Is the Proposed Amendment to Production Sharing Contracts a Home Run?

After a 10-year wait, a legislative bill initiated to amend the Deep Offshore and Inland Basin Production Sharing Contract of 1993 has been passed by the National Assembly and is currently awaiting presidential assent.

We expect the bill to be signed into law given strong support from the presidency, which partly hastened the legislative process. The amendment of this contract provides new revenue sources for the government, which include a 10.0% royalty for fields above 200 metres deep and 7.5% for Frontier/Inland Basin as well as a price-based royalty when oil price is above US$35.0/bbl. The amendment also allows for a review every five years.

The terms of the original contract allowed for a review of terms in 2004 when oil prices crossed US$20.0/bbl. in real terms and after 15 years (2008). However, failure to review terms has been costly, with the government estimated to have recorded a revenue shortfall of US$16.0bn-US$28.6bn between 2008 and 2017 according to the Nigerian Extractive Industry Transparency Initiative (NEITI). With this amendment, government’s revenue from these contracts is estimated to increase by US$1.5bn. Considering the FG’s fiscal deficit which we estimate at N4.0tn, its share of N209.7bn from this additional revenue will not make a dent.

We note that this amendment is good for the government in revenue terms, especially as PSCs now account for most of the oil production in Nigeria at 42.6% in H1:2019. However, this could also impose significant costs if it slows or discourages new investments which are desperately needed to exploit Nigeria’s oil and gas resources in the face of lower-for-longer oil prices.

In addition, the amendment allows for review every five years, which leaves room for uncertainty and could affect investment decisions considering that offshore projects require the minimum lifespan of 20 years for profitable investment.