Author: Sesan Akinsanya
Introduction
The Nigerian President, Muhammad Buhari, on November 5, 2019 assented to the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act 2019 (the PSC Amendment Act). The changes that were made by the PSC Amendment Act were made to the Deep Offshore and Inland Basin Production Sharing Contract Act 1993, CAP. D3, Laws of the Federation of Nigeria, 2004 (the PSC Act). The Amendment Act basically adds new revenue streams to the covers of the government, via increased royalty payment. These changes are quite significant and far-reaching, with significant implications for the existing Production Sharing Contracts (PSCs) between the Federal Government of Nigeria and the oil majors operating in the deep offshore of Nigeria.
Historical background
In 1993, Nigeria entered into PSCs with international oil companies (IOCs) to explore for oil in its contiguous offshore oil blocs. Prior to that time, Nigeria oil exploration and production activities were mainly limited to its land and swamp areas. At the time these PSCs were signed, Nigeria was facing challenges of funding oil exploration, especially under the then existing joint venture arrangements with IOCs. Also, deep offshore oil exploration was relatively new globally and certainly it was the case for Nigeria. It was also technically challenging and expensive, a risky venture with only limited few oil giants having record of success. For these reasons, the Nigerian government offered very attractive incentives to the eight international oil companies that the PSCs were signed with to encourage them to invest aggressively in the fields.
In response to the demands of the IOCs, the Federal Government in 1999 gave a statutory backing to the 1993 PSC arrangements when it enacted the PSC Act in order to demonstrate Government’s commitment to the PSC arrangements. In order to make it applicable to the 1993 PSCs, Section 19 of the PSC Act backdated its commencement to the 1st of January 1993.
The PSC Act provides for various incentives for to encourage the IOCs to commit to major investments. Key incentives provided are: · No royalty payable to the government for production beyond 1000 meters offshore.
· Royalty payment in various low graduated percentages for oil explored between 100 meters and before 1000 meters.
· A flat 10% royalty payment for oil found in the inland basin.
· A lower rate of petroleum profit tax (50% as opposed to 85% payable under the joint venture arrangement).
· Other favourable terms relating to profit oil split, investment allowance and cost recovery limits.
Successful exploration of Nigeria's offshore deep waters, inspired by the very attractive incentive provisions of the Act, led to the discovery of various rich oil fields. Some of the fields discovered and that are now producing are Bonga, operated by Shell under Oil Mining License (OML)118, Agbami (OML 127 and 128) operated by Chevron, Erha (OML 133) operated by ExxonMobil and many other offshore oil fields. With the massive investments among the oil majors, Nigeria's crude oil reserves rose to about 36 Billion barrels as at June 2019.
Despite the increased crude oil production per day and reserve, the Nigerian government shared comparatively very little in terms of revenue, due to the failure of past government officials to trigger successfully the review provisions of the PSC Act. This is the state of thing the amendment Act seeks to correct.
Review clause of the PSC Act A key provision of the PSC Act relates to the review of the PSCs. Section 16(1) of the Act provides that: “The provisions of this Act shall be subject to review to ensure that if the price of crude oil at any time exceeds $ 20 per barrel, in real terms, the share of the government of the Federation in the additional revenue shall be adjusted under the production sharing contracts to such extent that the production sharing contracts shall be economically beneficial to the government of the Federation.”
Sub-section 2 of section 16 the Act further provides that: “Notwithstanding the provisions of subsection (1) of this section, the provisions of this Act shall be liable to review after a period of fifteen years from the date of commencement and every five years thereafter.”
Despite the clear provisions of this section, it is baffling that those in authority in Nigeria did not take any concrete effort to take advantage of this provision. In light of the forgoing provisions of the Act, the PSC provisions ought to have been amended in such a way as to be economically beneficial to the Nigerian nation and its people since over 15 years ago, when the price of crude oil in real terms exceeded $20 dollar per barrel. Nothing was done until this latest amendment.
According to President Muhammadu Buhari of Nigeria “a combination of complicity by Nigerian politicians and feet-dragging by oil companies has, for more than a quarter-century, conspired to keep taxes to the barest minimum”
The amendments The PSC Amendment Act introduces new provisions by amending Sections 5 and 16 of the PSC Act.
Under the erstwhile regime, royalties for Deep Offshore Production Sharing Contracts are based on a sliding scale of water depth with the highest rate at 12% in areas between 201 to 500 meters water depth and 0% in areas in excess of 1000 meters of water depth. The PSC Amendment Act has changed this by having a combination of (i) a flat royalty rate for deep offshore and inland basins and (ii) change in price of crude, gas and condensate, as bases for determining royalties payable.
The Amendment Act introduces: · Flat rate royalty applicable to all PSCs irrespective of water depth Under the PSC Act, royalties were based on water depth depending on terrain with the relevant rates declining as water depth increases.
· The PSC Amendment Act provides for a flat rate royalty on all Deep Offshore PSCs (i.e. areas greater than 200m water depth) of 10% chargeable on the volume of crude oil and condensates produced from the relevant area.
· Also, the royalty rate of 7.5% on the volume of crude oil and condensates produced from the relevant area is applicable to Inland Basins which is a reduction from 10% applicable under the PSC Act.
· For the purpose of ensuring that royalties change on the basis of changes in price of crude oil, condensates and natural gas, section 16 of the PSC Act has been amended to the effect that royalty rates are now based on various prices of crude oil, condensates and natural gas.
The PSC Amendment Act mandates the Minister of Petroleum Resources to review production sharing contracts every eight years. In contrast, the erstwhile provisions in the PSC Act is silent on when the National Oil Company or when the Minister of Petroleum Resources is expected to review the signed production sharing contracts. It only provides for the review of the PSC Act provisions after the first fifteen years from the date of its commencement and every five years thereafter.
The PSC Amendment Act further provides for stiff penal provisions with regards to its violation. Specifically, it provides that any person who fails or neglects to comply with any obligations under the PSC Amendment Act commits an offence and is liable on conviction to a fine not below N500,000,000.00 (Five Hundred Million Naira) or to imprisonment for a period not less than five years or both.
Possible implications of the PSC Amendment Act There is no doubt that the PSC Amendment Act would have far reaching implications on the economics of offshore exploration and production in Nigeria, especially in the nearest future.
According to the Nigerian President, amendment of the PSC Act is in line with the need to urgently review the fiscal terms for deep offshore oil fields and to increase the Federal Government’s revenue. The amendment is expected to generate an estimated revenue of $500 million for the FG in 2020 and over $1 billion in 2021. Understandably, many Nigerians have given kudos to the Buhari administration for taking the bull by the horn. However, not all stakeholders are favourably disposed to the amendments. “This rate increase would result in future deep-water projects becoming economically unviable and leading to at least a $15 billion reduction in planned near-term investments, and a 20% decline in deep-water production by 2023,” said the Oil Producers Trade Section of the Lagos Chamber of Commerce, a group which the oil majors in Nigeria belong to.
The amendment is “a disincentive to investment in the deep-water and it is further eroding Nigeria’s global competitiveness,” the group further opined.
Analysts believe that due to the competitive nature of investments in the oil industry, the newly introduced PSC Amendment Act may result in diversion of investments from Nigeria to other oil producing countries, with more favourable fiscal regime.
Sesan Akinsanya
Published date: 2019-11-26
Culled from LinkedIn.