International Oil Companies (IOCs) in the country may have a huge bill to pay as the House of Representatives have blamed the Department of Petroleum Resources (DPR) for its failure to renew agreements on Production Sharing Contracts (PSCs). The lower house has also resolved to write the embassies of the affected IOCs seeking for a refund.
Solomon Ewuga who represented the DPR during the hearing, stated that the agency had had begun a review of the PSCs, but it had been stalled.
Minister of State for Petroleum, Ibe Kachikwu in December last year disclosed that the Federal Governnment had intentions to amend the deep offshore act. He also estimated that Nigeria had lost over $21 billion by not enforcing the deep offshore act.
What is a Production Sharing Contract ?
The Production Sharing Contract Act of 1993 was enacted in response to the difficulties faced by the government in funding Joint Venture (JV) arrangements as well as encourage companies to invest the deep offshore space.
Under this arrangement, the NNPC holds the blocs while the oil companies are “contractors”. The contractor bears all costs of exploration and production, and will receive no refunds in the event of no oil being found.
Cost is recoverable only if the find is in commercial quantity, with provisions made for taxes, capital and investment costs. The government( through the NNPC), then works out a sharing formula with the oil company. Majority of these PSCs were negotiated at the time oil was trading below $20, and account for some of Nigera’s most prolific oil blocs.
A section of the Act provides the review of the agreement once the crude oil price exceeds $20 per barrel. Oil price has traded above $20 for over a decade but no form of review was carried out.
Easier said than done
The move by the government to renegotiate terms may be near impossible, as the leases are currently running. A few them however are up for renewal in a few years.
News of possible backdated payments adds to the uncertainty surrounding the petroleum industry in the country. More so with President Muhammadu Buhari’s refusal to sign the Petroleum Industry Governance Bill (PIGB).