LOSING TRILLIONS THROUGH PRODUCTION SHARING CONTRACTS 

Monday comment2

 Iliyasu Gashinbaki canvasses forensic auditing of all PSCs transactions

 Nigeria agreed to a deep-water exploration venture with several IOCs to avoid the huge capital required to develop its oil reserves, increase oil production and to leverage on emerging deep drilling technology. This led to the approval of the first set of licenses in 1990. The adoption of the Production Sharing Contracts (PSCs) ensured the avoidance of heavy financial obligations on the part of the government. Essentially, under the PSC agreement, NNPC holds the concession, while the IOCs are the contractors who bear all the exploration risks and do not own any equity in the asset as installations and mineral resources are wholly owned by the government. All equipment and installations purchased by contractors are passed to the country immediately or over time.

Specifically, the two conditions precedent for a review as provided in the Deep Offshore and Inland Basin Production Sharing Contracts Act Cap. D3. LFN 2004 are as follows:  Section 16 (1) provides 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.” 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 five years thereafter”.

Sadly, several years of inaction has led to huge losses primarily due to poor management of the PSCs, in addition to the gross lack of accountability and transparency associated with the extractive industry. The NEITI Policy Brief, Issue 04, March, 2019 captures these disturbing scenarios vividly as follows: “the PSCs ought to have been reviewed first, in 2004 (when real oil prices exceeded $20 per barrel); and secondly on 1st January 2008 (15 years from 1st January 1993)…The results reveal that if the PSC contracts had been reviewed in 2008, and the fiscal regime from the 2005 PSC licensing round had been applied, additional revenue to the Federation between 2008 and 2017 would have been higher by between $16.03 billion and $28.61 billion.” According to Daily Trust Newspapers of 9th November, 2019, “In 2016, Akwa Ibom, Bayelsa and Rivers were in court with the Federal Government, stating that the IOCs operating in the deep offshore were in default in accruals in agreement with provisions in Section 16 (1) of the Deep Offshore & Inland Basin PSC Act, Cap D3 laws of the Federation. This law suit exposed the need to revisit the review of the PSC agreement. It was later determined that the failure to review the PSCs had led to the loss of $60billion or N22 Trillion as expressed by Acting Chairman Revenue Mobilization, Allocation & Fiscal Commission (RMAFC) – Shettima Abba-Gana.”

Fortunately, in a revolutionary decision as reported by THISDAY Newspapers of 27th of May, 2019, the Supreme Court of Nigeria on October 17, 2018 delivered what has been considered a landmark judgement in Nigeria’s petroleum fiscal space when it granted the prayers of the governments of Rivers, Bayelsa and Akwa-Ibom States which had sought relief from the Apex Court against the failure of the federal government to adjust the share of (additional) revenue accruable to the Federation from the PSCs after the price of crude oil exceeded $20 per barrel in real terms. The Supreme Court noted that the IOCs operating in Nigeria’s deep offshore and inland basin are in default of adjusting the revenue accruals in accordance with the provisions of section 16(1) of the Deep Offshore and Inland Basin PSCs Act, Cap D3, Laws of the Federation, 2004”.

All these taken together, it is quite clear that the deployment of forensic accounting and auditing professional skills especially during the early years of the PSC regime would have helped greatly in avoiding the significant losses of revenues suffered over the years in the following ways: Fostering and enhancing control over fiscal regimes and ensuring strict regulatory compliance to financial obligations between the government and any other party, unveiling both the visible and the non-visible or latent dynamics of financial transactions in a growing complex financial system, identifying immediate red-flags and real-time early warning financial/fiscal defaults or obligations for the government at all levels, and enhancing transparency and accountability in the overall extractive industry, which is considered highly opaque and nocturnal by the general public. –An article published by Natural Resource Governance Institute titled – From Opacity to Transparency: The Challenging Journey of the Nigerian Extractive Industry (November 2017) stated that “Opaque contracts entered into by NNPC cost Nigeria several billions of dollars.” To put things in perspective, the trillions lost doubles the 2020 budget; triples the cost of the Dangote refinery; will build the proposed 2nd Niger Bridge costed at N220Bn hundred times over; is sufficient enough to build over five Mambila Power Plants and able to fund Nigeria’s infrastructure deficit three times over at $20Bn according to a Bloomberg article published in March 2019.

 All these set aside and moving past the losses, the entire extractive industry is due for a complete financial, system and process audit. Reviewing of all outdated financial/fiscal ordinances (acts, laws, by-laws, regulations and policies) to avoid such gross negligence is both timely and necessary. Overall, pursuant to the Supreme Court Judgment, forensic accounting and auditing must be carried out on all process, systems and transactions for the entire PSCs to thoroughly investigate and communicate the true and fair view of the established losses in the interest of all parties. Finally, the Society for Forensic Accounting and Fraud Prevention (SFAFP) wishes to commend President Muhammadu Buhari for accenting the review of the PSCs Act on the 4th day of November, 2019 and the National Assembly for accelerated passing of the bill. This is no doubt by far the most remarkably brave and ambitious step taken by any administration since the commencement of the PSC regime targeted towards fostering transparency and accountability in the oil and gas sector.

Gashinbaki is Chairman, Society for Forensic Accounting and Fraud Prevention