NEITI: Nigeria Lost $28bn to Outdated Crude Oil PSCs

By Chineme Okafor in Abuja

For a period spanning over ten years, 2008 to 2017, Nigeria lost as much as $28 billion from crude oil due to outdated Production Sharing Contracts (PSCs) it signed with international oil companies (IOCs) operating in the country, the Nigeria Extractive Industries Transparency Initiative (NEITI), has disclosed.

NEITI, in a statement issued yesterday in Abuja explained that a quantitative study it conducted showed that the country lost this revenue because it failed to review the 1993 PSCs with IOCs, adding that it did the study with a Berlin-based extractive sector transparency group – Open Oil.

Quoting its latest publication titled: ‘1993 PSCs: The Steep Cost of Inaction,’ NEITI said it was important Nigeria urgently reviewed the PSCs to stem the huge revenue losses.

It explained that such a review was particularly important for the federation because oil production from PSCs has surpassed production from joint ventures (JVs), noting that oil productions from PSCs now contribute the largest share to the federation 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 per cent of total production. Total production by JV companies was 212,850,000 barrels, representing 30.84 per cent of total production,” NEITI said.

NEITI noted that the 1993 Deep Offshore and Inland Basin PSCs provided for a review of the terms on two conditions, the first being if oil prices exceeded $20 per barrel, and the second being 15 years following the commencement of the PSC Act.

NEITI added that the review should have been activated in 2004 when oil prices exceeded the $20 per barrel mark, adding that though the review was not done in 2004, 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.

NEITI explained that since the Supreme Court judgment had addressed the condition for the first review, the second review should have happened in 2008.

It said the analysis was conducted for the seven producing fields of the 1993 PSCs, and which included Abo (OML 125) operated by Eni; Agbami-Ekoli (OML 127 and OML 128) operated by Chevron; Akpo and Egina (OML 130) operated by Total and South Atlantic Petroleum; Bonga (OML 118) operated by Shell; Erha (OML 133) operated by ExxonMobil; Okwori and Nda (OML 126) operated by Addax; as well as 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, it used financial modeling to estimate the revenue.

The analysis, it added was conducted by changing the fiscal regime of the 1993 PSCs to the fiscal regime of the 2005 PSCs.

It said three estimates were obtained relating to revenues for the 1993 fiscal regime, and two estimates relating to revenues for the 2005 fiscal regime.

Further, NEITI said though there was a July 16, 2007 letter by the Department of Petroleum Resources (DPR) to the companies that the government intended to review the 1993 PSCs, but the review was however, not carried out.

“The implication 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 share in profit oil in OML 127 and OML 130 (PSA). This implies a difference of $28.61 billion.

“In summary, the results showed that between 2008 and 2017, 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,” the NEITI explained.

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 to Maiduguri rail line put at between $14 billion to $15 billion.

It said other projects that the lost revenue could have been used to fund include the 3,050 megawatts (MW) Mambila hydro power plant valued at t $5.72 billion; Ibadan-Ilorin-Minna-Kano Standard Gauge Line worth $6.1 billion; the Calabar-Lagos rail line at $11 billion; Fourth Mainland Bridge at $1.4 billion; Badagdry Deep Water Port Complex at $1.6 billion; and Lekki Deep Seaport at $1.2 billion.

It added that the higher threshold estimate of $28.61 billion could have funded 99 per cent of the proposed federal government budget for 2019, and recommended that the government through its appropriate agencies should commence urgent process to review the PSC agreement with oil companies.

It also asked the government to note that the affected contractors have expressed willingness to negotiate these terms and thus should commence the process.