A Review of the Nigerian Energy Industry

IOCs uncomfortable with NNPC’s review of oil contracts

25 September 2015, Lagos – Coming at a time of sustained decline in global oil prices, the plan by the Nigerian National Petroleum Corporation to review the fiscal terms of existing Production Sharing Contracts may be opposed by International Oil Companies involved in such deals, industry experts have said.

Shell logoExxonMobilSome of the experts, who spoke with our correspondent in separate interviews, said the action could further discourage investments by the IOCs and cause them to move their resources elsewhere.

The nation’s oil and gas production structure is majorly split between joint ventures with the NNPC onshore and in shallow waters and the PSCs in deepwater offshore.

Under the PSCs, the NNPC is the oil licence holder, but engages oil firms as contractors that bear all risks and recover costs from the production after royalty payments, which ranged from 12 per cent for fields in water depth of up to 500 metres to zero per cent for fields in water depth of above 1,000 metres.

The Group Managing Director, NNPC, Dr. Ibe Kachikwu, had last week said the corporation would be re-negotiating the contracts with some IOCs in “the weeks and months ahead” to extract as much benefit as possible for Nigeria.

He said some of the contracts were negotiated over 20 years ago and had since been overtaken by new realities in the industry.

A United States-based oil and gas expert and Co-Director, Institute for International and Immigration Law, Thurgood Marshall School of Law, Texas Southern University, Prof. Emeka Duruigbo, who told our correspondent that it was within Nigeria’s sovereign rights to initiate the process of renegotiation of the contracts, however, said, “From a legal angle, it calls into question the country’s respect for or adherence to the principle of sanctity of contracts.”

Duruigbo is of the view that agreements freely entered into by mature parties deserve deference and compliance, even when aspects of it are no longer palatable.

He said, “The key is to learn lessons from past mistakes and not repeat them in future transactions. Thus, calling for renegotiation may not be favourably received by the IOCs, especially if they do not see sufficient rationale to warrant such review.

“Secondly, from an economic standpoint, the IOCs are accustomed to the exact opposite treatment to what the NNPC GMD is proposing.”

According to him, in times of low oil prices as we are witnessing today, governments are more likely to offer more favourable fiscal terms to the IOCs to stimulate interest in further investments.

“Since the Nigerian action is in the opposite direction, there is a good chance that the move will deter further investments by the IOCs and cause them to move their resources elsewhere,” he said.

The President, Nigerian Association for Energy Economics, Prof. Wumi Iledare, said the idea of re-negotiation was floated by the Inter-Agency Team redraft of the Petroleum Industry Bill, 2008, but was vehemently opposed by the IOCs then.

He said, “In all honesty, the sanctity of contracts cannot be violated without repercussion. It is a noble wish if he (Kachikwu) thinks the contracts have a provision to negotiate. Perhaps, if the contracts have expired and are due for renewal, there is room to renegotiate the contracts.

“I cannot just fathom why any IOC will accept instruments and terms that may negatively impact asset profitability, especially when the IOCs are fully responsible for exploration development cost under a typical PSC regime.”

The best the government can do is to wait for the contracts to expire and redefine the terms for renewal, Iledare said.

“Competition is keener now than in 1993. The more regressive a fiscal system is in terms of instruments and terms, the less attractive the petroleum province is for investment. This is especially true as easy-to-find resources diminish,” he added.

According to the Head of Energy Research, Ecobank Capital, Mr. Dolapo Oni, there are a few of the contracts that are due for renewal, and are likely to be the main ones to be renegotiated.

“I think clearly the IOCs will definitely seek to protect their own interests. However, the NNPC has the final say on these matters; so, both parties will need to work out something beneficial to both sides,” Oni said.

An energy law and policy expert/Senior Associate at Banwo & Ighodalo, Mr. Ayodele Oni, who believes the proposed review is in order, however, said the IOCs might feel quite uncomfortable about it because of the plummeting oil prices.

Citing the Deep Offshore and Inland Basin Production Sharing Contract Act, which is the principal legislation regulating the PSCs, he said, “The Act stipulates that if the price of crude oil at any time exceeds $20 per barrel, the share of the government of the federation in the additional revenue would be adjusted under the PSCs to such an extent that the PSCs shall be economically beneficial to the government of the federation.”

A spokesperson for Shell declined to comment, while that of ExxonMobil, who promised to respond in 24 hours on Monday, had yet to do so as of Wednesday.

Nigeria first introduced the PSCs in 1993 to help solve the NNPC’s inability to fund its share in joint venture oil operations. The country has both JV and/or PSC deals with Shell, ExxonMobil, Chevron, Total, and Eni.

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