, awards for upstream operations are now made on PSC basis. The first set of PSCs was signed in 1993, followed by those executed in 2001, after the 2000 licensing rounds

“A lot of production activities have move towards deep offshore which was very attractive for PSCs since 2003; the idea was that as oil price goes up the contracts will be review however Nigeria government have failed to do so,” Adenikinju, professor of Economics at University of Ibadan said.

Under this arrangement, the concession is held by NNPC. NNPC engages the multinational oil company’s or the indigenous company as Contractor to conduct petroleum operations on behalf of itself and NNPC. The Contractor takes on the financing risk. If the exploration is successful, the Contractor is entitled to recover its costs on commencement of commercial production. If the operation is not successful, the Contractor bears the loss.

“The fiscal regime that underscores the administration of offshore activities were so generously drawn up for the PSC’s when oil prices were very low which is now currently out-dated allowing majority of the companies benefits from current higher oil prices than Nigeria itself,” Adenikinju told BusinessDay.

The Deep Offshore and Inland Basin Production Sharing Contracts Act prescribes fiscal incentives for companies operating in the deep offshore and inland basin areas of Nigeria under production sharing contracts.

Adenikinju added, “The PIB will have being an opportunity to bring the system to international standard and make it more competitive which will benefit the government more.”

The PIB is an omnibus legislation which seeks to regulate all activities in the Nigerian oil and gas industry; When passed into law, it will repeal the existing laws, which govern the industry, particularly the Petroleum Act of 1969, as amended, the Petroleum Profit Tax Act of 1990, as amended and the Nigerian National Petroleum Corporation Act of 1977.

Nigeria has been on a perpetual voyage with PIB which is one of its most important bills ever to be contemplated in Nigeria’s history in a journey that began sixteen years ago with a lot of anticipation and promises.

The bill is still stuttering through legislation after passing through four presidents, five presidential terms and five legislative tenures yet there are little or no results to show.

According to the agency mandated by law to promote transparency and accountability in the management of Nigeria’s oil and gas revenue, Nigeria Extractive Industries Transparency Initiative (NEITI) early last month declared that the old agreement used in computation of revenues to be shared between the government and oil companies is no longer acceptable, calling for urgent review despite earning $104.484 billion from oil between 2015 and 2017.

NEITI said the loopholes in the Deep Offshore and Inland Basin Production Sharing Agreement (PSC) between Nigeria and oil companies crippled the nation’s total share to $35.893 billion against the oil majors who earned about $68.591 billion.

“The fact that PSC productions now account for almost 50 percent of total oil production makes an urgent case for a review of the terms as stipulated by the Act,” NEITI said.

The agency noted that delay or failure to review and renew the agreement means that payment of royalty on oil production under PSCs would not be made while computation of taxes would be based on the old rates.

There is no doubt that the petroleum fiscal agreements (PFA) in Nigeria are good enough to propel Nigeria’s economy to its full potential. A study published by scholars at Louisiana State University’s Center for Energy Studies, however, suggests that the type of contract offered is not as important as the design of the contract and the terms negotiated.

“The present worth of a project under PSC to an IOC is more sensitive to fluctuations in oil prices than it is for a JV’s projects.  The sensitivity is, however, asymmetric with respect to decreasing or rising prices for both types of projects. The latter is also true for the present worth of the project for NOC. On the other hand, the present worth of a PSC project for the NOC is less sensitive to price variation than it is for a JVA project,” Center for Energy Studies, Louisiana State University’s said in its report.

Ademola Henry team leader at the Facility for Oil Sector Transformation (FOSTER) said the increase in PSCs is because onshore activities of joint venture are more prone to militants attacks compare to offshores where most PSC operates.

“Although, higher returns comes from PSC because yield determinations on equity is based on debt however  Nigeria government can’t meet up to its cash call obligations any more from joint ventures as majority of its contracts and laws are also outdated,” Henry team leader at FOSTER told BusinessDay.

Crude oil prices averaged $16.33 in 1993 and had risen to $17.44 by 1999 which was the last time efforts were made to amend the decree to reflect that if crude oil exceeds $20 to a barrel or after 15 years after the initial contracts were signed, the agreement should be renegotiated in a manner that will be favourable to Nigeria.

“There is an amendment act of PSC already with the national assembly which if amended will allow Nigeria benefit more from its oil,” Henry teamleader at FOSTER told BusinessDay.

There are at least, four bills to amend the Deep Offshore and Inland Basin Production Sharing Contracts before the National Assembly.

The challenges facing the oil and gas industry in Nigeria may perhaps be quite difficult to resolve constructively without an amendment to the 1999 Constitution of Nigeria. The key elements of these challenges include resource ownership and the exclusive rights of the national government to grant the permission to explore and develop petroleum resources in Nigeria; effective, progressive petroleum fiscal systems; funding options for joint venture operations and the NOC; authentic indigenous participation in the domestic oil and gas industry; the rules of law and institutional empowerment.


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July 6, 2018 | 5:16 pm
  |     |     |   Start Conversation

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