Re: USA Africa Dialogue Series - Nigeria deepwater PSC re-negotiation: how much is at stake?

I would love to see one of these contracts in its entirety so that I can assess the extent to which issues of environmental and ecosystem cleanup are covered. To what extent did local people (that is, the people in the communities where the oil production is taking place) participate in the negotiations leading to the concluding of the contracts and what was the impact of that participation, if any?

On Fri, Sep 25, 2015 at 5:31 AM, Kola Fabiyi <fabiyi@live.com> wrote:

INSIGHT SEP 2015

Nigeria deepwater PSC re-negotiation: how much is at stake?

Introduction

On 15 September, the head of NNPC, Emmanuel Kachikwu, stated his intention to begin the process of re-negotiation of deepwater production sharing contracts. An NNPC press release headlined "NNPC to Review Deep Offshore Production Agreements with Oil Companies" went on to say:

"NNPC is set to revisit the fiscal terms of the existing PSCs entered into by the Corporation with some International Oil and Gas Companies with a view to seeking favourable benefits to Nigeria based on prevailing realities in the industry."

All but one of Nigeria's six producing deepwater PSCs were signed in 1993, when its offshore frontier was unexplored. The contracts were therefore designed to incentivise exploration and development. The biggest producing fields from these earliest PSCs are Bonga (OML 118), Erha (OML 133), Akpo (OML 130) and Usan (OML 138)1.

With 10 years of production history and two billion barrels produced to date, these deepwater PSCs have so far generated US$84 billion for the government and US$57 billion for contractors (NPV10 at 1 January 2016). This equates to a contractor NPV10 of US$29/bbl. In other words, the 1993 PSCs are delivering world-class returns for investors who bore the risks of exploration and development in a frontier play.

NNPC's basis for a review is this amendment to the Deep Offshore and Inland Basin Production Sharing Contracts Decree No 9 of 1999 (the law applying to deepwater PSCs):

16. (1) The provisions of this Decree shall be subject to review to ensure that if the price of crude oil at any time exceeds $20 per barrel, real terms, the share of the Government of the Federation in the additional revenue shall be adjusted under the Production Sharing Contracts to such extent that the Production Sharing Contracts shall be economically beneficial to the Government of the Federation.

(2) Notwithstanding the provisions of subsection (1) of this section, the provisions of this Decree shall be liable to review after a period of 15 years from the date of commencement and every 5 years thereafter.

Because the decree was deemed to have come into force on 1 January 1993, NNPC intended to review the PSCs in 2008. But the government take debate became intertwined with the Petroleum Industry Bill (PIB), which also appeared that year. Seven years on, the industry finds itself back where it started, albeit with a very different external environment.

By seeking a review, NNPC is trying to resolve what it believes is a long-standing issue: to increase its share, particularly at a time when low oil prices have blown a large hole in the government's revenues.

How much oil and value is at stake?
Although some countries - for example the UK - have sought to improve fiscal terms for investors in the current environment, the deepwater Niger Delta is different. Unlike the North Sea, it is not a mature basin with increasingly marginal production. The producing PSCs are not even half-way through their life-spans with a total of 3.3 billion barrels still to be produced. Another 3.5 billion barrels is awaiting development from other later-vintage PSCs.


NNPC's desire to discuss PSC terms "with some International Oil and Gas Companies", indicates that not all of them should expect an invitation. Producing 1993 PSCs top the list because there is more scope to tighten terms, which would yield instant revenues for the government.
We expect NNPC to target Shell's OML 118, and ExxonMobil's OML 133 and OML 138, which together have over 80% of the remaining oil, and 80% of the US$35 billion of remaining contractor value in these earliest PSCs. As such, ExxonMobil and Shell have the most to lose since their PSC portfolio is made up almost entirely from these assets. Chevron is less exposed because over 50% of its value lies in later-vintage PSCs or ones containing undeveloped assets.
Commercial PSC contractor value by deepwater block


OML 130 is unlikely to feature because its named operator, South Atlantic Petroleum, is indigenous and also holds a sole risk contract covering the same acreage, while CNOOC Ltd is a relative newcomer to Nigeria. Eni's Abo field on OML 125 is too small to merit scrutiny.

Neither NNPC nor its subsidiary NPDC has any equity in the 1993 PSCs. NNPC's reliance on IOC cost-carries in the onshore and shallow water JVs means that any demands for deepwater PSC equity would be unwelcome. Time will tell whether NNPC can be successfully reformed so that it pays its equity share of investments in the long term.

Although PSCs signed in 2000 would by NNPC's reckoning qualify for review in 2015, we do not think this is likely because these have tougher fiscal terms than the 1993 vintage, and none are in production except for Statoil's OML 128.

Timing

With the current focus on restructuring NNPC, we believe that re-negotiations will have to wait until the upheaval at NNPC settles down. Indeed, IOCs could interpret "the provisions of this Decree shall be liable to review after a period of 15 years from the date of commencement and every 5 years thereafter" to mean the Decree law and not the PSCs, and to mean 2018 rather than now. They will also point to stabilisation clauses in their PSCs which could be triggered by a change of law.

Potential legal argument set against a back-drop of low oil prices and Nigeria's high cost reputation, is likely to result in difficult negotiations lasting years. With a re-drafted PIB to be submitted to the National Assembly as well, we do not expect the PSC issue to be resolved unless IOCs have some certainty as to what will (and won't) be in the final version.

As we have seen with shallow water licence negotiations, NNPC can extract concessions from the IOCs in return for 20-year licence renewals. Ultimately, it can offer the 1993 PSCs to other investors when they expire around a decade from now. The fact is the IOCs and NNPC have so much remaining value at stake in deepwater that we cannot see a scenario whereby they fail to reach an agreement. Licence expiry effectively sets a deadline on negotiations.

1. The Agbami-Ekoli field (the country's biggest producer) is licensed under an indigenous sole risk contract on OML 127 (expiry: end-2023) and a later-vintage PSC on OML 128.

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JOHN MUKUM MBAKU, ESQ.
J.D. (Law), Ph.D. (Economics)
Graduate Certificate in Environmental and Natural Resources Law
Nonresident Senior Fellow, The Brookings Institution
Attorney & Counselor at Law (Licensed in Utah)
Brady Presidential Distinguished Professor of Economics & Willard L. Eccles Professor of Economics and John S. Hinckley Fellow
Department of Economics
Weber State University
1337 Edvalson Street, Dept. 3807
Ogden, UT 84408-3807, USA
(801) 626-7442 Phone
(801) 626-7423 Fax

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