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FG Reviews Profit Sharing Policy with Oil Majors
•Operators want 2005 licensing round suspended By Mike Oduniyi, 11.21.2004
The Federal Government has started reviewing the profit sharing arrangement with multinational companies exploring for crude oil in the country's deep offshore region, as Nigeria begins a drastic overhaul of the rules and guidelines for operation in the region. Oil industry operators in the country have, however, canvassed for the suspension of the planned 2005 licensing round for the offer of 27 blocks, until the Federal Government concludes the review of the guidelines. Special Adviser to the President on Petroleum and Energy, Dr. Edmund Daukoru, told THISDAY that under a new Production Sharing Contract (PSC) currently being drafted by the government, a ceiling will be placed on the rate at which the oil companies operating deepwater concessions can recover cost expended on developing a deep offshore field. The new policy, according to Daukoru, will be such that the oil firms, which are contractors to the Nigerian government in operating the fields, will no longer have to recover their cost (known as cost oil) before sharing the profit accruing from crude oil produced. The existing PSC agreement entered into between the Nigerian National Petroleum National Petroleum Corporation (NNPC) and all new entrants in new inland, deep and ultra deep water acreages, provides that: •The contractor bears all costs of exploration and production without such being re-imbursed if no oil is found. •Cost is recoverable with crude oil in the event of commercial find •Cost is recovered through tax oil to offset actual tax, royalty and concession rentals. •Cost is also recoverable through cost oil which is re-imbursing the contractor for capital investments and operating costs, and •Profit oil, which is the balance shared between NNPC and the contractor after deduction of tax oil and cost oil. Daukoru said these provisions are no longer acceptable to the government. "As it is now, it is an open ended thing, the operator recovers its cost fully before there is oil left to be shared as profit oil. "We are saying let's put a cap on it. Any given year, you don't recover more than 80 percent (of cost oil). That is the only way Nigeria can begin to share early enough. If you wait for all the cost to be recovered, then we will never get it shared," he said. Daukoru added that another main feature in the review of the PSC agreement, will be in the guidelines on the gas ownership and treatment in deepwater operation. According to him, the new rules would be once a contractor failed to develop gas discovered in the field within a stipulated period, then the Nigerian government has a lien on it and can bring in a third party to develop it. "Government is also reviewing the size of blocks classified under deepwater region," he added. While beneficiaries of blocks in the deep offshore have hailed the existing PSC, (described as helping to solve government's funding problems in the upstream oil sector), Petroleum Ministry officials have on the other hand, decried the agreement as one capable of drastically reducing Federal Government's revenue from oil in the near future. The PSC agreement is opposed to the Joint Operating Agreement (JOA) that governs joint venture oil business between the government and oil majors. In the latter arrangement, the two parties jointly fund the operations and lift the crude produced in accordance with the equity holding in the venture. The ministry officials argued that once the PSC fields begin production, government will be obliged to reduce production allocated to Joint Venture fields in the bid to ensure that the companies recover their cost running to several billions of dollars. Nigeria currently earns about $14 billion yearly from oil, and the revenue come from joint venture oil and gas fields. Industry officials said nearly $10 billion will be spent on deepwater drilling between now and 2008. Meanwhile the Nigerian Association of Petroleum Explorationists (NAPE) has called on the Federal Government to suspend the planned 2005 licensing round for 27 blocks until a comprehensive review of the guidelines, policy and fiscal regime in the light of the current understanding of the deep offshore is carried out. "In order to ensure that a favourable position is developed for all stakeholders, the proposed review should incorporate inputs from foreign as well as Nigerian companies currently operating in the Niger Delta as well as service companies," NAPE said in a communique issued at its workshop on deep offshore drilling in Nigeria. The Federal Government said it would hold a second open licensing round for the award of oil blocks by March next year. The industry operators noted that the symbiotic relationship between the Nigerian and foreign oil exploration and production companies in the deep offshore had so far, not yielded the desired growth in national capacity building. This, they attributed to the nature and magnitude of the financial and operational challenges. "Government, having commenced the process of indigenization, must take on the required role of a midwife and create an enabling environment for success and growth," NAPE said
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