Corruption: Senate Fast tracts amendment of PSC Bill

 
Tue Oct 8th, 2019 - Abuja (FCT)
 

To debate and Pass it Next Week Tuesday

By Henry Umoru

ABUJA- AS part of moves to address the corruption in the Oil industry with the International Oil Companies, OIC cheating on the Federal Government, the Senate yesterday fast tracked the amendment to the Production Sharing Contract, PSC

Subsequently, a Bill on the Deep Offshore and Inland Basin Production Sharing Contract 2004 (Amendment) Bill 2019 passed second reading yesterday.

Senate

The Senate has however asked the Committees on Petroleum, Upstream, Gas and Finance to expedite action on it and report back at Plenary for the bill to be considered and passed next week Tuesday.

The first reading of the Bill was taken last week.
The Production Sharing Contract is a contractual arrangement for exploration and production of petroleum resources.

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The Bill is sponsored by Senators Albert Bassey Akpan, Peoples Democratic Party, PDP, Akwa Ibom North East and Ifeanyi Ubah, Young Progressives Party, YPP, Anambra South, respectively.

The bill “is seeking to amend section 5 of the Production Sharing Act to bring provisions of that section into conformity with the generality of the provisions of the Act and into congruence with the intendment and essence of the Production Sharing Contracts ”

The first reading of the Bill was taken last week.
The Production Sharing Contract is a contractual arrangement for exploration and production of petroleum resources.

With this, the federal government through the Nigerian National Petroleum Corporation as owner of the petroleum resources engages a contractor, the International Oil Companies to undertake all the financial responsibilities and all the risks while providing the technical and financial services for exploration and production operations for an agreed share in profit after payments of royalty, cost and tax oil.

It will be recalled that the federal government entered into this agreement with the IOCs in the 1991 licensing round but it became effective in 1993.

In his lead Debate, Senator Akpan said, “this bill seeks to amend the DEEP OFFSHORE AND INLAND BASIN PRODUCTION SHARING CONTRACT CAP D3 Laws of the Federation of Nigeria 2004 (PSC Act). Specifically, the bill seeks to amend section 5 of the PSC Act to bring the provisions of that section into conformity with the generality of the provisions of the Act and into congruence with the intendment and essence of Production Sharing Contracts

“The Production Sharing Contract (PSC) is a contractual arrangement for exploration and production of petroleum Resources. This is an arrangement whereby the state as owner of the petroleum resources engages a contractor to undertake all the financial responsibilities and all the risks while providing the technical and financial services for exploration and production operations for an agreed share in profit oil after payments of royalty, cost and tax oil. The PSC arrangement was offered by the Federal Government of Nigeria as a contractual arrangement for the exploration and production of petroleum in the 1991 licensing round. In order to provide further comfort to the contractors, the salient terms of the PSC was codified into a legislation namely, the Deep Offshore and Inland Basin Production Sharing Contract Act Cap D3 LFN 2004 (PSC Act) which became effective on January 1, 1993.

“The PSC Act was enacted to “… among other things, give effect to certain fiscal incentives given to the oil and gas companies operating in the Deep Offshore and Inland Basin areas under production sharing contracts…”. The Act sought to deliver these fiscal incentives by providing for:

A longer duration of oil prospecting licences;

Reduction in the petroleum profit tax;

Investment tax credit or investment tax allowance; andA distinctively lower royalty regime based on water depth which requires that contractors carrying out petroleum operations in areas from 201 to 500 metres water depth shall pay royalty at 12%, from 501 to 800 metres, 8%; from 801 to 1000, 4% and zero percent in areas in excess of 1000 metres depth, which is where most of the deep offshore exploration activities under PSC takes place.

“All of these fiscal incentives are distinct and absent from the provisions of the Petroleum Act and the Petroleum Profit Tax Act which regulates the fiscal regime of other types of petroleum exploration and production arrangements.

“The above fiscal incentives were given by the Federal Government in order to: Attract oil and gas companies to the Nigerian deep offshore.De-risk the Nigerian Deep Offshore which was a new vista for oil and gas companies; Create environment for deployment of new deep offshore technologies; Allow for rapid cost recovery; Assure bankability because the prevailing oil price was very low, hovering around US$13 per barrel when the Act was enacted;

“The PSC Act shows that at the time of the execution of the contract and the enactment of the Act, all parties to the PSC understood that the incentives extended by the Act were excessive but were necessary to achieve the objectives afore-stated above. However, all parties to the PSC also understood that the incentives were, to all intent and purposes, supposed to be ad hoc, improvisational, contingent and therefore amendable. This is the reason why the Act provided in section 16 that where the price of crude oil exceeds US$20 per barrel, the PSC Act will be reviewed to ensure that the share of the Federal Government of Nigeria (FGN) in the additional revenue is adjusted to the extent that the PSCs shall be economically beneficial to the FGN and that in any event, the PSC Act shall be liable to be reviewed after 15 years from its commencement in 1993 and every 5 years thereafter.

