IOCs warn against contracts overhaul

12 October 2015, Lagos – Executives of international oil companies (IOCs) operating in Nigeria have warned the federal government against sweeping changes to commercial contracts that could lead to the government taking a bigger share of revenues from the country’s vast deepwater fields.


Osagie Okunbor, New Country Chair for Shell Companies in Nigeria.

Osagie Okunbor, Country Chair for Shell Companies in Nigeria

As Africa’s leading crude producer begins a clean up of the industry that is its economic lifeblood, the state-owned Nigerian National Petroleum Corporation (NNPC) has said it plans to renegotiate production-sharing agreements with oil majors.
The decision, which NNPC said will affect companies such as Royal Dutch Shell, Chevron, Eni and ExxonMobil “in the weeks and months ahead”, has stoked concern among western industry officials, reported the Financial Times (FT) yesterday.
Several executives of the IOCs said they knew nothing of the details, while others said that they had not been contacted.
One executive, who declined to be named, said: “Don’t mess with the fiscal terms.”
The IOCs have been resistant to renegotiating the terms under the Production Sharing Contracts (PSCs) and Joint Operating Agreements (JOAs) that govern the bulk of Nigeria’s oil operations.
Their refusal to accept new fiscal terms in the Petroleum Industry Bill (PIB) was one of the factors that led to the delay in the passage of the crucial legislation which has been with the National Assembly for eight years.
Stephane Foucaud, analyst at First Energy Capital, said: “If the PSCs start changing, that might seriously make people rethink their investment exposure to Nigeria. Companies don’t like uncertainty. In the context of the majors cutting capital spending, there are many more opportunities for capital deployment.”
The scale of changes planned by NNPC, under a new leadership following the election of President Muhammadu Buhari this year, remains uncertain.
However, the Group Managing Director of NNPC, Dr. Ibe Kachikwu, has made it clear that the corporation intends to review all its production sharing contracts with the majors, the aim being to boost government revenues after the collapse in crude prices.
Western companies would be almost certain to resist changes to the terms of existing agreements, many of which date back to the 1990s, while the development of eight planned deepwater projects, due by 2020, could be put back. The new projects would contribute one million barrels a day of output.
“With oil prices being about half what they were a year ago, there is less capital to go around. I think Nigeria is focused in the right place. Let’s make sure we have a stable environment, so when we do have a project that is competitive, those funds go to those projects,” said another executive.
Mr. Osagie Okunbor, Chairman of Shell Nigeria, said neither NNPC nor the international oil groups want the negotiations “to have an adverse impact on investment in the country”. He added: “We’ll have to look at several clauses and then take a position.”
Shell has deferred until next year a final investment decision on its multibillion-dollar Bonga South West project in light of the oil price collapse and has said it will approve only two developments globally this year.
Industry insiders believe Nigeria would find it difficult to agree a bigger government revenue take at a time when the big oil and gas groups are slashing spending in an effort to shore up cash flow and protect dividends.
Felicia Kemi Segun, a solicitor with Nigeria-based ACAS-Law, said NNPC was entitled to broach a review of existing PSCs, but warned: “There will no doubt be great resistance from the international oil companies to a renegotiation of fiscal terms that see their profits further shaved to the extent that the government is able to extract any additional commercial benefit.”

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