NEITI urges ‘urgent’ review of Nigeria’s deep offshore oil exploration agreements

Oil rig
Oil rig used to illustrate the story.

The Nigeria Extractive Industries Transparency Initiative (NEITI) has urged the federal government to review the Deep Offshore and Inland Basin Production Sharing Agreement between the country and oil companies.

The agency said in a statement Sunday that the urgency to review the obsolete legislation without further delay is in view of the revenue losses to the federation by the use of the old agreement in the computation of revenues to be shared between the government and oil companies.

The call for the review of the agreement came days after a PREMIUM TIMES report detailed how the country is losing trillions of Naira by failing to review its fiscal policies governing the exploration of oil in deep, offshore waters.

The Deep Offshore and Inland Basin Production Sharing Contracts Act of 1993 provides for a review of the terms when prices of oil cross $20 in real term, and also a review of the terms 15 years after operation of the agreement and five years subsequently. It is, however, yet to be reviewed since then.

NEITI in its statement by Ogbonnaya Orji, Director of Communications and Advocacy, expressed concern that Nigeria is yet to adhere to this important provision despite the price of crude oil currently hovering around $70 per barrel.

According to an Occasional Paper released by the agency which reviewed three years of NNPC’s financial and operations reports, NEITI noted that crude oil production under the Production Sharing Contracts (PSCs) has since overtaken production under the Joint Venture arrangements.

“A careful look shows that Production Sharing Contracts (PSCs) accounted for 44.8 percent of total oil production while the Joint Ventures (JVs) contributed 31.35 percent,” the paper stated.

A NEITI historical analysis of the relationship between PSCs and JVs showed that JV Companies accounted for over 97 per cent of Production in 1998 while PSCs contributed only 0.50 per cent.

The trend continued until 2012 when PSCs accounted for 37.58 per cent while JVs contributed 36.91 per cent.

By 2013, PSCs contributed 39.22 per cent while JVs contributed 36.65 per cent.

In 2014: PSCs; 40.10 per cent and JVs 32.10 per cent.

The PSCs-JVs figures for 2015 is 41.45 per cent and 31.99 per cent, while that of 2017 is 44.32 per cent and 30.85 per cent respectively.

“Other companies, comprising Nigerian Petroleum Development Company (NPDC), Alternative Financing (AF), and Independent/ Marginal Fields contributed 2.39% to total production in 1998 and by 2017 this had risen to 24.83%,” the NEITI Occasional Paper stated.

“This figure clearly shows the changing structure of oil production in Nigeria, where PSCs (which contributed a mere 0.5% to total production 20 years ago) have dramatically overtaken JVs (which contributed 97% to total production 20 years ago).”

Between 2015 and 2017 covered by NEITI’s Occasional Paper review of NNPC Report, Nigeria produced 2.126 billion barrels of crude oil and condensate.

A further review of the NNPC Report shows that: “Production was highest in 2015 with 775.6 million barrels produced and lowest in 2016 with 661.1 million barrels produced.

In 2017, 690 million barrels was produced.

The year 2016 was a difficult year for oil production because production was shut in a number of oil terminals, the report noted.

NEITI said its major concern is that with PSCs currently accounting for about 50 per cent of total oil production and the major source of revenues, the delay or failure to review and renew the agreement means that payment of royalty on oil production under PSCs would not be made while computation of taxes would be based on the old rates.

On lifting of crude oil, the NNPC Monthly Financial and Operations Report stated that “international oil companies (IOCs) lifted more crude oil than the government. Total lifting of crude oil and condensates was 2.135 billion barrels. Of this sum, IOCs and Independents lifted a total of 1.367 billion barrels, while government’s lifting by NNPC was 721.16 million barrels.

“This means that the operators lifted 64.01 percent of total crude lifting’s, while government through NNPC lifted 33.76 percent. When expressed in monetary terms, total government lifting of oil amounted to $35.893 billion while the figure for IOCs and Independents was $68.591 billion.”

The NNPC report further disclosed that refineries received 15.15 per cent of total domestic crude lifting out of which 41.32 per cent was utilised under the Direct Sale Direct Purchase (DSDP) program of NNPC.

On refineries and domestic crude utilisation, the report disclosed that for the three years under review, Nigeria’s refineries recorded an average capacity utilisation of 12.26 per cent. A further breakdown shows that Kaduna refinery had the lowest capacity utilization of nine per cent while Warri and Port Harcourt recorded 9.73 per cent and 15.4 per cent respectively.

Furthermore, the NNPC reported a loss of N547 billion between 2015 and 2017, with the Corporation’s headquarters recording the highest revenue loss to the tune of N336.268 billion.

On the contrary, the report revealed that the Nigeria Gas company made a profit of N141.324 billion.

NEITI said while the monthly voluntary disclosures by the NNPC should be applauded, it had not independently verified the information and data from the NNPC reports through its auditors under the EITI framework.

“NEITI has not, except for the year 2015, independently validated the data from NNPC,”. the agency stated.

“This will be done in ongoing and future reconciliation reports. What has been done here is a preliminary analysis of the data that NNPC has made available for the three-year period.

“The figures examined here do not represent the sum total of all revenues from the sector, as other payment streams like royalties and taxes from JVs, signature bonuses, transportation rental fees, NESS fees, penalties and others are not covered by the NNPC financial and operational reports.”

NEITI also commended the NNPC for the reconciliation of the crude swap under-delivery transaction executed during the crude- for- product- swap. It urged the corporation to sustain the new spirit of openness while encouraging the citizens to use the information and data from the NNPC’s disclosures to promote public debate required in implementing the on-going reforms in the extractive sector.

The NEITI Occasional Paper series which reviewed the three years of NNPC operations and financial reports is the third in the series.

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