The recent decision by the Federal Government through the Office of the Attorney General of the Federation and Minister of Justice, Abubakar Malami, to demand from the international joint venture oil companies the payment of $62 billion as arrears of revenue they should have paid based on the terms of the Production Sharing Contract (PSC) agreement has continued to generate controversies from interest groups in the oil and gas industry.
In this interview, culled from the NNPC News magazine, the Chief Operating Officer (Upstream), Bello Rabiu, explains why it has been difficult for the government to renegotiate the fiscal terms and amend the PSC with the IOCs. Excerpts:
The Nigerian Extractive Industries Transparency Initiative (NEITI) said recently in one of its reports that Nigeria lost about $28 billion as revenue for not reviewing the fiscal terms in the country’s Production Sharing Contracts (PSC) over the years. How do you react to this?
RABIU: The PSCs started in 1993 as a result of the funding problem by the joint venture partners in the oil and gas industry. When the country discovered offshore oil assets, government thought it wise to introduce a system that could help attract international oil companies with the capacity to put in their money and produce the oil.
To do that, government decided to borrow what was going on in other countries in terms of PSCs, instead of doing a JV arrangement that required the NNPC to contribute money.
In PSC, the government or its national oil company is not required to contribute any money. The arrangement is that the oil block will be given to the national oil company, in the case the NNPC.
Then, NNPC will employ contractors to bring in their technology and money to first explore for the oil. Once oil is found and produced, the contracting companies pay 100 per cent of the money for exploration and production.
If after exploration they fail to find oil, then all they have invested in exploration and production activities is lost. But, if they discover oil, they will recover their costs invested from the proceeds of crude oil produced. After recovering their exploration and production costs, whatever is left as profit is shared between the contractors and the owners of the oil block (NNPC). That is how the PSC system works.
When the PSC system started, government recognized that it involved very high risks. So, the entire economics of the development of PSC in Nigeria was woven around very generous fiscal terms to encourage the companies to agree to venture into the investment. Government decided to reduce the rate for royalty for the contractors from 25 per cent to eight per cent depending on the water depth of the acreage.
For Petroleum Profit Tax (PPT), government said the contractors should pay 50 per cent, instead of 85 per cent. This was because at that time the price of crude oil was very low. Government also said the fiscal terms in the PSC would not be reviewed until the price of crude oil hits $20 per barrels.
All these were done to compensate the contractors for the high risks they take to venture into the investment. All parties agreed on these terms captured in the PSC. The terms were also enshrined in the Deep Offshore and Inland Basin Production Sharing Decree, which became an Act since 1999.
What does the law say?
RABIU: The law was that when oil price rises above $20 per barrel, then government should sit down with the contractors to renegotiate the fiscal terms and change the law. The intention was to ensure that government can get more revenue from royalty, tax and PPT.
There is another provision in the PSC which says: in the event that oil price does not go beyond $20 per barrel, if production continues for more than 15 years, the contract can be reviewed.
That term was introduced because government believed that in 15 years, the contracting companies would have recovered their costs fully. These were the two conditions provided for by the law under which the PSCs can be reviewed. Fortunately, in 2008 the two conditions were met.
In 2008, crude oil price shot beyond $20 in the $25-$27 per barrel band. That year also marked the 15th year since 1993 when the PSC law came into force. Government was aware of this and was ready to invoke the two clauses and call for a review.
If the government was aware of these clauses, why did it not invoke its powers and enforce them?
RABIU: A committee was actually set up to look at the issue. But, it was decided that the only thing it needed to do was to review the fiscal terms in line with the due process stipulated by law. The committee wrote a memo to the then Minister of Petroleum Resources to notify him of the intention to trigger the process.
The Minister directed that the committee should give notice that the Nigerian government has the intention to review the Act and for everyone involved to get ready.
From that time till 2015, the committee was unable to do it (begin the process).
Clearly, there was a deficiency of the political will on the part of government then to implement that very simple arrangement. The main challenge was that the IOCs did not want the fiscal terms to be reviewed. Obviously, they will not be happy that government wanted to get them to pay more. The companies are making more money from the current fiscal regime. But, it is government’s duty to ensure the law is reviewed.