“The PSC Act recognizes and anticipates the necessity for post execution and periodic review of the Act once the above objectives have been attained in order to ensure that government derives maximum and equitable benefits from the PSCs and, to wit, set out the following review incidents and datelines in the Act:

“Price-induced review of the provisions of the PSC Act – that is, a review to be undertaken whenever the price of crude oil exceeds US$20 per barrel, real terms, in order to increase revenue accruable to the Government of the Federation from the PSCs.

Review of the entire provisions of the PSC Act (including sharing-formula provisions contained in the Act) 15 years after the commencement of the Act in 1993; and Review of the entire provisions of the PSC Act every 5 years thereafter.

“The extant Act however did not provide any mechanism or sanction for the implementation or otherwise of the provisions regarding the statutory periodic review in Section 16. To this end, the new sections 17 and 18 have placed a responsibility and subsequent consequences for non-compliance to section 16.

“It is noteworthy that the Act has achieved the objectives of the Federal Government of Nigeria with respect to which the excessive incentives were given to the PSC contractors. In addition, the water-mark for periodic review of the salient provisions of the Act which include increase in oil price above US$20 (in real terms) and 15 years after the commencement of the Act have already been surpassed.

“This bill contains the amendment of salient provisions of the PSC Act which are sections 5 and 16 of the Act. This amendment alters the royalty payable by the PSC contractors so that whenever oil and gas price increases the share of government increases with the automatic inception of the newly introduced royalty by price mechanism. The bill provides that whenever oil price goes above US$35 per barrel the royalty by price shall kick in for each of the terrains. The royalty regime proposed by the bill for oil and condensates is as follows:

From US$ 0 and up to US$36 per barrel: …………. 0 percent. Above US$36 and up to US$70 per barrel: ……. 2 per cent per dollar increase.

Above US$70 and up to US$ 100 per barrel:…… 8 per cent plus 0.2 per cent per dollar increase.

Above US$ 100 and up to US$ 190 per barrel: …. 20 per cent plus 0.1 per cent per dollar increase.

Above US$ 190: ………………………………………………… 25 per cent.

“The royalty regime proposed by the bill for natural gas is as follows:

0% for a price from US$0 per million British Thermal Unit (Btu) and up to and including US$2 per million Btu;

over US $ 2 per million Btu and up to and including US $ 6 per million Btu the royalty rate shall increase by 0.3% for every US $ 0.10 per million Btu increase in over US $ 2 per million Btu. Over US $ 6 per million Btu and up to and including US $ 10 per million Btu the royalty rate shall be 12% plus 0.2% increase for every US $ 0.10 per million Btu increase in over US $ 6 per million Btu, and over US $ 10 per million Btu and up to and including US $ 15 per million Btu the royalty rate shall be 20% plus 0.1% increase for every US $ 0.10 per million Btu increase in over US $ 10 per million Btu, and over US $ 15 per million Btu the rate shall be 25%.

“This long-awaited amendment of the PSC Act is in accord with the intendment of the Principal Act. It provides for the review of the salient provision of the Act to ensure that the share of the Federal Government of Nigeria (FGN) in the additional revenue is adjusted to the extent that the PSCs shall be economically beneficial to the FGN. In doing this amendment, we have retained the generality of the fiscal incentives afforded the PSC companies. This is to ensure that Nigeria will retain its competitiveness while remaining a first rate destination for deep water investment.”

The projection of $35 per barrel threshold in the lead Debate was however rejected by the Senate

In his remarks, President of the Senate, Senator Ahmad Lawan who noted that jerking the threshold to $35 per barrel would amount to a conscious ploy to sleaze the nation, said: “Jerking up from $20 to $35 is totally unnecessary, we already losing $7.5 per barrel becauae if we are to get fifty per cent of whatever accrues when it is over $20 per barrel, it means we are consciously inviting loss of revenue.

“Therefore, I believe that we should stick to the $20 and I also think that the percentages of the report on page 5 are low.”While we are not going to make it difficult for investors, we should actually benefit from it as a country, So I want to urge the Petroleum Upstream committee to look into this.”Definitely, we have to stick to $20 per barrel, we can’t go to $35 consciously losing revenue, we cannot do that. We are looking for revenues. Majority of us won’t take $35 per barrel.”

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source: Vanguard