Nigeria’s Oil & Gas Sector in Review – 4th Quarter 2019 Deep Offshore and Inland Basin Production Sharing Contract (PSC) Amendment Bill Passes Into Law 2019

On Monday 4 November 2019, President Muhammadu Buhari signed the historic Deep Offshore and Inland Basin Production Sharing Contract (PSC) Amendment Bill into law. There is a consensus of opinions that the legislation promises to significantly increase Nigeria’s share of earnings earned from its oil wells offshore. The Act is seen a victory for the campaign for Tax Justice in the oil and gas sector.

The Deep Offshore and Inland Basin Production Sharing Contracts Act’s provisions of stipulate that the law shall be subject to review to ensure that if the price of crude oil at any time exceeds $20 per barrel, the share of the revenue to the Nigerian government shall be adjusted under the PSC.

In 2017, Dr. Ibe Kachikwu the then Nigerian Minister of State for Petroleum Resources disclosed that Nigeria had lost approximately $21 billion due to its failure to implement the premium element governing the country’s oil and gas production sharing contracts (PSCs) as provided under the Deep Offshore and Inland Basin Production Sharing Contracts Act. Under the Act, the Nigerian government was entitled once the price of crude oil exceeded $20 per barrel to exercise rights over a “premium element”, which would have been distributed in accordance with the PSCs between the government and IOCs under an agreed formula in a manner that the Nigeria would have derived more value for its oil.

In 2013, there was a notice to oil companies that we were going to do this, but the Nigerian government did not follow through in terms of going to the Federal Executive Council (FEC) the decision making body of the executive arm of the Nigerian federal government, to get approval. Due to the inertia of the Nigerian government in not taking the required steps in the past 20 years had cost a considerable amount, thus prompting the then Minister to seek the FEC’s approval in 2017 to amend Section 15 of the Act.

Accordingly, since 2017, the federal government initiated moves to amend the Deep Offshore Act, in order to increase the government’s revenue from crude oil sales when prices exceed $20 a barrel.
The Deep Offshore and Inland Basins PSC Act enacted on March 23, 1999, with its commencement backdated to January 1, 1993 to provide the fiscal framework for foreign investments in deep offshore and inland basin acreages in the oil and gas sector.

It was also targeted at addressing the challenges confronting the joint operating agreements (JOA), which paved the way for the Nigerian National Petroleum Corporation (NNPC) to become the concession holder while the international oil companies (IOCs) became the contractors.
Following the agreements entered into by NNPC with eight IOCs in 1993, the country was able to attract foreign investments running into billions of dollars to develop oil acreages located in deep waters offshore Nigeria.

Some of such oil fields include the 225,000 barrel per day (bpd) Bonga oil field operated by Shell, the 250,000bpd Agbami oil field operated by Chevron, and the 180,000bpd Usan oil field operated by Total. Others are the Total’s Egina field, which started production on 28 December 2018, Eni’s Zabazaba and Etan fields located in oil prospecting lease (OPL) 245 offshore Nigeria in the Gulf of Guinea.

The Zabazaba and Etan fields are estimated to hold a combined total of 560 million barrels of oil equivalent (Mboe).
The Niger delta of Nigeria is estimated to contain 34.5 billion barrels of recoverable oil and 93.8 trillion cubic feet of recoverable gas reserves, is spread over an area of 300,000km². The world’s 12th biggest oil and gas resource. It lies in the Gulf of Guinea and is surrounded by the Cameroon volcanic line to the east and the Dahomey basin to the west.

The delta is estimated to contain 34.5 billion barrels of recoverable oil and 93.8 trillion cubic feet of recoverable gas reserves and has a sediment volume of 500,000km³ and a sediment thickness exceeding 10km in the basin depocenter. The primary source rock in the delta is the Akata formation.

On Monday 4 November 2019, President Muhammadu Buhari signed the historic Deep Offshore and Inland Basin Production Sharing Contract (PSC) Amendment Bill into law.
The Deep Offshore and Inland Basin Production Sharing Contracts Act was last The provisions of the Act stipulate that the law shall be subject to review to ensure that if the price of crude oil at any time exceeds $20 per barrel, (even when prices were in triple digits decades after!) the share of the revenue to the Nigerian government shall be adjusted under the PSC.
There is a consensus of opinions that the legislation promises to significantly increase Nigeria’s share of earnings earned from its oil wells offshore. The Act is seen a victory for the campaign for Tax Justice in the oil and gas sector.

In view of the total losses of $21 billion due to the government’s failure to exercise its rights under the Act. It is noted that it would be difficult to recoup past losses, given that oil companies that were not paying the government a premium for sales over $20 a barrel were not breaking the law. However, attempts by the government to recoup money lost cannot be completely precluded. This is viewed by the Nigerian government as a necessary step towards greater transparency and accountability in the oil and gas sector as envisaged by the Petroleum Industry Bill (PIB). It may well also speed up the passage of the PIB and herald the unbundling of the Nigerian National Petroleum Corporation (NNPC).

There are some concerns about the implications of the amended Deep Offshore and Inland basin Act, namely, that all PSC productions will now attract royalty based on combination of water depth and oil price and this will lead to some decline in investments. The amendment will end the incentive of 0% royalties from offshore production such as Agbami, Akpo, Bonga, Erha, Nigeria’s biggest producing fields.
However, the government is optimistic concerns about a decline in investments are overrated and that the amended Act will correct the revenue deficit the Nigerian government has suffered in the sector for a considerable period of time.

Unshackling the Power Sector- New Eligible Customer Regulations 2017

The Nigerian Electricity Regulatory Commission (NERC) on Monday 6 November 2017 released the newly-approved eligible customers’ regulations and outlined the terms that would guide the direct purchase of electricity by end-users from power generation companies.

In May 2017, the Minister of Power, Works and Housing, Babatunde Fashola, declared that eligible power consumers would be free to purchase electricity directly from the Generation Companies (GenCos).
These regulations have been opposed by the Distribution Companies (DisCos) however, NERC on Monday 6 November 2017 presented the approved terms to the Honourable Minister in Abuja, and announced that the 11 electricity distribution companies had been designated as suppliers of last resort in the trading framework of the new regulations.

OPEC has sought to address this situation with output cuts but experts predict that this will not be enough. Last week OPEC and its allies agreed to deeper output cuts in a bid to save declining oil prices. Following the deal, Nigeria’s Minister for Petroleum, Timipre Sylva, announced that the country will now be producing 1.412 million barrels per day, as against 1.829 million barrels per day. With this volume, if crude oil is sold at an average price of $25 bpd in April, then the country would be earning N13.41 billion per day as against the N17.29 billion that was earned prior to the cut.
The International Energy Agency’s projection is that global oil demand in April will be 29 million b/d lower than a year ago; down to a level last seen 25 years back (1995). This demonstrates that cuts in output by producers may not fully offset the near-term falls facing the market.

The NERC explained that the regulations were a product of extensive consultations with relevant stakeholders in Lagos, Kano, Yola, Jos, Port Harcourt, Enugu and Abuja. The objective of the regulations was to permit high end-customers the freedom to purchase power directly from the GenCos and as a result, the DisCos may eventually lose a good number of their high demand customers and become standby suppliers of electricity to eligible customers, where such consumers’ contract suppliers fail to meet up with the required supply.

Time will tell the effects that these regulations will have on the industry. What is clear is that the new regulations will break the monopoly DisCos currently have on distribution of Power and this will inevitably create more competition and drive prices down.