ARTICLE
3 December 2018

Supreme Court Orders Federal Government To Increase Its Revenue Share Under Oil Production Sharing Contracts

Ai
Andersen in Nigeria

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Andersen in Nigeria is the Nigerian member firm of Andersen Global. We are an independent tax and advisory services firm with a worldwide presence through the other member firms and collaborating firms of Andersen Global. The firm consists of professionals with many years of experience in taxation, transactional, transfer pricing, accounting and business advisory services both at local and international levels.
By virtue of this judgment, the Federal Government is expected to increase its revenue share from the sale of crude oil at any point that the price of crude goes above $20 per barrel.
Nigeria Energy and Natural Resources
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On 17 October 2018, the Supreme Court delivered a Consent Judgment in the case between the Attorney-General (A.G.) of Rivers State & 2 Others vs A.G of the Federation. The Judgment mandates the Federal Government to increase its share of revenue under oil Production Sharing Contracts (PSC) whenever the price of crude oil exceeds $20 per barrel in line with Section 16 (1) of the Deep Offshore Inland Basin Production Sharing Contract Act (DOIBPSCA).

Details

Section 16(1) of the DOIBPSCA requires the Federal Government to review the share of revenue accruable to the Federation, pursuant to a PSC, whenever the price of crude oil exceeds $20 per barrel. However, the Federal Government has not adjusted the revenue accruable to the Federation over the years despite the fluctuating increase in the price of crude oil beyond $20 per barrel.

In December 2017, the plaintiffs approached the Supreme Court for interpretation of Section 16(1) of the DOIBPSCA and urged the Court to declare the failure of the Federal Government to adjust its revenue share in line with Section 16(1) as a breach to the law. However, the parties to the case reached an "out-of-court" settlement on 5 April 2018 and the Supreme Court delivered a Consent Judgment adopting the Terms of Settlement of the parties.

In line with the Terms of Settlement, the Federal Government is required to carry out an upward review of its revenue share in line with Section 16 (1) of the DOIBPSCA. In addition, the parties are to set up a body and necessary mechanism for recovering all lost revenue accruing to the Federation from the PSCs till date.

Implication

By virtue of this judgment, the Federal Government is expected to increase its revenue share from the sale of crude oil at any point that the price of crude goes above $20 per barrel. Thus, it is expected that the Federal Government would begin to review its current PSCs with the various International Oil Companies (IOCs) to increase the share of the government's revenue arising from such PSCs. By implication, an increase in the Federal Government's share of revenue under PSCs should result in a reduction of IOC's share of revenue under PSCs.

It is still unclear how such lost revenue would be recovered by the Federal Government from contractors in the PSC arrangement as it appears this Judgment seeks to retrospectively apply a new fiscal term on previous sharing arrangements. More so, the Federal Government failed to exercise its right to upwardly review its revenue share when the price of crude oil exceeded $20 per barrel.

Thus, it is important for all stakeholders to engage their consultants in the contract review process to ensure equity and compliance with relevant legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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