SPECIAL REPORT: How Nigeria loses trillions of Naira to deep offshore oil explorations

Oil rig
Oil rig used to illustrate the story.

The failure of the Nigerian government to review its fiscal policies governing the exploration of oil in deep, offshore waters has caused the country a loss in oil revenue amounting to trillions of Naira, PREMIUM TIMES can report.

A calculation of the royalty payments on four randomly selected deep offshore oil blocks – Bonga, Agbami, Akpo, and Erha – showed that Nigeria would have, at a conservative three per cent royalty, netted just over N1 trillion between 2010 and 2017.

And at a five percent royalty – the rate currently being proposed by lawmakers at the House of Representatives – the revenue over the same eight-year period will rise to almost N2 trillion.

Nigeria’s Deep Offshore and Inland Basin Production Sharing Contract Act (1993) is the legislative framework guiding deep offshore oil production, covering acreages greater than 200 metres in water depth.

Enacted in 1993, the fiscal policy stipulates a zero per cent royalty from oil companies for explorations above 1,000 metres water depth. Prior to the period, oil exploration and production operations were mostly on land, swamp, and shallow offshore.

At the time the Act was enacted in 1993, then as a Decree, deep offshore oil exploration and production were uncharted territories in Nigeria and, as a result, there was a need to encourage upstream investors to put risk capital in that direction.

The first commercial deepwater discovery in Nigeria, the Bonga oil field, was awarded to Shell Nigeria Exploration and Production Company (SNEPCO) in 1993, but production did not start till 2005.

Drilling at a water depth of 1,030 metres, the Bonga field (Oil Mining Lease, OML, 118) is operated by SNEPCO (55 per cent) under a production sharing contract with the Nigeria National Petroleum Corporation. Other partners include Esso (20 per cent), Eni (12.5 per cent), and Elf Petroleum Nigeria (12.5 per cent).

According to Shell, the Bonga oil field has produced over 600 million barrels of oil to date.

After Bonga’s success, several other deepwater oil explorations followed in quick succession including Agbami (Chevron), Erha (ExxonMobil), and Akpo, Egina, and Usan (Total) among others.

But the inability of the Nigerian government to collect royalty payments from deepwater oil operations has seen the country miss out on key sources of revenue even as it struggles to fund its annual budget.

India, for instance, collects five per cent royalty on deepwater offshore production for the first five years of commercial operation and ten per cent thereafter.

Analysts say the 1993 Deep Offshore contract was entered into at a time Nigeria, under the late dictator Sani Abacha, was burdened by sanctions and needed money for key infrastructure projects.

“It may not have been the best approach but you may want to look at the rationale for setting that,” said Dauda Garba, an expert in resource governance.

“At the time those contracts were signed, offshore oil prospecting and exploration and production were very novel in Nigeria.”

The granting of Production Sharing Contracts in the deep offshore saw Nigeria’s crude oil reserves increase to 36 billion barrels (bbls), with production now averaging 548,000 bbls/day.

There were, indeed, efforts to amend the decree in 1999, when the sanctions on Nigeria were lifted after Mr Abacha’s demise, to reflect that if crude oil exceeds $20 to a barrel or after 15 years after the initial contracts were signed, the agreement should be renegotiated in a manner that will be favourable to Nigeria.

Crude oil prices averaged $16.33 in 1993 and had risen to $17.44 by 1999.

Oil-rich Waters

In January 1999, Chevron struck oil at the Agbami OML 127 and 128, some 113 kilometres offshore the Niger River Delta at a water depth of 1,372 metres. But commercial production did not start until July 2008.

Operated by Star Deep Petroleum Limited, a Chevron affiliate, alongside a consortium of other firms, the Agbami field is the largest deepwater discovery to date in Nigeria with estimated recoverable reserves of 900 million barrels.

One month after Chevron struck oil, and at a water depth of 1,200 metres, ExxonMobil struck oil in the Erha oil and gas field. Commercial production began in March 2006 at a rate of 190,000 barrels of oil per day.

By 2000, Total E&P had discovered the Akpo field situated on OML 130 about 200 kilometres from Port Harcourt. Drilling is at a water depth of 1,100 to 1,700 metres.

As the oil companies continued to hit more oil in the deep waters, analysts say a review of the country’s offshore regulations to reflect the current times would see more revenue accrue to the government.

For instance, in 2011 when crude oil price averaged $113 per barrel, these four deep shore fields produced 271,000 barrels. At a three per cent royalty rate, that would have seen, at least, N215 billion remitted to the government coffers.

That N215 billion accounted for five per cent of Nigeria’s 2011 budget.

But beyond the review of the royalties, the Deep Offshore Act has other provisions that the government had failed to utilise to shore up its revenue base.

One of such provisions allows the Nigerian government to charge oil companies a premium for the share of sales once the price of crude exceeds $20 a barrel.

In December last year, Ibe Kachikwu, Nigeria’s minister of state for petroleum, bemoaned the loss of “close to $21 billion” extra revenue for the country due to the non-review of the Act.

“From 1993 to now, we have lost a total of $21 billion just because government did not act. We did not exercise it,” the Reuters news agency quoted Mr Kachikwu as saying.

There are, at least, four bills to amend the Deep Offshore and Inland Basin Production Sharing Contracts before the National Assembly.

