The Deep Offshore and Inland Basin Production Sharing Contract Act enacted as a decree in 1993 (DOIBPSCA or the Act) provides the legislative framework guiding Nigeria's deep offshore oil production, covering acreages greater than 200 meters in water depth. It embodies a gradation of fiscal incentives with a zero royalty and fifty percent (50%) flat rate of chargeable profit from oil exploration and production companies (Contractors) involved in exploration beyond 1000 meters water depth. In recent times, the Federal Government of Nigeria (FGN) expressed resolute commitment to review the DOIBPSCA, in order to maximize the needed revenue that can be deployed for the socio-economic development of the Nigerian people.
On 24th April 2019, the Deep Offshore and Inland Basin Production Sharing Contracts (Amendment) Bill scaled second reading at the House of Representatives. The Bill which is yet to be passed into law, seeks to amend Section 16 of the Act which stipulates a periodic review to guarantee economic benefits from additional revenues to the FGN from deep offshore acreages underpinned by Production Sharing Contracts (PSCs). This development has thrown up certain issues for consideration. One of such issues is that the proposed amendment seeks to modify the royalty rate from 0% to 50% for the FGN in respect offshore acreages beyond 1000 meters in water depth. In effect, the international oil companies (IOCs) or Contractors which operate in the deep offshore areas of Nigeria will commence paying a 50% royalty rate to the FGN based on the current proposition of the Bill. This report analyzes the impact of the upward revision of the fiscal terms of the PSC against the implications on prospective investments in the oil and gas industry of Nigeria.
Driven by the need to encourage upstream investments in offshore acreages, which was considered extremely risky and novel at the time, the DOIBPSCA was enacted more than two decades ago to provide fiscal incentives for investment in deep waters. Nigeria's offshore deep waters proved prolific with Bonga oil field being the first commercial deep water discovery (OML118), which has produced over 700 million barrels of oil since inception, followed by Agbami (OML 127 and 128), Erha (OML 133) , Akpo and Egina (OML 130), and Usan (OML 138) amongst others. Thus, the incentives which led to massive investments amongst the IOCs unlocked an increase in Nigeria's crude oil reserves to about 36 Billion barrels as at June 2019. Despite oil price rising slightly above $100 per barrel between 2010 and 2014, the FGN has been accused of not maximizing the opportunity to review the DOIBPSCA in order to cream off the additional revenues thus losing about $21 billion dollars (Twenty One Billion Dollars) of extra revenue due to non-review of the DOIBPSCA.
Section 16(1) of the Act provides that:
“The provisions of this Act shall be subject to review to ensure that if the price of crude oil at any time exceeds $ 20 per barrel, in real terms, the share of the government of the Federation in the additional revenue shall be adjusted under the production sharing contracts to such extent that the production sharing contracts shall be economically beneficial to the government of the Federation.”
Sub-section 2 of the Act further states that:
“Notwithstanding the provisions of subsection (1) of this section, the provisions of this Act shall be liable to review after a period of fifteen years from the date of commencement and every five years thereafter.”
The implication of the forgoing is that the provisions of the Act ought to be amended in such a way as to be economically beneficial to the FGN whenever the price of crude oil in real terms exceeds $20 dollar per barrel, thus impacting on the fiscal terms of the Production Sharing Contracts (PSCs) negotiated between the Contractors and the FGN. Although the fiscal terms enshrined in the Act have long been due for review, since crude oil price soared above $20 for more than fifteen years, no progress towards review of the Bill has been made until recently.
The proposed Bill seeks to comply with the requirement of periodic review of the Act. For the proposed amendment, sub-section 3 was created which provides that:
“In accordance with the provisions of subsection (1) of this section – (a) a royalty rate of 50% shall apply for the additional revenue in the contract area of the production sharing contracts under this Act; and (b) the additional revenue shall be determined by the product of the volume of crude oil or condensate sold and the difference between the actual nominal sales price of the oil or condensate and the nominal value of $20 per barrel, (1993 real terms) shall be determined based on relevant US All items Consumer Price Index (CPI) as published by the US Bureau of Labour Statistics.”
