A powerful lobby from the oil and gas industry is mounting pressure on the Attorney General of the Federation to soften his stance on recouping arrears of revenue due to Nigeria from production sharing contract agreements on crude oil dating back to 1993.
Credible sources estimated the arrears of revenue in the region of $62 billion over the years. “This money is the share due to Nigeria as profit from oil exploration, giving proper adjustments in profit calculation as dictated by price of crude oil in the market”, a lawyer in the energy sector told CREDIBLE NEWS.
The bone of contention is the interpretation, operation and enforcement of Production Sharing Contracts, PSCs, dating back to 1993. Originally enacted as a Decree, the relevant clauses in the law, which became an Act, are Section 16 (1) and section 16 (2). The law is known as the Deep Offshore and Inland Basin Production Sharing Contract Act.
Section 16 (1) stipulates that if at any time the price of crude oil exceeds $20 per barrel in real terms, the share of the Federal Government of Nigeria in the additional revenue shall be reviewed to make it economically advantageous to Nigeria, while Section 16(2) specified that the Act may be reviewed after 15 years from its commencement and every five years thereafter.
Our lawyer friend further argued: “The contract stipulates that if oil is found and produced, the oil companies which have invested tremendous funds will allocate a fraction of the oil for royalty, another portion for cost of their investment and another percentage for tax and then the final fraction becomes the profit oil. At the time these contracts were entered, the price of crude oil was at $9.50 per barrel.
“The Production Sharing Contracts were entered in good faith for the purpose of putting the Nigerian economy on a solid platform while also taking care of the business interests of the contracting parties. The agreement was investor-friendly considering the enormous capital involved in oil exploration.”
Other industry analysts have argued that sub-section 1 of Section 16 does not require the intervention of the National Assembly. Instead it imposes a duty on the oil companies and contracting parties, led by NNPC, to voluntarily review the sharing formula so as to make it more economically advantageous to the Federal Republic of Nigeria. In order words, it’s an inescapable duty binding on all the contracting parties.
“It was the failure to observe and abide by this clause either by dereliction of duty or by wilful mischief that neither party reviewed the sharing ratio in the economic interest of Nigeria as stipulated in the PSCs even when oil prices have exceeded $20 per barrel.
“In fact, at the time the first oil was struck by the Nigeria Agip Energy, the price of oil was already at $28.50 per barrel. In putting the ceiling $20 per barrel, it was presumed that oil prices will not exceed twice its price at then. That is, $9.50 per barrel. Thereafter the oil prices kept rising. It got to $60 per barrel when SNEPCO got oil, $65.00 per barrel when Total/Elf got oil and it got to $95.00 per barrel when SNEPCO got oil at Bonga, yet no party cared to effect the terms of the binding contracts,” said a top official in the oil industry.
Recall that late 2017, the Minister of State for Petroleum Resources, Mr. Ibe Kachikwu had broached an amendment to the PSCs to achieve the objective of Section 16 of the Act. The minister also warned that Federal Government, a major party in the contract, had lost about $ 21 billion in about 20 years owing to the failure to review the PSC Act as provided under Section 16.
“Section 162 of the Constitution of the Federal Republic of Nigeria required that 13% of the crude oil revenue earned by the country should go to the oil producing states. So, who has the responsibility to do this? It is the Federal Government of Nigeria, because it occupies the position of trustee for the oil producing states. The Attorney-General of these states after reviewing this position believe they should get more. They did not hold the oil producing companies responsible for the shortfall. Instead, they believe that their trustee being the Federal Government of Nigeria should get the additional revenue.
“So they decided to test this law by inviting a legal team to approach the supreme court of Nigeria so as to invoke this original jurisdiction to determine whether this law has been obeyed. If it is not obeyed then determine whether the Federal Government of Nigeria is not liable to them in terms of revenue loses. They sued the Federal Government as represented by the office of the Attorney-General of the Federation.
“Through an ill-advised contravention, some lawyers applied to join in that case despite being warned that this is a case of the states against the Federal Government and when one lawyer was insistent on abusing the order of the Supreme Court, he was slammed with N 8million fine,” said the legal practitioner.
The Supreme Court in a unanimous decision in October, 2018 said the claim by state governments is well founded and directed the Attorney General of the Federation to constitute a committee to carry out the recovery from the oil companies.
The current sharing formula is hugely biased in favour of the oil producing companies who currently take 80% while the Federal Government takes 20% even though they have since wholly recovered their cost of production through cost oil.
In spite of this position, the Oil Producers Trade Section, Shell Nigeria Exploration and Production Company and other interested parties are challenging the decision of the Supreme Court on the PSC.
The Attorney General of the Federation and Minister of Justice, Abubakar Malami, SAN, last week met the agitating parties where he emphasised the Federal Government’s interest to maintain cordial relationship with business concerns operating Nigeria and the desire to protect foreign investments. He clearly stated that government will ensure that the duties and responsibilities associated with the Laws in Nigeria are followed and respected by Nigerians and foreign investors in order to create enabling business environment where mutual respect for law and order provides a win-win situation.