In a move by the government to secure its equitable share of the proceeds of oil production, President Muhammadu Buhari, through his official Twitter handle (@MBuhari) disclosed that he had signed the Deep Offshore and Inland Basin Production Sharing Contract (PSC) Amendment Bill into law.
Reportedly, Nigeria has lost about US$21 billion to the failure of the government to review the PSC as required by the Act. In our view, the amendment of the PSC Bill reinforces the efforts of the fiscal authority in exploring more sources of revenue to fund its spending plans.
In the amended PSC bill, two more revenue streams were added to the 1993 Deep Offshore and Inland Basin PSC. Firstly, there is a flat 10% royalty on all projects over 200 meters deep and the other is a 7.5% royalty on frontier and inland basins. Under the previous fiscal regime, offshore projects of between 200 meters to 400 meters deep paid 12% of the project costs in royalties.
Projects between 401 meters to 800 meters deep paid 8%, while those from 801 meters to 1 000 meters paid 4%. Deep offshore projects above 1 000 meters deep did not pay any royalties.
The 2019 amended PSC bill, which has now become law, prescribes a flat rate of 10% across board. The revised Act also introduces a price-based royalty payment system, which would add between 0% to 10%, depending on the prevailing oil price in the market. In other words, oil firms executing deep offshore projects in Nigeria will be paying varying percentages based on the prevailing price of a barrel of oil at the time. Notably, it is only when oil sells for $20 and below that the new royalty will seize to apply.
Also, Section 16 of the repealed bill provided for a review of the PSC’s (the first of which was signed in 1993) after 15 years and subsequently every five years. The re-adjustment window was increased to eight years, albeit there was no clarity as to whether this clause will apply to new projects like the Total-operated Egina field, the Shell and Eni-operated Etan/Zaba Zaba field and the Bonga South-West block, which Shell is yet to take a final investment decision on.
The signing of the amended bill has generated mixed reactions across the country, with some stakeholders holding the opinion that the new levies will make deep offshore projects less profitable and result in lower investment. On the other hand, it is expected that Nigeria’s share of earnings from offshore oil wells will increase significantly, particularly in the periods when oil prices are rising. The government is hoping to raise around US$500 mn in 2020 and over US$1 bn in 2021, from new taxes levered into the fiscal terms of the contract. In our opinion, this will be of benefit for governments’ purse at a time when the fiscal authority is struggling with a brewing fiscal crisis.