Report that the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) has thrown its weight behind President Muhammadu Buhari on the approval given to the Nigerian National Petroleum Corporation (NNPC) to enable it undertake a review of all Production Sharing Contracts (PSC) between it and its various partners to reflect current realities is a sad reflection of inattention to responsibility and good governance in the economic sector.
The Federal Government should not have waited at all for the RMAFC to nudge it to review all Production Sharing Contracts. In a recent statement, the frustrated revenue commission (RMAFC) said it had since called for the review of the Production Sharing Contracts as approved by the Federal Executive Council (FEC) at its meeting held on December 13, 2017. It is sad that the Commission was referring to a FEC decision eight months ago, another unfortunate case of executive procrastination.
The statement quoted the RMAFC Acting Chairman, Mr. Umar Gana, as saying that the failure of the government to review the contracts in the past nine years had led to Nigeria’s loss of a whopping $21 billion.The Revenue Commission, which has a constitutional responsibility of monitoring revenue accruals into and disbursement of the same from the Federation Account, has consistently called for the review of these contracts for the past seven years.
For instance, in April 2016, it drew the attention of the Federal Government to the fact that three main contract types namely Joint Venture, Production Sharing and Service Contracts were in use in the Nigerian Oil and Gas Industry.
The RMAFC in the recent reminder to the FEC had noted, “These contracts had not been reviewed nine years after both conditions stipulated in the relevant provisions of the Act had elapsed, thereby leading to the huge revenue loss of about $21billion by the country in the last 20 years.”
The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, recently announced that the government had approved steps to amend Section 17 of the Deep Offshore and Inland Basin Production Sharing Contracts Act, 1999, which specifically provided that the 1993 PSCs should be reviewed once the price of crude oil exceeded $20 a barrel or 15 years after the contracts.
That is also why the RMAFC’s intervention that the government should take appropriate steps to ensure the review of the agreements with due diligence should not be ignored. What is more, the JVC makes the highest contribution to the federation account compared to other revenue streams in the country.This revenue leakage is happening even as the same financially challenged Federal Government said it would finance the N1.950 trillion deficits in the 2018 budget through borrowing from both domestic and international capital markets.
Meanwhile, the imperative of reviewing the Production Sharing Agreement came to the fore again when the Nigerian Extractive Industry Transparency Initiative, NEITI, declared that Nigeria’s $104.5 billion three-year oil earnings had favoured the International Oil Companies (IOCs), the joint venture partners more.
NEITI had then declared that the old agreement used in computation of revenues to be shared between the government and oil companies was no longer acceptable.
Despite the fact that the country earned $104.484 billion from oil between 2015 and 2017, NEITI said the loopholes in the Deep Offshore and Inland Basin Production Sharing Agreement (PSC) between Nigeria and oil companies crippled the nation’s total share to $35.893 billion against the oil majors who earned about $68.591 billion.
It then said the revenue losses to the federation by the use of the old agreement was not acceptable, insisting on review as the contract now accounts for about 50 per cent of the country’s total oil production and major source of revenues.
The implication of this tardiness has been far-reaching. The delay or failure to review and renew the agreement means that payment of royalty on oil production under PSCs would not be made while computation of taxes would be based on the old rates.
Though the pact signed in 1993 provides for “ a review of the terms when prices of oil crosses $20 in real term and a review of the terms 15 years after operation of the agreement and five years subsequently,” Nigeria is yet to adhere to the provision though the price now stands at $79 per barrel.A recent report, which reviewed three years of NNPC’s financial and operations reports, noted that crude oil production under the PSCs has since overtaken production under the Joint Venture (JV) arrangements. A careful look shows that PSCs accounted for 44.8 per cent of total oil production while the JVs contributed 31.35 per cent.
A historical analysis of this development by NEITI shows that JV companies accounted for over 97 per cent of production in 1998 while PSCs contributed only 0.50 per cent. This trend continued until 2012 when PSCs accounted for 37.58 per cent while JVs contributed 36.91 per cent.In 2013, PSCs reportedly contributed 39.22 per cent while JVs contributed 36.65 per cent; 2014, PSCs 40.10 per cent and JVs 32.10 per cent; 2015, PSCs 41.45 per cent and JVs 31.99 per cent. In 2017, the contributions stood at PSCs 44.32 per cent and 30.85 per cent. In the same vein, the NEITI further explained: “Other companies, comprising Nigerian Petroleum Development Company (NPDC), Alternative Financing (AF), and Independent/Marginal Fields contributed 2.39 per cent to total production in 1998, and by 2017, this had risen to 24.83 per cent.
This figure clearly shows the changing structure of oil production in Nigeria, where PSCs (which contributed a mere 0.5 per cent to total production 20 years ago) have dramatically overtaken JVs (which contributed 97 per cent total production 20 years ago).”
Between 2015 and 2017, Nigeria produced 2.126 billion barrels of crude oil and condensate, the report said. “Production was highest in 2015 with 775.6 million barrels produced. It was lowest in 2016 with 661.1million barrels produced, while production in 2017 was 690 million barrels. The 2016 was a difficult year for oil production because production was shut in a number of oil terminals,” the report noted.
On lifting of crude oil, the NNPC monthly financial and operations report disclosed that, “international oil companies (IOCs) lifted more crude oil than the government. Total lifting of crude oil and condensates was 2.135 billion barrels. Of this sum, IOCs and Independents lifted a total of 1.367 billion barrels, while government’s lifting by NNPC was 721.16 million barrels. This means that the operators lifted 64.01 per cent of total crude while government through NNPC lifted 33.76 per cent. In monetary terms, total government lifting of oil amounted to $35.893 billion while the figure for IOCs and Independents was $68.591 billion.”
It is indeed curious why there hasn’t been enthusiasm on the part of successive governments to review these agreements in favour of the government and the people of Nigeria who own the oil.The Budget and Planning Minister spoke at a budget briefing ceremony about “new funding mechanism for JV operations, allowing for cost recovery in lieu of previous cash call arrangement; additional oil-related revenue including: Royalty Recovery, New/Marginal Field Licences, Early licensing renewals and Review of the fiscal regime for Oil Production Sharing Contracts (PSCs).
Again, all these plans will be a mirage unless the government musters the political will needed to review the Production Sharing Contracts (PSCs) in a way that the arrangement can give the best value to the country.The president doubles as the Petroleum Resources minister. He should just do his job as president and call for the review of the PSCs today.Also, the Petroleum Industry Governance Bills (PIGB) that should take care of most of these challenges should be passed before the end of this session of the National Assembly.The shroud over the operations of the nation’s oil industry must be lifted for it to give good returns to the Nigerian people.
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