Nigeria’s oil sector reforms back in focus

Nigeria’s Senate on 15 October unanimously passed a revised version of the Offshore and Inland Basin Production Sharing Contract (PSC) Act. Senate President Ahmad Lawan said: “By passing the bill Nigeria will be at least $1.5bn richer in 2020.” A Senate committee had earlier estimated that International Oil Companies (IOCs) had avoided having to remit 7trn naira ($21bn) in the last 26 years due to the non-implementation of the PSC Act. This non-implementation refers to a clause in the Act that when crude oil prices exceed $20 per barrel, the terms of the PSC Act can be reviewed to revise revenue allocations; a process that never occurred. The Act also provides for a routine review of the Act’s terms 15 years from its initial enactment in 1993 and every five years thereafter. However, no such review has occurred, despite the fact many PSCs were negotiated in the 1990s when oil was below $20 per barrel.

• The revision of the PSC Act represents the most concerted effort yet by the Nigerian administration to review fiscal terms on PSCs with a view to raising more revenues for government. Successive administrations have proposed reviews to PSC terms but have failed to act on the initiative, facing political and legal tangles, as well as concerted industry lobbying. The most recent bid by then petroleum minister Emmanuel Kachikwu in 2015 fell foul of legal objections and a falling oil price which placed huge constraints on the industry, resulting in government easing its demands. However, greater stability in the sector and the continued crunch in public finances appears to have reinvigorated political interest in this initiative.

• The push to revisit PSC terms is likely to meet stiff industry pushback, as was the case with previous initiatives. Industry is likely to employ a legalistic stance but will likely face a more concerted government drive than in 2015, largely because dynamics in the industry have evolved since then with a moderate recovery in the oil price. Beyond the PSC revision, the government also continues to harbour ambitions to bring the Petroleum Industry Bill (PIB) back onto the table in 2020, revisiting both governance structures for the industry and fiscal terms for the country’s joint venture projects.

• While some results may be achieved on PSC revision – notwithstanding legal resistance – prospects for the swift advancement of the highly politicised PIB are poor. The Bill’s revision is likely to elicit intense debate over fiscal benefit and reformed oversight structures, meeting pushback from industry and disagreement between rival ethno-regional blocks within the political apparatus. As such, although the government has reduced its subsidy exposure and adjusted the structure of some of its contractual arrangements with the supermajors on its joint ventures to reduce the extent to which it was unable to meet sizeable cash calls, it will face a huge challenge in advancing and implementing a more ambitious and comprehensive reform agenda for the oil and gas sector.

• A failure to advance major oil and gas reforms and a push for more equitable balance of profits from PSCs is ultimately likely to reduce investor interest in Nigeria’s oil sector. The relatively more subdued global oil price and questions over its long term trajectory reinforce this assessment. Nevertheless, there remain considerable opportunities within the sector given its proven potential, with IOCs focusing increasingly on the technically challenging deep offshore where fiscal terms remain favourable to investment, with the onshore and shallow water territories seeing continued interest from indigenous companies, provided they can sustain cashflow and manage costs at a lower oil price point.

• On a positive note, the ability to drive cross-party consensus and revise the PSC Act signals reduced political frictions within the legislature. During President Buhari’s first administration, tensions between the executive and legislature formed a major barrier to legislative reform, especially given that the legislature faces its own internal challenges in managing ethno-regional rivalries and inter-party rivalries. However, provided Buhari can manage relations with the Senate and House’s leadership in the coming months, there are signs that he has a better window to advance reforms requiring legislative input before 2023 election politics come to the fore once again.

An industry in flux

Nigeria’s oil and gas sector was historically dominated by a series of joint venture agreements signed between IOCs and the government which operated on a concessional basis. These joint ventures required the government – through the state-owned oil company NNPC – to front its share of investment in exploration and development. These investments ran into multi-billion dollar sums, leaving the NNPC increasingly incapable of meeting its dues. As the industry has pushed into more technically challenging offshore and deep offshore assets, costs have also increased, resulting in the increased use of PSCs as a means of shifting the risk expenditure to the operator and providing more favourable fiscal terms in compensation. PSCs have grown considerably in their importance, now accounting for over 39% of all production compared to negligible sums in the 1990s when the PSC Act was instituted. Meanwhile, a growing proportion of onshore and shallow water assets have shifted ownership from IOCs to indigenous operators, though the IOCs still account for the majority of oil produced within the country through both joint venture and PSC models.

Roddy Barclay is the Director of the Intelligence and Analysis team at Africa Practice. In this role, Roddy leads the company’s political risk advisory and business intelligence practice across sub-Saharan Africa.