Further to the Nigerian government's announcement in 2017 of its intention to revisit the fiscal terms of existing Production Sharing Contracts, the Nigerian President on November 5, 2019 assented to the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act 2019 (the "PSC Amendment Act").
Although 11 years late, the PSC Amendment Act, which is a revenue-oriented legislation, seeks to introduce a new provision via its amendment of Sections 5 and 16 of the Deep Offshore and Inland Basin Production Sharing Contract Act, CAP. D3, Laws of the Federation of Nigeria, 2004(the "PSC Act") with regards to royalty rates and periodic review of the PSC Act. Under the erstwhile regime, royalties for Deep Offshore Production Sharing Contracts are based on a sliding scale of water depth with the highest rate at 12% in areas between 201 to 500 meters water depth and 0% in areas in excess of 1000 meters of water depth. The PSC Amendment Act has changed this by having a combination of (i) a flat royalty rate for deep offshore and inland basins and (ii) change in price of crude, gas and condensate. This briefing note examines the specific amendments introduced by the PSC Amendment Act and its implications.
Flat rate royalty applicable to all PSCs irrespective of water depth Under the PSC Act, royalties were based on water depth depending on terrain with the relevant rates declining as water depth increases. The PSC Amendment Act provides for a flat rate royalty on all Deep Offshore PSCs (i.e. areas greater than 200m water depth) of 10% chargeable on the volume of crude oil and condensates produced from the relevant area. Also, the royalty rate of 7.5% on the volume of crude oil and condensates produced from the relevant area is applicable to Inland Basins which is a reduction from 10% applicable under the PSC Act.
Price based royalty For the purpose of ensuring that royalties change on the basis of changes in price of crude oil, condensates and natural gas, section 16 of the PSC Act has been amended to the effect that royalty rates are now based on various prices of crude oil, condensates and natural gas as follows:
Please note that the foregoing royalty rates shall be identical for various water depths in the Deep Offshore areas (i.e. areas beyond 200meters of water depth).
Periodic Review of Production Sharing Contracts
The PSC Amendment Act mandates the Minister of Petroleum Resources to review production sharing contracts every eight years. The erstwhile provisions of the PSC Act is silent on when the National Oil Company or the Minister of Petroleum Resources is expected to review production sharing contracts themselves but provides for the review of the PSC Act provisions after the first fifteen years from the date of its commencement and every five years thereafter.
Imposition of Penalties
The PSC Amendment Act provides for stiff penal provisions with regards to its violation. Specifically, it provides that any person who fails or neglects to comply with any obligations under the PSC Amendment Act commits an offence and is liable on conviction to a fine not below N500,000,000.00 (Five Hundred Million Naira) or to imprisonment for a period not less than five years or both. This provision inserts a new section 18 under the PSC Act which means that the fine or imprisonment not only applies to the provisions of the PSC Amendment Act but the violation of any provision of the PSC Act.
Matters Arising on PSC Amendment Act
There is no doubt that the PSC Amendment Act would have far reaching implications on the economics of offshore exploration and production in Nigeria especially in the near term however, the following are some salient implications:
The royalty rates under the price-based royalty are on a sliding scale basis with the rate changing on the basis of price. Historically, in the interpretation of the Petroleum (Drilling and Production) Regulations ("PDPR") with regards to the applicable royalty rates, we have seen instances where the Department of Petroleum Resources ("DPR") adopts an aggressive interpretation with regards to determining the applicable band for royalty without necessarily taking into consideration the sliding scale basis and this has led to disputes in the past. It is not unlikely that there may be interpretation issues on how royalties are to be determined for which judicial interpretation may be required.
The PSC Amendment Act does not provide that the flat royalty rate is to be applicable to natural gas. Again, this may give rise to interpretation issues as to whether the existing flat royalty rates on natural gas of 5% for offshore areas under the PDPR would continue to apply in addition to price based royalties as contained in the PSC Amendment Act. Bearing in mind that the PSC Amendment Act is silent on the existing royalties under the PDPR, there is the likelihood that the existing royalty rate under the PDPR would apply in addition to the price-based royalty for natural gas.
Also, we note that the PSC Amendment Act does not mention that price-based royalty shall be applicable to inland basin. While the PSC Amendment Act expressly mentions frontier acreages and deep water, it is arguable that the non-inclusion of "Inland Basin" expressly excludes it from price-based royalty. This may be a source of potential dispute between the DPR and PSC Contractors as there is the likelihood of divergence of opinion with regards to interpretation of the PSC Amendment Act.
Older PSCs in the Nigerian Oil and Gas Industry contain stabilization clauses to the effect that a change of law or regulation by the government occuring after the effective date of the PSC which would substantially affect the economic benefits of the contractor, must be managed by the parties. The parties are mandated to use their best efforts to modify the PSC in such a way as to compensate for the effect of such changes. It can be argued that the PSC Amendment Act may have triggered stabilization clauses in the PSCs for which stabilization claims can be made. The coming months would determine whether whether the contractors would make stabilization claims under their relevant PSCs. Considering that some of the PSCs are currently being renegotiated between the Nigerian National Petroleum Corporation and the Contractors, perhaps this may be a good time to trigger stabilization claims. That said, a counter argument against stabilization claims is that the contractors were aware of the possibility of change in law under the erstwhile provisions of Section 16 of the PSC Act.
Can the government claw back revenues as a result of lack of amendment of the 1993 PSC Act?
There are speculations that the government intends to make a claim from the contractors with regards to revenues which it had lost for failure to review the PSC Act since 2008. The basis for this speculation is yet to be seen particularly because the PSC Amendment Act is not a retroactive legislation. It is doubtful that any claim against the contractors for 'revenues lost' would be successful within the context of the current legislation especially because the non-amendment of the PSC Act cannot be attributed to any fault of the contractors.
No doubt the PSC Amendment Act changes the dynamics of engaging in deep offshore exploration and production in Nigeria. This said, the reality is that with the assent of the President, the royalty regime has come to stay. The highlighted issues in this briefing note are issues for both the Nigerian Government and Contractors to consider with regards to the implementation of this law.
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.