President Muhammadu Buhari President Muhammadu Buhari earlier in the week signed the Deep Offshore and Inland Basin Production Sharing Contract (PSC) Amendment Bill into law, putting to rest decades of calls for review of the PSC terms. The signing of the bill followed its approval by the National Assembly a fortnight ago and subsequent transmission to the president for assent. Advocacy for urgent review of the PSC terms had received slow attention since the present administration took office in 2015 but hope that the review would happen was rekindled recently when President Buhari gave the Nigerian National Petroleum Corporation (NNPC) directive to initiate a review of the PSC. What is PSCs and how did it come about? In the 1990s when Nigeria started discovering oil offshore, the federal government introduced a system that could help attract oil companies to terrains described as “risky and expensive” coupled with low oil price at the time. Instead of doing a joint venture where government would be required to put in money, the government in 1993 decided on the PSC option where the NNPC as the holder of the oil block employs contractors (ideally international oil companies-IOCs) who bring in money and technology to explore for oil. In 1993, the NNPC entered into PSC with eight IOCs. The Deep Offshore and Inland Basin Production Sharing Contracts Decree of 1993 which later became an act in 1999 gave life to the PSC agreements signed by the NNPC with the IOCs. At the time the agreements were signed, crude oil price was very low and it was agreed that the fiscal terms in the contract would not be reviewed until the price of crude hit $20 per barrel. Two clauses of the Deep Offshore and Inland Basin Production Sharing Contracts gave conditions upon which the PSC terms could be reviewed. The first is Section 16 (1) which provided for a review of the terms if oil prices exceeded $20 per barrel. Section 16 (1) of the Deep Offshore and Inland Basin Production Sharing Contracts specifies that: “the provisions of the Act shall be subject to review to ensure that if the price of crude oil at any time exceeds $ 20 per barrel, 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.” This review should have been activated in 2004 when oil prices exceeded the $20 per barrel mark but it was not done in 2004. Section 16 (2) provided for the second review to be activated 15 years following commencement of the PSC Act. Section 16 (2) states: “Notwithstanding the provisions of subsection (1) of this section, the provisions of this decree shall be liable to review after a period of 15 years from the date of commencement and every 5 years thereafter.” This second review should have happened in 2008. Though there was a July 2007 16, letter by DPR to the companies that the government intended to review the 1993 PSCs, the review was not carried out. “Fortunately for us in 2008, the two conditions were met. A committee was set up to look at it and it was decided that the only thing we needed to do was to tell the federal government that we want to review the fiscal terms as stipulated by law,” immediate past NNPC’s Chief Operating Officer, Upstream, Bello Rabiu, said in an interview. Huge losses A March 2019 report done by the Nigeria Extractive Industries Transparency Initiative (NEITI) and open oil found that failure to review the PSC terms, as demanded by the law, cost the country between $16.03 billion and $28.61 billion within 10 years (2008 and 2017). That was a loss of between $1.6 billion and $2.86 billion on the average per year within that period. Such a review, NEITI said was particularly important for the federation because oil production from PSCs has surpassed production from JVs. Thus, productions from PSCs now contribute the largest share to federation revenue. Acting chairman of the Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC), Shettima Abba-Gana, recently estimated losses to the non-review of the PSC for the past 11years at about $60bn. The Senate had earlies in October directed its relevant committees to probe the loss of revenue accruable to the federal government as a result of failure to amend the PSC Act. In the motion which was sponsored by Senator Ifeanyi Ubah (Anambra South) and co-sponsored by 16 other senators, they noted that “as a result of the non-review and amendment of the PSC Act, the federal government lost about $21 billion over a period of 20 years due to the failure to review and amend the PSC Act as stated by the Minister of State for Petroleum Resources following the meeting of the Federal Executive Council on the 14th day of December, 2017.” Why PSC amendment lingered Speaking in an interview published in the March, 2019 edition of the NNPC News, a monthly publication of the NNPC, Rabiu who was at that time the NNPC’s Chief Operating Officer, Upstream, gave reasons why the review of the PSC took very long. “The companies don’t want the fiscal terms to be reviewed. They will not be happy that you want to get them to pay more. They are making more money from the current situation,” Rabiu said. Explaining efforts to get the PSC reviewed, he said, “When this government came in, we expressed concern and told them that if we don’t get the National Assembly to change this law, we will continue in this circle. So, this government actually sent a bill to the National Assembly seeking to amend just that portion of the Act that talked about increasing what accrues to the government from the PSCs. We have been on it since then.” Is there potential backlash? Less than 48 hours after President Buhari signed the bill into law, Reuter reported French energy giant, Total, seeking to sell its 12.5 per cent stake in OML 118 a major deepwater oilfield off the coast of Nigeria. Oil Mining Lease (OML) 118, located some 120 kilometres (75 miles) off the Niger Delta, is operated by Shell, which holds a 55% interest, Exxon Mobil 20% while Italy’s Eni and Total each hold 12.5% stake in the block. Nigeria’s vast oil resources have attracted foreign oil companies for decades but changes to the country’s oil revenue laws as well as an unexpected tax levy over the past year could make investments in offshore projects less attractive. Shell and its partners were expected to make an investment decision on Bonga Southwest last year but uncertainty over its fiscal terms with the Nigerian government have delayed the process. Shell in February launched a tender for bids for a 225,000 barrels per day (bpd) floating production, storage and offloading vessel for the new development phase. It has since pushed back the schedule for the bids. International oil companies and their local counterparts under the aegis of the Oil Producers Trade Section (OPTS), a private industry group under the umbrella of the Lagos Chamber of Commerce and Industry, had earlier said the amendment of the PSCs would worsen Nigeria’s competitiveness and make its $15bn planned deepwater investments economically unviable. The OPTS, had in its presentation to the Senate, said the Deep Offshore and Inland Basin Production Sharing Contracts (Amendment) Bill (now an Act) seeks to introduce an additional price-based royalty on revenues above $35 per barrel, which ranges from 0.2 per cent to 29 per cent as oil price increases. It said, “The industry is burdened by a plethora of other taxes, fees, levies and other tariffs. This rate increase would result in future deep water projects becoming economically unviable and leading to at least a $15bn reduction in planned near-term investments.” According to the group, Nigeria has one of the least competitive deepwater fiscal terms in Africa and is currently losing substantial amount of potential investments in the oil and gas industry to other countries, particularly Mozambique, Angola and Ghana. The Nigerian government earlier in October had vowed to recover over $62 billion it claimed were arrears of profits due to it from the non-review of the PSCs. The IOCs have reportedly taken the matter before the Federal High Court in Lagos to contest the allegations of violation of their PSCs and indebtedness.