The federal government has begun renegotiating Production Sharing Contracts (PSC) on deep offshore oil blocks with Royal Dutch Shell, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, has said.
A report yesterday by Financial Times quoted Kachikwu as saying that Shell’s current PSC would expire in 2023, while the PSCs of other international oil companies (IOCs) would expire in 2028.
According to him, when negotiated, the Shell’s new PSC model will then be the basis of the negotiation of other PSCs.
The opening of renegotiation between the federal government and Shell came against the backdrop of a judgment of the Supreme Court, which had last year decided on a consent judgment brought before it by the three Niger Delta states – Akwa Ibom, Bayelsa and Rivers.
The judgment noted that the IOCs operating in Nigeria’s deep offshore and inland basin are in default of adjusting the revenue accruals in accordance with the provisions of section 16(1) of the Deep Offshore and Inland Basin PSCs Act, Cap D3, Laws of the Federation, 2004.
The crux of the matter was that in 1993, the then federal government entered into a contract with the oil companies to explore oil and gas in the deep offshore and inland basins of Nigeria.
The two parties had agreed that if at any point, the price of crude oil exceeds $20 per barrel; both parties would renegotiate the sharing formula as contained in the law.
Since then, the three states argued, oil had soared from nine dollars to above $20.
The states in 2016, therefore, took the federal government to court through their respective commissioners of justice.
The court, led by the then Chief Justice of Nigeria (CJN), Justice Walter Onnoghen, gave the order in a consent judgment and adopted it as its judgment.
“The AGF is expected to work with the three states to “immediately set up a body and the necessary mechanism for recovery” of all the lost revenue since August 2003,” the Supreme Court had directed.
Also, the apex court ordered that within 90 days, the federal government should put in place the mechanism for the recovery of the lost revenue.
The three states had argued that they, along with the federal government, were short-changed to the tune of $20 billion between 2003 and 2015.
Speaking further on the commencement of renegotiation between the two parties, Kachikwu said the old agreements favoured the foreign companies, giving them as much as 80 percent of the oil that was produced after costs — known as profit oil — against the 20 percent for the federal government.
He said: “That is a non-starter; it’s got to be better.
“We’ll be looking to better terms than the previous (production-sharing contracts). We would like to get better packages.
“At the time of renewal, you have an opportunity to review it, and we’ll be looking at it in terms of have you recovered your investment, have you made money out of it?”
The minister, however, said the current contracts would be honoured, and renegotiations “must be done as partners trying to find solutions and not government holding a big stick.”
The original PSCs stipulated that they had to be renegotiated likely in terms more favourable to the federal government, once oil passed $20 per barrel, which the government did not do.
The global benchmark, Brent crude has been above this mark since the early 2000s.
Kachikwu said the Nigeria National Petroleum Corporation (NNPC), had already entered into renegotiations with Shell, which in 2023 will be the first company to see its PSC expire.
Others will expire by 2028.
“The Shell model, when they finish, will then be the basis of what we do with all other PSC contractors,” he added.
The new PSC terms will affect Shell’s final investment decision (FID) on developing the new $10 billion Bonga South West deepwater project, for which it issued a tender for contractors in February.
The federal government had for years sought to overhaul these contracts and stem the huge revenue shortfall for the country of up to $28.6 billion over the decade to 2017, according to a recent report by the Nigeria Extractive Industries Transparency Initiative (NEITI).
Despite the ongoing efforts by the federal government to ensure that the IOCs refund the shortfalls, Kachikwu said the government did not plan to collect that money from the oil companies.
“What’s done is done. We need to go forward and avoid that happening again,” he said.
But he said he hoped it would give it leverage in settling another lawsuit, in which the court ruled that the country owed the oil companies roughly $6 billion for over-collecting oil from the joint ventures.