But, why has government not done so?
RABIU: Again, looking at it objectively, you will discover that the country is the victim of past military governments’ experience. That experience made us to be unconsciously used to Decrees prepared and signed into law in one day. But, under democracy, the experience is different. To change, review or amend any law requires all stakeholders to make inputs.
And the process will require going to the National Assembly to present a Bill; the Bill will undergo different stages of lawmaking, before it is brought back to the President for assent, before it becomes an Act of the National Assembly.
So, those people who are not interested in having the fiscal terms reviewed can also lobby the National Assembly not to agree to change the law.
The fiscal terms you referred to are also in the PSC agreements signed by the NNPC and the JV companies. Can’t the review be carried out at that level without amending the Act?
RABIU: No. The Act is what gave life to the agreement in the first place. If the fiscal terms were not enshrined in the law, and they were only stated in the agreement, that would have been possible.
Another way we could have avoided this was for the provision to have been more explicit, stating what percentage of the revenue should accrue to the government if the price of crude oil goes above $20 per barrel.
However, what the law says is that if the price of crude oil goes above $20 per barrel, government will change the law to accommodate higher revenue for government.
So, one can see clearly that the law must be changed first. And changing the law under a democracy in Nigeria is not easy. This is one of the things the Petroleum Industry Bill was intended to address.
Unfortunately, they (the IOCs) used that as an opportunity to kill the PIB. The IOCs were against the PIB. Some other stakeholders were also against the Bill. That was how the PIB could not be passed throughout the tenure of the National Assembly between 2007 and 2011.
When the new regime came in 2011, government again tried to push for it to be passed. That was when the PIB version was called the 2010 PIB. We were on the issue till 2015, and it was not passed till the end of that regime. When the present government came in, the committee expressed concern and told them that if the National Assembly is not asked to change the law, the country will continue in endless circles.
Was there any response from government over the Committee’s concern?
RABIU: The government actually sent a Bill to the National Assembly seeking amendment to just that portion of the Act that talked about increasing what accrues to the government from the PSCs in such a way that when there is any increase in crude oil price, then a part of it should go straight to the government. We have been on it since then.
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(Last week, the Senate amended section 5 of the PSC Act to bring its provisions into conformity with the generality of provisions of the Act and into congruence with the intendment and essence of Production Sharing Contracts).
We learnt the cost of production per barrel of oil has been reduced from $28 to $23. How was that achieved?
RABIU: Like I said earlier, one of the things that determines how much revenue accrues to government from oil production is the cost of production.
The first deduction from any barrel of oil produced is royalty. The second is the cost of production. In Nigeria, security is a major contributor to the cost of production. When the situation in the Niger Delta is tensed, or the oil facility is bombed, it adds to the cost of production.
One of the most tremendous things that has happened is government’s intervention in security. That has helped a lot to reduce the cost of production.
The second point is that because the security situation has improved, many companies that left the country are now back. This has introduced competition into the environment, with competitive bidding for every job, leading to lower cost.
The third point is that now the companies are sharing some facilities in their operations. Before now, when we were doing with the NLNG, gas supply was from three different joint ventures – Shell (Petroleum Development Company), Total E&P Nigeria, and Agip (Nigerian Agip Oil Company). Each of the three JVs saw itself as independent, and so constructed its own gas supply lines, even though the gas was all going to the same Bonny LNG plant.
But, now we know that if we are supplying gas to the same off-taker, the best thing to do is to share the pipeline. This has also helped reduce the cost. Companies are managing costs together. Even helicopter services are now shared.
The fourth point is when oil price crashed, we went back to review some of the contracts with the contractors. We made them to understand that paying prices that were negotiated when oil was $40 per barrel at a time when it has crashed to $28 would not work. It’s either we stopped production and contract terminated, or we reduced that cost of production so that we can try to produce at a lower cost and survive. They saw reason with us and we saved some costs. We are in a position to say that we are happy that the cost of producing oil in Nigeria has come down significantly.