PSC Amendment Bill and Nigeria’s Future

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Chika Amanze-Nwachuku takes a look at the recently passed Deep Offshore and Inland Basin Production Sharing Contract (amendment) Bill, 2019, and its likely adverse consequences on the oil industry and Nigerian economy

About a fortnight ago, precisely on October 15, 2019, the Senate passed the Deep Offshore and Inland Basin Production Sharing Contracts (amendment) Bill, 2019 (PSC Amendment Bill).

The Bill sponsored by Senator Albert Bassey Akpan, who also is Chairman of the Senate Joint Committees on Petroleum (Upstream), Gas and Finance, was passed by the upper legislative chamber, after adopting the committees’ report on the bill and conclusion of public hearing on it.

President Muhammadu Buhari, during the presentation of the 2020 budget to the National Assembly, had stated the need to amend the PSC Bill “to secure increased revenue for the federal government to fund projected expenditure in the 2020 and subsequent budgets.”
To this end, Buhari in an executive communication to the President of the Senate, Ahmad Lawan, dated October 10, 2019, specifically sought an expeditious consideration and passage of the PSC Amendment Bill into law by the Senate.

The letter partly read: “Pursuant to Section 58 of the Constitution of the Federal Republic of Nigeria 1999 (as amended), I hereby present the Deep Offshore and Inland Basin Production Sharing Contracts (Amendment) Bill, 2019 for consideration and passage into law by the Senate.

“This Bill seeks to reflect the current realities in the oil and gas sector, as well as to secure increased revenue for the federal government to fund projected expenditure in the 2020 and subsequent budgets.”

The upper legislative chamber during the clause-by-clause consideration of its committees’ report on the bill, also amended clause 17 of the PSC Act, and amended the timeline for review of future contracts from five years to eight years. The Senate also increased the penalty for failure to comply with the obligations of the Act to not less than N500 million or a prison term of not less than 5 years, or both.
The bill highlighted the approval of various royalty rates based on price range of crude oil & gas, and water depth of fields (deep offshore or frontier/inland basin).

But of particular interest in the amendment Bill was a proposed amendment to Section 5 of the Act, which highlights Royalty by Water Depth; Royalty by Price. The recommendation was that “Royalties shall be calculated on a field basis and shall be at rate per centum of the chargeable volume of crude oil and condensates produced from the relevant period as follows: In deep offshore: greater than 200m water depth – 10 per cent, and in frontier/inland basin – 7.5 per cent.”

In addition to the water depth-based royalty rate, the Bill further recommends that the Act also reflect a Royalty by Price where: “The royalty rates shall be based on increase that exceeds $20 per barrel, and shall be determined separately for crude oil and condensate as follows: From $ 0 and up to $20 per barrel – 0 per cent; Above $20 and up to $60 per barrel – 2.5 per cent; Above $60 and up to $ 100 per barrel – 4per cent; Above $100 and up to $150 per barrel – 8 per cent and Above $150 – 10per cent.”
Procedurally, the Bill would be sent to the House of Representatives for concurrence and onward transmission to President Buhari for his assent.

During the clause-by-clause consideration of the bill, the Senate President had expressed optimism that amendment of the PSC Bill will generate more revenue for Nigeria.
He declared: “With the passage of this bill, Nigeria will gain at least $1.5 billion in 2020 as a result of this amendment.

Lawan, emphasised that the amendment of the PSC Act will also create a level playing ground for the government and the international oil companies (IOCs) doing business in Nigeria.
“For the IOCs doing business in Nigeria, the amendment will not in any way discourage investment; we expect that they will continue to do business in Nigeria.

“When we legislate at the National Assembly, we will always be mindful of the need to have a competitive environment.
“When we work on the Petroleum Industry Bill, maybe in January, we will ensure that it is a win-win situation for Nigerians and those doing business in the oil and gas industry”, Lawan added.

It is indubitable that Nigeria, with the largest oil and gas reserves in Africa, has significant untapped hydrocarbon potential available to advance her economic development goals. The development of Deepwater PSC has been a major contributor to the Nigerian petroleum industry, the economy and to government revenue. Currently, Deepwater PSCs account for 40per cent of Nigeria’s oil production.

Findings from oil and gas industry indicate that the Deepwater PSC 1993 terms have attracted $86billion of investments since the commencement of Deepwater developments in 2001. Between 2001 and this year, Nigeria has received about $180billion from Deepwater oil production. The structure of PSCs is such that with increasing cumulative production, the share of profit oil to the Federal Government of Nigeria, through the Nigerian National Petroleum Company increases.

However, in the last decade, the Nigerian oil industry has sanctioned only three new Deepwater projects whereas other African countries with less hydrocarbon potential have attracted significantly more investments than Nigeria, because they offer more attractive Deepwater fiscal terms that encourage investments.

Impact on Investments, Economy
Oil and gas industry experts have expressed concern that introduction of additional price-based royalty and as well as the increase in water depth-based royalties on revenues already burdened with a plethora of other taxes, fees, levies and other tariffs would worsen Nigeria’s competitiveness. Analysts believe that US$48 billion of currently planned oil and gas investments would no longer be economically viable, and could result in significant decline in production and government revenues by 2023.

Besides, analysts opine that there are another $43billion of future Deepwater investments that will also not likely occur due to the lack of competitiveness in Nigeria’s fiscal policies. This will mean that the Nigerian contractors will not have work and the thousands of jobs that would have been created from the projects will not materialise for Nigeria.

Industry operators and other stakeholders reason that the Bill, which seeks to extract more revenue for the Federal Government of Nigeria through additional royalties in a high oil price regime, did not factor the corresponding increase in capital expenses, operating expenses and associated service costs. Furthermore, the bill does not consider its potential negative impact on long-term Deepwater investment and development.

Currently, Nigeria has one of the least competitive Deepwater fiscal terms in Africa and is fast losing substantial amount of potential investments in the oil and gas sector to other countries, particularly Mozambique, Angola and Ghana.

In the last decade, for instance, the Nigerian oil industry has been able to start up production of only three new Deepwater projects – Usan, Aje and Egina. Nigeria, with significant reserves of 55 billion barrels of oil equivalent, has attracted only a paltry $27billion of investments, whereas Egypt, Angola and Ghana with about half of Nigeria’s reserves combined, have attracted massive US$130 Billion for new projects, because they offer more attractive Deepwater fiscal terms to encourage investments.

Oil and gas industry experts therefore recommend that one of the most sustainable ways for the Nigeria to increase her revenue is by enabling new production from Deep Offshore and other locations. They reasoned that investments can be attracted through timely conclusion of ongoing industry reform to guarantee legislative certainty and clarity; ensuring fiscal terms remain globally competitive to maintain investment commitments, and enabling a conducive business environment. With a competitive fiscal framework in place, further income for the federal government can be quickly garnered by conducting a new and transparent oil licensing bid round.

Experts who are very conversant with operations of oil and gas industries in Nigeria and across the globe, have therefore advised Nigerian Legislative and Executive arms of government to take a holistic approach in addressing issues around the fiscal terms, taking into consideration all fiscal elements (taxes, royalties, incentives etc.) of the industry, and the passage of a petroleum industry bill that is sustainable and encourages investments.

Until competitive fiscal terms (with all fiscal elements) are achieved, Nigeria’s objective to attract investments in her oil and gas sector, which currently is the mainstay of her economy, may remain a mere wish that cannot be achieved.