From the foregoing, the Bill is anticipated to modify the present economic realities of the PSCs, if passed by the National Assembly, resulting in lower revenues for the IOCs or Contractors and increased revenues to the FGN.
Issues and Considerations
A. Fiscal Incentives for Investment
The introductory part of the Bill states that it is a Bill to:
“give effect to certain fiscal incentives given to the oil and gas companies operating in the Deep Offshore and Inland Basin areas under production sharing contracts between the Nigerian National Petroleum Corporation or other companies holding oil prospecting licenses or oil mining lease.”
It is therefore expected that an amendment of the Act would, among other things, give effect to the fiscal incentives which accrue to the IOCs or Contractors. Legislative changes to the PSCs will invariably alter the economic dynamics of existing operators and determine the investment decisions of the IOCs, thereby impacting on the level of foreign investment in the sector. Since certain critical incentives are necessary to foster growth and investment, it is pertinent that an amendment to the Bill does not precariously affect the incentives which the FGN seeks to give to the Contractors or IOCs. Although the Act seems tilted in favour of the FGN, in terms of its anticipation of a rise in crude oil, it does not seem to foresee the possible prospect of decline in the price of crude oil, in which case necessitating the need for a downward review of the rates. It is suggested that this Bill sought to be passed should take into consideration such possibility of a decline so as to ensure flexibility in renegotiating balanced fiscal terms between parties, going forward.
To this end, it is pertinent that stakeholder consultation with the concerned industry operators, contractors or IOCs should be engaged to deliver a robust legislative review process.
B. Petroleum Industry Fiscal Bill
Another consideration is the impact of the proposed amendment of the PSCs on the IOCs vis-à-vis the proposed Petroleum Industry Fiscal Bill (PIFB), when passed. The PIFB would, in effect, repeal the Act in its entirety and introduce further changes to the fiscal incentives for companies operating in the upstream oil industry. It is likely however, that the amendment to the Bill will precede the assent to the PIFB, which incidentally has been plagued with controversial fiscal terms. The amended Bill will provide economic benefit to the FGN in the short-term but with the PIFB however taking effect, the entire incentives which may have become operational when the Bill becomes law would be extinguished.
It is therefore imperative for the FGN to bear in mind the effect of the certainty of robust fiscal terms for guaranteeing increased investment within an industry which provides almost 85% of the foreign exchange earnings of the FGN.
C. Renegotiation of Terms
A 50% royalty rate as proposed by the Bill appears high relative to current 12% provided in the Act (Section 5(1)), though it is not clear from the current Bill whether this rate will be applicable as a flat rate to deeper offshore acreages. The model PSCs typically provide for renegotiation of terms where a unilateral change in law or the existing arrangements would impact on the economic conditions of the Contractors. It is hoped that this protective clause would foster considerations of a mutually beneficial stakeholder engagement to arrive at a realistic and economically beneficial incentive package.
Overall, the effect of the amendment to the Bill entails a reduction in the fiscal incentives available to investors within the oil and gas industry with a view to driving up the revenues of the FGN. Notwithstanding the need to drive up revenue for the FGN, a mutually beneficial outcome would be borne out of a negotiation process between the FG and the IOCs for a win-win solution.
It is pertinent then, that the valuable contributions of the operators, contractors or IOCs be obtained and implemented for a smooth transition to the new oil and gas fiscal regime. There is thus, a delicate balance to maintain between satisfying the government's interests and the IOCs' interests. Effective regulation which is based on interest-balancing mechanisms should be employed in the process of navigating the difficult terrain of ensuring the accrual of increased earnings to the FGN and incentivizing foreign investment in the sector.
In the face of stiff geopolitical competition, there is an overwhelming need for Nigeria to unlock more reserves which can only happen when investors are attracted to licensing rounds due to favourable fiscal incentives that guarantee certainty of returns. It is our considered recommendation that ongoing, sector-wide stakeholder engagements will foster a smooth transition of the sector to a new fiscal regime.