One of them, sponsored by Victor Nwokolo, a member of the House of Representatives, seeks to extend Nigeria’s royalty regime for petroleum and gas to areas in excess of 1,000 metres water depth. The lawmaker proposed a three per cent royalty on explorations beyond 1,000 metres.

Weeks of efforts to interview Mr Nwokolo (PDP, Delta) for this article were unsuccessful as he did not respond to phone calls, text messages, or requests for an audience.

Another lawmaker in the House of Representatives, Samuel Ikon (PDP, Akwa Ibom), is also proposing a five per cent royalty for 1,000 and beyond water-depth.

In the Senate, Ben Murray-Bruce (PDP, Bayelsa) and Theodore Orji (PDP, Abia) are also pushing for a five per cent royalty in areas excess of 1,000 metres water depth.

Attempts to speak to the senators were also unsuccessful.

But, it is not just the lawmakers who are interested in the amendment, the state-owned Nigerian National Petroleum Corporation, NNPC, have also begun moves to amend the Deep Offshore Act.

In January last year, it announced a proposal for some key amendments to the Deep Offshore and Inland Basin Production Sharing Contract (PSC) Act to enable the federal government to optimise the collection of royalties and other revenue in deepwater oil production activities.

Bello Rabiu, NNPC’s Chief Operating Officer, Upstream, said in a presentation to a joint House of Representatives Committee that it was imperative to effect increment in royalties across all categories to increase government take.

“It is our opinion that the proposal to increase the royalty rate for terrains beyond 1000 metres, from zero per cent to three per cent, is commendable but it is necessary to also make corresponding adjustments in other categories,” he said.

Under the proposed PSC royalty regime, the calculation of what is due to the government shall be based on production and price to guarantee fairness and balance between PSC contractors and government, the NNPC said.

For royalty based on production within a tranche of 50,000 barrels of crude per day, the NNPC proposed a royalty tranche rate of eight per cent.

Under a production tranche of 50,000 to 100,000bopd (barrels of oil per day), the royalty tranche rate would increase to 15.5 per cent and would rise to 28 per cent once the production surpasses the 100,000 bopd mark.

To calculate royalty based on price, NNPC proposed that under a $50 per barrel price regime, the tranche incremental royalty rate shall be zero per cent but the rate would increase to 0.30 per cent if the price hovers between the $50 to $100 mark. Also, a price regime of $100-$130 would attract royalty of 0.20 per cent while an increase of price between $130 -$170 translate to royalty rate of 0.10 per cent. A price regime of $170 and above would attract zero per cent royalty payment.

The NNPC argued that in the alternative, the graduated royalty scale as provided in the Act should be removed while the Minister of Petroleum Resources should be empowered to intermittently set royalties payable for acreages located in deep offshore and inland basin production sharing contracts through regulations based on established economic parameters.

Extra Revenue Stream

Last year, the United States government raked in $7 billion in royalties and fees from energy production on federal and tribal lands and waters, more than half of the revenue coming from offshore oil and gas production, according to the Department of Interior. The U.S. collects 18.75 percent royalty for fields deeper than 200 feet (60.96 metres).

In Egypt, the national oil company, the Egyptian General Petroleum Corporation (EGPC) pays royalties of ten per cent, from its share of production to the state.

In Kuwait, the government collects 15 per cent royalty on all deepwater explorations and productions.

Ayodele Oni, a specialist on Energy and Natural Resources, said the Kuwaiti example if applied in Nigeria would go a long way towards increasing government revenue.

“Economic yields from royalties at a flat rate would be valuable for a number of reasons,” said Mr Oni, a partner at Bloomfield Law Practice.

“It can be utilised to offset cost of refining overseas as Nigeria still pays to have final fuel products imported which is a drain on the currency reserves. The yields can also be apportioned to offset the imminent cost of completing the refinery which has dragged for years.”

Mr Garba also agreed that a flat-rate royalty regime would be suitable for the country.

“For instance, Iran has a flat rate, where you will not even belabour yourself calculating because sometimes if you go into the issues existing between some of the oil companies and the government, there are disagreements about the depths too,” he said.

“And you know, when there are disputes over these things, you cannot collect until such disputes are resolved. So those who advocate for a flat rate may not have to worry about such issues.”

 

Successive Nigerian annual budgets over the years had always recorded a deficit and analysts say opening up an extra revenue source would go a long way in closing the gap as well provide more funds for capital projects.

For instance, a conservative three per cent royalty on oil explorations in water depths of 1,000 metres and beyond in 2017 would have earned at least N300 billion to the government’s coffers, enough to fund the Second Niger Bridge and finish the Lagos-Ibadan Expressway reconstruction.

Olanrewaju Suraju, the head of the Human and Environmental Development Agenda, said the government should have the muscle to not just collect the royalties but penalise the oil multinationals for violating their terms of the agreement.

“They are not just meant to pay the royalties, they are also meant to pay penalties for the periods in which they failed to pay those royalties,” Mr Suraju said.

“That is where the civil society and the media will come in. We need to hold the National Assembly not only responsible but accountable.

“If it is expected that such amendment to the law or an enactment of a new one is meant to pass through the legislative process within an expected period and it doesn’t happen, we are meant to speak out loudly, we are meant to also monitor the process, that law and the resources that would be attracted by the review of that process are more than sufficient to fund the basic infrastructural needs of the country.”


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