Riding High:PSC Regime Illuminates Nigeria’s Oil Production Future

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23 years after its introduction, the Production Sharing Contract (PSC) has overtaken all other fiscal regimes in terms of its contribution to the country’s total oil production. It is hard not to be optimistic.

Until 2016, the Joint Operating Agreement (JOA) was responsible for more than 80% of the total crude oil production. Under the PSC regime, exploration risks, development and production costs are borne by the oil firm while in the JOA arrangement the federal government through the state-oil company, Nigerian National Petroleum Corpo-ration (NNPC), contributes counterpart funding to meet its equity participation in the Joint Ventures (JV). However, consistent inability of government to meet its cash call obligations led to the introduction of the PSC in 1993.

The entry of NNPC into PSCs arrangement with 8 international oil companies (IOCs) at the inception of the fiscal regime attracted additional foreign investment. According to the NNPC report, PSCs have aided the attraction of about $40 billion investment into the oil sector – though lower than the expected investment of $100 billion for the sector.

By the year 2000, NNPC offered 8 new deepwa-ter licenses. Between 2000 and 2004, invest-ment into exploration and production increased: More 3D seismic data were acquired by the oil companies, the number of wells drilled doubled and daily crude oil production increased by 11% from 2.249 barrels per day in 2000 to 2.489 barrels per day in 2004.

“Profit oil is shared between the NNPC and the IOC in accordance with a previously agreed profit split based on cumulative levels of production.”

Howev-er, the terms of the PSC for the 8 deepwater licenses were considered tough for IOCs. The reduced risks involved in finding larger deepwater reserves was the main reason for tougher profit oil splits in the 2000 PSC terms. 

In 2005, NNPC offered additional 14 deepwater licenses to the existing licenses. The new licenses brought about some alteration to the PSCs arrangement for better play. These alterations were in the area of bonuses; signature bonuses are paid immediately after the completion of negotiations and signing of the PSC while production bonuses are paid when the production from a specific contract area reaches a particular threshold. Royalties, paid through royalty oil, are based on produc-tion and correlate with water depth; they essentially decrease as water depth increases. Royalty oil is the quantum of oil allocated to the NNPC that will generate proceeds equal to the actual royalty payable each month and the concession rent payable each year.

Another alteration is cost recovery oil, which is allocated to the IOC to enable it recover all its operating costs.

The next portion is tax oil – the quantum allocated to the NNPC so as to allow it to pay on

behalf of itself and the IOC, the petroleum income tax due each month in accordance with the provisions of the Petroleum Profits Tax Act (Section 9, Deep Offshore Decree). Profit oil is shared between the NNPC and the IOC in accordance with a previously agreed profit split based on cumulative levels of production. Term and relinquishment was altered among others which include manage-ment committee, minimum work obligations, national interest provisions, and miscella-neous provisions.

These changes in the existing PSC arrange-ment placed the PSC regime on a higher pedestal compared to other fiscal regime in the sector from 2005 till date.

There are more entries into PSCs arrangement to the extent that, the contributions of PSCs to oil production skyrocketed from just 3% in to 23.99% in 2007 and continued till 2016 where PSCs share of oil production reached 47.34 % compared to share of other fiscal regimes. As at May 2019, NNPC monthly report revealed that PSCs are responsible for 39.94% of Nigeria’s total crude oil production.

Most remarkable is that contrary to the general notion that Nigeria is making little or nothing from Deepwater Operations, the NNPC report shows that $180 billion revenue was generated from deepwater operation due to increase in production.

NNPC continues to maintain its focus on deepwater development. Out of the 15 Floating Production Storage and Offloading (FPSO) in Nigeria, seven have been deployed for Deepwater Operations as it is believed to be the future of Nigeria’s oil production.

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