How Obasanjo’s Negligence Cost Nigeria Over $18bn

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President Olusegun Obsanjo, who doubled as Nigeria’s oil minister between May 1999 and January 2007, made the country lose at least $18 billion owing to his negligence to propose relevant amendments to the Deep Offshore and Inland Basin Production Contracts Act of 1999 to the National Assembly, .

This failure has also snowballed into one of the bones of contention between the Federal Government and International Oil Companies (IOCs) over the fiscal terms contained in the first generation production sharing contracts (PSCs) signed for deep offshore oil acreages in 1993.

The cat-and-mouse game that has ensued between both sides over the 1993 PSCs is also one of several issues that have become contentious since the Petroleum Industry Bill (PIB) was sent to the National Assembly last year.

The PIB has passed through the third reading in both chambers of parliament, and when enacted, will repeal several of the subsisting oil industry legislations in the country, ushering in a new era in the manner the oil and gas sector operates.

Obasanjo, as oil minister, missed several golden opportunities to take advantage of a clause in the Act which stipulates that any time the price of crude oil exceeds $20 per barrel, Nigeria is entitled to additional revenue from oil acreages governed by the PSCs.

Industry experts such as his Minister of State for Energy, Dr. Edmund Daukoru, and former Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr. Funsho Kupolokun, were also negligent in their responsibilities by failing to bring the clause to the attention of the former president.

Even the IOCs, who usually hammer on corporate governance and best practice, were said to have deliberately kept quiet over the clause and continued to reap enormous benefits to the detriment of Nigeria.

Section 16 (1) of the Act states: “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.”

Investigations have shown that Nigeria could have started benefiting from this clause from as far back as November 2005 when Shell’s Bonga, the first of the country’s deep offshore oil fields under the PSCs, came on stream. Bonga has a nameplate capacity of 225,000 barrels per day.

Ever since, three more major oil fields operated by Esso (Exxon-Mobil’s offshore subsidiary), TotalfinaElf and Chevron have started production.

These are the 230,000 b/d Erha operated by Esso which started production in March 2006; 250,000 b/d Agbami oil field operated by Chevron which commenced production in July 2008; and the185,000 b/d Akpo field operated by Total which came on stream in March 2009. Another field operated by Agip, Abo, came on stream in 2004.

Figures obtained from oil industry sources confirmed that most of the operators have been producing at close to peak production since they brought the fields on stream, except Akpo whose production climbed from 25,000 b/d last March to 50,000 b/d by the middle of this year.

A detailed breakdown of what each of the fields produced shows that Shell’s Bonga did 58.5 million barrels in 2006, 93.4 million barrels in 2007, 64.4 million barrels in 2008 and 16.7 million barrels in 2009.

Other figures are: Mobil’s Erha – 53.4 million barrels (2006), 74.9 million barrels (2007), 72.4 million barrels (2008), and 23,325,664 barrels (2009); Chevron Agbami – 19.4 million barrels in 2009; while Agip’s Abo produced 3.6 million barrels (2004), 10.4 million barrels (2005), 9.2 barrels (2006), 6 million barrels (2007), 6.6 million barrels (2008) and 3 million barrels in 2009.

Oil industry sources explained that since Total’s Akpo field only commenced production in March 2009, no production could be ascribed to the operator yet, because the field is currently on a long production test.

When these volumes produced by the IOCs are computed against the average price of crude oil (in real terms), which OPEC’s website put at $42.04, $59.09, $70.98, $75.21 and $98.50 per barrel in 2004, 2005, 2006, 2007 and 2008, respectively, this translates to $34.7 billion that has accrued from four of the five fields between 2004 and 2008.

Given that the price of crude exceeded $20 per barrel from 2004 to date, had the government’s share been adjusted under the PSCs to such extent that it is economically beneficial to it, the amount that could have accrued to the federation account is certain to exceed $18 billion.

Confirming that Nigeria has lost a lot of money owing to the negligence of top government officials, an official with one of the multinational oil firms said this is very unfortunate because the additional revenue could have been deployed for infrastructure projects and other socio-economic programmes.

However, he disclosed that the government and NNPC were not completely unaware of the existence of this clause in the Deep Offshore and Inland Basin Production Contracts Act, but displayed sheer incompetence when they failed to do the right thing.

“NNPC should have realised that once the price of crude oil rose above $20 per barrel in 2000, it should have kept an eagle eye on deep offshore operations covered by the 1993 PSCs because it had the right to amend the law but neglected it.

“The clause should have been sent to the National Assembly for amendment long before those fields started production,” he explained.

Instead, he said, the Federal Government resorted to seizing the cargoes of the IOCs in late 2007, early 2008 and have continued to do so to date.

The official disclosed that even when an attempt was made to reconfigure the formula in terms of the distribution of crude, the government still failed to take it to the National Assembly.

Putting a value on the volume of crude that has been seized from the IOCs, the official said it is somewhere in the region of $6 to $7 billion worth of crude. “It could be higher,” he volunteered.

In reaction to the government’s seizure of crude cargoes, the oil majors, he continued, had initiated arbitration to recover the amount confiscated, but added “they are not averse to some kind of settlement.”

Further investigations show that the government was just as negligent with the revision of the fiscal terms under the 1993 PSCs.

Obasanjo, it was gathered, attempted to alter the fiscal terms by imposing a royalty of 8 per cent for deep offshore acreages in water depths of 1,000 metres and more.

Under the 1993 PSCs, oil acreages in water depths of 1,000 metres and more, attract zero per cent royalties.

But in 2006, Obasanjo gazzetted an amendment to the Petroleum (Drilling Production) Act of 1969 in which he substituted some paragraphs in the legislation with new ones imposing revised royalties for acreages in different terrains.

Once more, the IOCs went up in arms against the president and ignored the revised royalties especially for the deep offshore acreages on the grounds that he failed to get the Petroleum Act amended by the National Assembly.

In spite of the loopholes in the PSCs and other oil industry legislation, the Federal Government is beginning to get adept at outsmarting the IOCs at their own game.

Early this year, the government cleverly cashed in on one area that the IOCs did not pay attention to – gas terms under the 1993 PSCs.

Under the PSCs, ownership of the gas in the fields was not expressly spelt out, but the IOCs, especially Shell’s Bonga, Esso’s Ehra and even Total’s shallow water Amenam field, had been selling the gas, with the Nigeria Liquefied Natural Gas company benefiting from the sales supplied by Bonga and Amenam.

Once the government got wind of what was going on, it informed the IOCs that the gas belongs to the Nigerian Federation and promptly issued invoices to them for the gas sold.

The move by the government completely caught the oil majors off guard, and will “be the cliché for negotiations as the weeks and months progress”, revealed an official of the Ministry of Petroleum Resources on october 7th 2009.
From This day Newspaper.

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