By LOUIS IBA
Lurked in water depths of over 1,000 meters, Nigeria’s deepwater crude oil blocks have been gradually turned into a battle field, where the Federal Government and International Oil Companies (IOCs) battle over the determination of what should constitute appropriate tax payments on these assets valued at over $15 billion.
The government, in 1993, had begun the award of oil acreage to IOCs under a production Sharing Contract (PSC) deal that allowed oil firms to source for funds independently, undertake a sole risk exploration for the oil and, when oil was discovered and drilled, it is sold to recoup their investments under a 70 per cent to 30 per cent profit sharing formula. Royalty payment was set at zero. Industry sources told Daily Sun that there were serious concern that the relationship between top officials of the Ministry of Petroleum and the management of the IOCs, who operate most of the deepwater or offshore oil acreages, had been “deteriorating with every passing month, in a way inimical to the interest of the industry, as it becomes very clear that the government was bent on imposing taxes and royalties on these deepwater oil blocks.
“The relationship between the IOCs and the Ministry of Petroleum is so strained, as it appears the government is bent on going ahead with the tight fiscal regime as contained in the proposed Petroleum Industry Bill (PIB), and the IOCs don’t want that done, so it has been a source of concern to the industry that both parties are yet to agree on favourable royalty and tax terms,” added the source.
While the government sees the fiscal reforms for the deep water oil fields as capable of making the industry attractive to investments (whether local or international) as well as boosting government revenue, the IOCs who, for some years now, had enjoyed a sort of royalty exemptions on these fields, see any form of refom as a disincentive to investment and are currently intensifying their lobby on members of the National Assembly to jettison the reform idea.
Anyone who had doubts that all was not well between the Petroleum Ministry and IOCs, had such skepticism cleared at the just concluded Nigerian Economic Summit Group (NESG) conference in Abuja, with Petroleum Minister, Deizani Alison-Madueke, and CEOs of IOCs openly disagreeing on the proposed tax reforms. “The government wants to collect more revenues from large profitable fields in the deep offshore waters,” said Alison-Madueke.
And she went ahead to state a resolve not to back down, noting that the reform constitutes “the largest overhaul of the government petroleum revenue system in the last four decades. “I wish to state that Nigeria is not alone in ‘tightening’ of fiscal terms,” she added, citing Angola, another African oil producing nation as an example where fiscal regime had been reviewed for international investors. A week after the minister’s pronouncements, US oil giant, ExxonMobil, came out with its ‘Energy Outlook’ – a forecast for the future energy trend – where it faulted the fiscal terms for the deep-offshore acreages.
“The current draft PIB proposes fiscal and non-fiscal recommendations that will not encourage investment in the industry, nor will it offset natural decline as fields mature. An operator needs to reinvest about 50 per cent of annual cash flow to keep production flat,” said ExxonMobil. “Without new investments, Nigeria’s production will decline by 40 per cent by 2020, while it could potentially grow by nearly 50 per cent within same period, with continued (and planned) investments of $110 billion,” the oil firm added. But an official of the Petroleum Ministry told Daily Sun that such a position held widely by most IOCs was “flawed and inimical to the economy as only the IOC enjoyed the benefits.”
“The government had entered into the PSC term in the early 90s because it had not fully comprehended what the PSC’s meant,” the source said. “At that time the government was scared nothing could be found offshore so it turned itself into a Father Christmas with generous incentives for the IOCs just to encourage them explore offshore.” He explained that the PSCs were signed when price of crude oil was pegged at $20 per barrel. Continued the source, “in this case, it implies, if the oil price goes above $20, government should take more from the wind fall. But since the PSC started in 1993, oil price has always been above $20 per barrel, but government did not invoke the clause.
“The contract also made provisions for a review a review after 15 years which expires in 2008. But sadly this was not done because the oil companies threatened to relocate and government out of fear that time allowed it to linger,” the source added.