NEITI alert: FG loses $28bn due to non-review of 26yr-old PSCs

NEITI alert: FG loses $28bn due to non-review of 26yr-old PSCs

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Chibisi Ohakah, Abuja

The Nigeria Extractive Industries Transparency Initiative (NEITI) has called for an urgent review of the Production Sharing Contracts, PSCs to stem the huge revenue losses to Nigeria, revealing that the country lost at least $16 billion between 2008 and 2017, following the failure to review the 1993 PSCs with oil companies operating in Nigeria.

In a recent study, done in collaboration with a Berlin based extractive sector transparency group, Open Oil, NEITI said in actual terms, the losses might be as much as $28 billion if, after the review, Nigeria were allowed to share oil profit from two additional licenses.

NEITI said that between 2008 and 2017, the lost revenue to the Federation owing to failure to review the PSC terms, was between $16.03 billion and $28.61 billion depending on which scenario one adopts. Putting the losses in project terms, NEITI reported that the lower threshold loss of $16.03 billion to the Federation Account would have funded the Port Harcourt – Maiduguri rail line put at between $14 billion to $15 billion.

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.

In the report contained in NEITI’s recent publication titled, ‘‘1993 PSCs: The Steep Cost of Inaction’’, the agency said the review is particularly important for the Nigeria because oil production from PSCs has surpassed production from Joint Ventures [JVs]. Thus, productions from PSCs now contribute the largest share to the country’s revenue.

“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,” the report said

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 PSCs to such extent that the PSCs shall be economically beneficial to the Government of the Federation.”

According to NEITI, the review was due for activation since 2004 when oil prices exceeded the $20 per barrel mark. However, the judgment 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, NETI went further, 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.

NEITI said that since the Supreme Court judgment addressed the condition for the first review, the second review was therefore the focus of its Policy Brief. The NEITI analysis was conducted for the seven producing fields of the 1993 PSCs. They include Abo (OML 125): operated by Eni; Agbami-Ekoli (OML 127 & OML 128): operated by Chevron; Akpo & Egina (OML 130): operated by Total and South Atlantic Petroleum; Bonga (OML 118): operated by Shell; Erha (OML 133): operated by ExxonMobil; Okwori & Nda (OML 126): operated by Addax; Usan (OML 133): operated by ExxonMobil.

According to NEITI, after compiling data from the seven offshore fields on oil production, oil prices, cost of development, operating costs, decommissioning costs, and the applicable fiscal regimes, the financial modeling, the standard methodology in the industry, was adopted to estimate revenue in the study.

The policy brief explained that in the above two OMLs, government does not share in profits and therefore considers the hypothetical case where government shares in profits which clearly shows that the federation is losing huge revenue by not sharing in profits. The figures for this scenario provide the higher threshold in estimated losses.

The 2005 PSCs were preferred for two reasons the first being the terms have better implication for government take in that it disallows cost consolidation, pegs cost recovery and mandates payment of royalties on all production irrespective of water depth. This is a departure from the 1993 PSCs that provides for zero royalties at water depths from 1000 meters and above.

The second reason is that the 2008 review would have come three years after the 2005 PSCs and it is therefore conceivable that the terms would have been at least at the level of the most current PSCs at that time. Though there was a 16 July 2007 letter by DPR to the companies that the government intended to review the 1993 PSCs, the review was not carried out.

Thus, three revenue figures were obtained as follows: Total revenues using 1993 fiscal regime = $73.78 billion; Total revenues using 2005 fiscal regime (scenario 1) = $89.81 billion; Total revenues using 2005 fiscal regime (scenario 2) = $102.39 billion. The implication, the report said, is that revenue would have increased from $73.78 billion to $89.81 billion if the review had simply been done using the 2005 fiscal regime.

This implies a difference in revenue of $16.03 billion. Also, revenue would have increased from $73.78 billion to $102.39 billion if the review had been done using the 2005 fiscal regime and government shared in profit oil in OML 127 and OML 130 (PSA). This implies a difference of $28.61 billion.

While calling for an urgent action by government to review the contracts, NEITI noted 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. The NNPC should follow international best practices and make the contracts with oil companies public in other to ensure transparency and maximum government take.

The NEITI Policy Brief is one of the agency’s policy and advocacy instruments, designed to focus the attention of policy makers and citizens on important issues in the extractive sector, especially those requiring urgent attention.


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