Follow Us on Google
Adewale Sanyaolu
Mixed feelings have continued to trail the recent signing into law of the Deep Offshore and Inland Basin Production Sharing Contract (DOIBPSC) (Amendment) Act 2019 (the “PSC Amendment Act”).
While some believes the new law would stagnate efforts of the Federal Government to attract fresh investments in the oil and gas sector, others say the country has been denied huge revenues that ought to accrue to it over a long time.
But International Oil Companies (IOCs), and their local counterparts under the aegis of the Oil Producertrade Section have said Federal Government’s planned increase in deepwater royalty may worsen Nigeria’s competitiveness and make its $15billion planned deepwater investments economicallunattractive.
The OPTS, a private industry group of the Lagos Chamber of Commerce and Industry, also said the move would result in an estimated 20 per cent decline in deepwater oil production by 2023.
The nation’s oil and gas production structure is majorly split between joint ventures onshore and in shallow water with foreign and local companies and the PSCs in deepwater offshore, to which many IOCs have shifted their focus in recent years.
But, an energy law expert and partner, Bloomfield Law Practice, Mr. Ayodele Oni, disagrees with the position of OPTS, saying the law could affect investments marginally , and that any substantial decline in investments would be for reasonsincluding the changes in PSC fiscal terms and not that alone.
The Amendments
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 per cent in areas between 201 to 500 meters water depth and 0 per cent 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.
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 per cent chargeable on the volume of crude oil and condensates produced from the relevant area.
Also, the royalty rate of 7.5 per cent on the volume of crude oil and condensates produced from the relevant area is applicable to Inland Basins which is a reduction from 10 per cent applicable under the PSC Act.
Price based royalty 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 as follows:
It should be noted that the foregoing royalty rates shall be identical for various water depths in the Deep Offshore areas (i.e. areas beyond 200meters of water depth).
Periodic review of production sharing contracts
The PSC Amendment Act mandates the Minister of Petroleum Resources to review production sharing contracts every eight years. The erstwhile provisions of the PSC Act is silent on when the National Oil Company or the Minister of Petroleum Resources is expected to review production sharing contracts
themselves but 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.
Imposition of penalties
The PSC Amendment Act 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. This provision inserts a new section 18 under the PSC Act which means that the fine or imprisonment not only applies to the provisions of the PSC Amendment Act but the violation of any provision of the PSC Act.
Matters arising on 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 near term however, the following are some salient implications:
Old law as revenue loss for the country
In March 2019, NEITI published a policy brief titled “the 1993 PSCs: the steep cost of inaction,” which showed that Nigeria lost between $16.0 billion and $28.61 billion within ten years for non-review of the terms of PSC agreement in 2008 as was required by the law governing the PSCs.
According to NEITI, the two triggers for reviewing the act were met in 2004 when the price of oil crossed $20 per barrel and in January 2008 after 15 years that the 1993 PSCs. section 16 (1) of the deep offshore and inland basin production sharing contracts act cap. D3. LFN 2004 stipulates 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”.
Adio also expressed confidence that the government will witness improved revenue generation from PSC arrangement with oil companies with the amendment.
SPE, expert react
Commenting, Chairman, Society of Petroleum Engineers (SPE) Nigeria Council, Mr. Joe Nwaukwe, said it would be too premature to say if the PSC amendment would scare aware investors.
He was however; quick to add that the old royalty regime in the PSC Act which stipulates that oil exploration in deep offshore basin for water depths deeper than 1,000 meters attracts zero royalty is not sustainable because there is nowhere that zero royalty is in practice.
‘‘If the only way that exploration and production would be done in the deepwater is to have zero royalty, then it is better to leave the oil in the ground. If you check all our deepwater operations, they are all in water depths of that range. The aggregate royalty to government is about 2 per centand that is not good enough,’’he warned
Generally speaking, costs are high and that reduces margin significantly. What investors will be asking to know is the distributable profit after cost, oil, and tax oil is removed.
Remember what they are changing in the Act is royalty which is a first line charge and it could be good or bad. But we need to see it first the bill first.’’
Oni said while it is projected that the FG will earn an estimated sum of $1.5 billion from the enactment of the PSC Act as a result of the adjustments in the FG royalty take, investors care more about certainity and clarity albeit fiscal terms, among other considerations.
Besides, he said the current fiscal terms were formulated when crude was less than $20 per barrel, saying he believes oil firms must have been preparing for this as it was approximately 20-25 years in the making.
‘‘It could affect investments marginally, but any substantial decline in investments would be for other reasons or an accumulation of reasons, including the changes in the PSC Fiscal terms and not that alone. I believe foreign direct investments have been declining in Nigeria for sometimes now and the change in PSC regime wasn’t the reason. I suspect that a number of the IOCs may want to rely on the Stabilisation Clauses in the PSCs or want to rely on advantageous provisions in Bilateral Investment Treaties and the likes.
Older PSCs in the Nigerian Oil and Gas Industry contain stabilization clauses to the effect that a change of law or regulation by the government occuring after the effective date of the PSC which would substantially affect the economic benefits of the contractor, must be managed by the parties. The parties are mandated to use their best efforts to modify the PSC in such a way as to compensate for the effect of such changes.
He equally said that the PSC Act, also provided, that regardless of any changes on oil price, the Act must be reviewed 15 years post enactment and on the expiration of each 5 -year cycle thereafter.
Presently, he said crude oil sells at circa $61 per barrel, and the PSC Act, which commenced in 1993 is 26 years old at date, adding that, there is no gainsaying that the PSC Act is long due for an amendment.
