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Oil production sharing contract and conspiracy of silence

OPEC, OIL

By Sonny Atumah

President Muhammadu Buhari last Monday in far away the United Kingdom gave accent to the long-awaited Deep Offshore and Inland Basin Production Sharing Contract Act 2004 (Amendment) Bill, 2019.

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To Buhari, it appeared a joyous moment that Nigeria will now receive its fair, rightful and equitable share of income from natural resources for the first time since 2003.

It was sad that all this time Nigeria failed to secure its equitable share of the proceeds of oil production. Rapid reductions in the cost of exploration, extraction and maintenance of oil fields had occurred over these 25 years, at the same time as sales prices have raised. President Buhari believes that a combination of complicity by Nigerian politicians and feet-dragging by oil companies were conspiratorial to keep taxes to the barest minimum above US$20 per barrel—even as now the price is some three times the value.

What happened that for this long we could not identify this monkey bite? It was our usual carefree attitude and conspiracy of silence hunting us. Nigeria lost at least US$16 billion due to non-review of Production Sharing Contracts, PSC with oil companies in ten years according to NEITI report this year.  The PSC which appeared to be a solution to the Joint Venture, JV system was another albatross.

The joint venture system mandates monetary contributions from all partners, with the NNPC’s subsidiary, the National Petroleum Investment Management Services, NAPIMS serving as a joint venture partner to International Oil Companies, IOCs. NAPIMS struggled to meet the funding needs of oil companies, with total arrears that reached US$6.8 billion in 2016 before it was renegotiated and reduced to US$5.1 billion. By June 2018, NAPIMS had made full payment on all joint venture arrears.

In 1993, the Federal Government entered into Production Sharing Contracts with oil companies to explore oil and gas in the deep offshore and inland basins of Nigeria. The PSC provides that total control of petroleum resources is retained by the government. Exploration risks are borne by exploration and production companies that provide technical knowhow and finances. When the oil is successfully explored and exploited, the operating company recoups the cost, while the profit from oil, all calibrated is shared between the government and the company. \

The government takes the royalty and the tax, from crude oil produced. The generous terms of the PSC were drawn considering the risks and low oil prices than to attract investors in exploration and production, E&P in offshore fields. The seven producing fields of the 1993 PSCs are OML 118 Bonga operated by Shell, OML 125 Abo operated by ENI, OML 127&128 Agbami-Ekoli operated by Chevron, OML 130 Akpo and Egina operated by Total and South Atlantic Petroleum, OML 133 Erha operated by ExxonMobil, OML 126 Okwori and Nda operated by Addax and OPL 222 Usan operated by ExxonMobil.

The 1993 agreement, despite its imperfection, had provision for both parties to renegotiate and review when the price of crude oil exceeds US$20 per barrel. A review could also be triggered after 15 years from the date of commencement of the PSC Act, and every five years thereafter. The time past and price of crude at a time went up to unimaginable levels, but both parties winked at the PSC. The IOCs would never forget to remind the Federal Government of not meeting its equity participation by way of cash calls or counterpart funding even as the PSCs fell flat. With a shrewd assessment of the situation in Nigeria, IOCs were comfortable that the law comes to the assistance of those who are vigilant with their rights, and not those who sleep on their rights. It indeed evoked sadness.

In 2016, three oil-producing states of Akwa Ibom, Bayelsa and Rivers challenged the Federal Government and the IOCs in court and obtained a judgment from the Supreme Court. The three states argued that oil had soared from nine dollars to above US$20. The three state governments had argued that along with the Federal Government, were shortchanged to the tune of US$20 billion between 2003 and 2015. The Supreme Court in a consent judgment directed the Attorney General of the Federation to work with the three states to set up a body and necessary mechanism for recovery of all the lost revenue since August 2003. In our usual way, we are jolly good fellows. And Nigeria paid dearly for it.

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The international oil companies that drill our oil and the home countries have become beneficiaries of entitlement programmes ordinarily meant for Nigerians. Entitlement programmes are government programmes that target a particular section of the population to receive specific social benefits. Money for these programmes comes primarily from general government funds. Their governments provide work incentives to people having difficulty finding desirable full-time jobs by providing wage supplements to part-time workers.

They also provide funding for employers to create jobs, subsidies to employers who hire welfare recipients, and job-seeking assistance. One hopes that President Muhammadu Buhari’s assurances of having the capacity to generate at least US$500 million for the proposed 2020 budget would be a reality. It could go a long way for special intervention programmes for the poorest of the poor, the implementation of which should be devoid of our systemic infection of failure.

Vanguard

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