President Muhammadu Buhari today signed into law, a Bill to amend the Deep Offshore (and Inland Basin Production Sharing Contract) Act [the PSC Act].
Production Sharing Contract (PSC) is a contractual arrangement for exploration and production of petroleum resources where the contractor undertakes all the financial, technical and operational risks associated with petroleum operation in return for a share of profit oil after payment of royalty, cost and tax oil.
The arrangement was introduced during the 1991 licensing round while the PSC Act became effective on 1 January 1993. The price of oil per barrel at the time was around US$13 per barrel. It was considered that certain incentives were necessary to encourage activities in the deep offshore which requires significant investment and technology. The special incentive regime includes:
- longer duration of oil prospecting licenses
- reduction in the petroleum profit tax rate
- investment tax credit or investment tax allowance
- lower royalty regime
Section 16 of the PSC Act provides for the incentives to be reviewed where the price of oil exceeds US$20 per barrel or in any event after 15 years from inception and every 5 years thereafter.
The new amendment now introduces the following key changes:
- Introduction of incremental royalty rate based on the price of oil
- Periodic review of the PSC arrangement every 8 years
- Significant penalty for offences including imprisonment
The federal government estimates that the changes will generate about $500m in additional revenues for the government in 2020, and over $1bn from 2021. The changes are expected to take effect from fiscal year 2020.
Below is our alert and a copy of the Bill as passed by the National Assembly:
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