LEGAL IDEAS FORUM

A seismic Reformation of oil Operations in Nigeria: The Production sharing Contract Amendment Act

 

INTRODUCTION
President Muhammadu Buhari on November 4th 2019 assented to the Bill amending the Deep Offshore (and Inland Basin Production Sharing Contract) Act (“PSC Act”). This is perhaps one of the most remarkable reforms the Nigerian Oil Industry has experienced in the past few decades.
The legislative proceedings leading up to the signing of the Bill is largely owed to the outcome of the suit (SC.964/2016) instituted by the Attorney General (“AG”) of Rivers State, AG Bayelsa State and AG Akwa-Ibom State, which resulted to the Supreme Court giving a consent judgment ordering Oil Companies to pay an estimated sum of $1,149,750,000 under the Production Sharing Contract (“PSC”) for the period between 2003 and 2015 on the basis that the price of crude oil had exceeded the $20 per barrel threshold. In addition, the Federal Government and the three states were mandated to set up a body and the necessary mechanism for the recovery of all lost revenues accruing to the Federation Account in relation to the PSC.
To ensure statutory oversight in relation to the PSCs, the National Assembly (on October 2019) passed a Bill proposing an amendment to the erstwhile PSC Act. What is quite striking is the expediency with which this Bill was passed into law; hopefully the National Assembly will maintain such consistency in policy making.
UNDERSTANDING THE PRODUCTION SHARING CONTRACT
A PSC is a contractual arrangement for exploration and production of petroleum resources in which the Federal Government (“FG”) engages Oil Operator(s) to undertake all risks and financial responsibilities for exploration and production operations for an agreed share in crude profit.  Its main features are:
(a)   The contractor bears all costs of exploration and production without such costs being reimburseable if no find is made in the acreage.
(b)  Cost is recoverable with crude oil in the event of commercial find, with provisions made for:
(i)                  Tax Oil: This is to offset actual Tax, Royalty and Concession Rental due and payable/deductible in full in the year.
(ii)                Cost Oil: To reimburse the contractor for capital investments and operating costs.
(iii)              Profit Oil: The balance after deduction of Tax Oil and Cost Oil, which is to be shared between the NNPC and the contractor in an agreed proportion.
THE FORMER LEGAL POSITION ON PSCs
The erstwhile PSC Act sought to incentivize exploration activities in Nigeria by providing for:
(a)               Longer duration of oil prospecting licenses;
(b)              Reduced Petroleum Profit Tax;
(c)               Investment Tax Allowance;
(d)              Low royalty regime based on water depth. Therefore contractors operating in areas of 200-500 meters would pay 12% royalty, areas of 501-800 meters would attract 8% royalty, areas of 801-1000 4%, areas beyond 1000 meters 0% royalty.
The incentives were aimed at attracting oil and gas companies to the Nigerian deep offshore- born in response to the funding problem faced by the old Joint Venture arrangements as well as the desire of the Nigerian Government to open up the sector for more foreign participation.
Interestingly, the price of crude was as low as circa $13 per barrel as at 1993, and perhaps as a means of increasing the FG revenue when the price of crude eventually rises, the Act then provided in section 16 that where the price of crude oil exceeds $20 per barrel, the PSC Act will be reviewed to capture an adjustment of the profit accruable to the FG under the PSCs.
Furthermore the PSC Act shall be liable to review after 15 years from 1993 and every 5 years thereafter. There was however, no express provision for any mechanism or sanction for the implementation of the PSC Act.
THE PRESENT LEGAL POSITION ON PSCs
The newly enacted PSC Amendment Act is in essence reformatory for the following reasons:
(1)                The hitherto applicable royalty rates based on water depth have been replaced with a flat rate of 10% of chargeable crude and condensate products which applies to all areas of depth in excess of 200 meters. Also a 7.5% royalty rate is imposed on afore stated products in the inland basin. This implies that operators who did not pay royalty because they were exempted by the 1000 meter water depth rule would today be liable to pay 10% royalty. More so, other operators who paid royalty based on the graduated scale of depth would have their liability increased.
(2)               The Act adopts a price based royalty regime. The royalty rate applicable for price brackets include:
(a) 2.5% for prices above US$20 and up to US$60/barrel;
(b) 4% for prices above US$60 and up to US$100/barrel; and
(c) 8% for prices above US$100 and up to US$150/barrel; and
(d) 10% for prices above US$150.
(3)               The Act mandates the Minister of Petroleum Resources to cause the Nigerian National Petroleum Corporation (NNPC) to review the PSCs every eight (8) years. This obviates the need for legislative review of the PSCs as was contained in the former PSC Act.
(4)              The Act imposes a penalty of not less than N50,000,000 or imprisonment for a period of not less than one year, or both, for failure to carry out any obligation imposed by the Act.
The point needs to be made that the new Act seeks to increase the FG revenue, ensure stricter compliance with its provision and provide for adequate means of administering same.
CONCLUSION
The PSC Amendment Act sought to rectify the inadequacies obtainable under the previous regime and will have a far reaching effect on oil & gas operations in Nigeria. Therefore there is a need for joint negotiations and consensus between the Government and Operators to ensure an efficient implementation of the Act. It goes without saying that the increased liability on the part of the operators may appear to be onerous; however, the Act merely reinforced what should have been the state of affairs if the Government had diligently reviewed the PSCs from 1993 till date.
Another source of concern is whether the Government will enforce the Supreme Court consent judgment in addition to the provisions of the new Act; this is a knotty issue which calls for collaborative mechanisms to resolve resulting problems.
In any case, moving forward, it is certain that there will be improved reviews of the PSCs by the appropriate authority consequently affecting the landscape of Governmental oversight of oil operations in the country.
About the author 
 
Markanthony Ezeoha is a law graduate and a legal intern at Oando Plc, he has numerous publications to his name and writes from Lagos, Nigeria. 
SOURCES:
 
(1)    Templars Legislative Watch: Legal and Commercial Implications of the Proposed PSC (Amendment) Bill 2019.
 
(2)    Olaniwun Ajayi: Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Bill 2019
 
(3)    Lead Debate on Deep Offshore and Inland Basin Production Sharing Contract CAP D3 LFN 2004 (Amendment) Bill 2019 by Senator Bassey Albert Akpan.
 
(4)    http://napims.com/dynamic.html
 
 
 
 
 
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