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Published On: Mon, Mar 4th, 2019

Oil: Nigeria loses $28.6bn to production sharing contracts flaws -NEITI

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By Etuka Sunday

A quantitative study by the Nigeria Extractive Industries Transparency Initiative (NEITI) has revealed that the estimated $28.61billion lost by Nigeria due to Non-Review of Production Sharing Contracts (PSCs) with oil companies can fund 2019 Budget.
The NEITI study revealed that Nigeria lost at least $16billion over a ten-year period (2008 – 2017) due to non-review of the 1993 PSCs with oil companies.
The study, which was done in conjunction with Open Oil (a Berlin-based extractive sector transparency group) indicates that the losses could be up to $28.61billion if, after the review, the Federation were allowed to share profit oil from two additional licenses.
In its latest publication titled, ‘‘1993 PSCs: The Steep Cost of Inaction’’, NEITI called for an urgent review of the PSCs to stem the huge revenue losses to the Federation.
Putting the losses in project terms, NEITI reported that “the lower threshold loss of $16.03bn to the Federation Account would have funded the Port Harcourt – Maiduguri rail line put at between $14billion to $15billion.
“Other projects that the lost revenue could have been used to fund include the “Mambila Power Plant of 3,050 MW at $5.72 billion, while the estimated cost of the Ibadan-Ilorin-Minna-Kano Standard Gauge Line is $6.1 billion.
“The combined cost of these projects is $11.82 billion, which is less than the lower threshold of estimated losses…. the Calabar-Lagos Railine ($11 billion), Fourth Mainland Bridge ($1.4 billion), Badagdry Deep Water Port Complex ($1.6 billion), and Lekki Deep Seaport ($1.2 billion)” the Publication revealed.
“Meanwhile, the higher threshold estimate of $28.61 billion can fund 99% of the proposed federal government budget for 2019”, NEITI said.
Such a review it said is 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.
As noted in the brief: “Between 1998 and 2005, total production by PSC companies was below 100,000,000 barrels per year while JV companies produced over 650,000,000 barrels per year’’. By 2017, total production by PSC companies was 305,800,000 barrels, which was 44.32% of total production. Total production by JV companies was 212,850,000 barrels, representing 30.84% of total production.”
NEITI in the policy brief stated that the Deep Offshore and Inland Basin Production Sharing Contracts provided for a review of the terms on two conditions:
The first review was to be triggered 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.”
NEITI observed that this review should have been activated in 2004 when oil prices exceeded the $20 per barrel mark. Although the review was not done in 2004, the judgement of the Supreme Court in October 2018 had mandated the Attorney General of the Federation to work together with the governments of Akwa Ibom, Rivers and Bayelsa States to recover all lost revenues accruable to the Federation with effect from the respective times when the price of crude oil exceeded $20 per barrel.
The second review was to be activated 15 years following commencement of the PSC Act.
Section 16 (2) states that:
“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”.
At inception in 1993, the PSC terms were drawn up to incentivize and attract oil and gas companies to invest in the exploration and production of offshore fields considering the risks involved coupled with low oil prices.
Thus the PSC contracts were supposedly more beneficial to the companies. However, the Law anticipates that the companies would have recouped their investments when oil price increases and after many years of operations, hence the two trigger clauses in the Act.
Since the Supreme Court judgement has addressed the condition for the first review, this second review was the focus of NEITI’s Policy Brief. According to NEITI, this second review should have happened in 2008 and informed why it chose 2008 as the the start date for commencement of estimated losses in the model.
NEITI explained that the analysis was conducted for the seven producing fields of the 1993 PSCs. These are:
i. Abo (OML 125): operated by Eni;
ii. Agbami-Ekoli (OML 127 & OML 128): operated by Chevron;
iii. Akpo & Egina (OML 130): operated by Total and South Atlantic Petroleum;
iv. Bonga (OML 118): operated by Shell;
v. Erha (OML 133): operated by ExxonMobil;
vi. Okwori & Nda (OML 126): operated by Addax;
vii. Usan (OML 133): operated by ExxonMobil.
NEITI therefore made the following recommendations:
(i) The FG through its appropriate agencies should commence urgent process to review the PSC agreement with oil companies now not later.
(ii) That the FG should note that the affected contractors have expressed willingness to negotiate these terms and therefore they and the state governments should be carried along in the review process.
(ii) The NNPC should follow international best practices and make the contracts with oil companies public in other to ensure transparency and maximum government take, as Nigerians can properly scrutinize such contracts and draw attention to areas of improvement.

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