How Falana’s Letter to Kachikwu Exposed Nigeria’s Huge Losses in Deep Offshore PSCs

Indications have emerged that a letter written by a human rights activist and Senior Advocate of Nigeria (SAN), Mr. Femi Falana to the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, when he was the Group Managing Director of Nigerian National Corporation (NNPC), exposed Nigeria’s huge losses in the Production Sharing Contracts (PSCs) signed with the international oil companies (IOCs) on the deep offshore oil fields.

THISDAY had reported that the country lost close to $60 billion to the non-enforcement of the terms of the PSCs signed between the federal government and the IOCs in 1993, quoting the minister, who had disclosed this at the 2017 conference of the Nigerian Council of the Society of Petroleum Engineers (SPE) held recently in Lagos.

The federal government had in 1993, awarded some oil blocks in the deep water to the IOCs under PSCs, which provide that theroyaltiestobepaidbytheIOCs woulddepend onthedepthof the water where oil is found.

The 1993 PSC also provides that royalties paid by the IOCs on oil blocks located in deep water should be reviewed upward when crude oil price exceeds $20 per barrel.

Nigeria lost out in the PSCs as oil was discovered in water depths above 1,000 metres in all the five deep-water oilfields that came on stream between 2005 and 2010, as the contracts stipulate that royalty is zero in water depths exceeding 1,000 metres.

Though the terms of the PSC also stipulate that the agreements would be reviewed when oil price exceeded $20 per barrel, the federal government did not enforce this provision.

In a letter dated August 5, 2015 written by Falana to Kachikwu when he was the group managing director of the NNPC, the constitutional lawyer had called on the National Assembly to repeal the provision of the PSCs, which stipulates that royalty on crude oil production in water depths exceeding 1,000 metres is zero.

Falana’s letter titled “Re: Deep Offshore and Inland Basin Production Sharing Contracts Act,” which was obtained by THISDAY, also recalled how the military administration of Abdulsalami Abubakar in 1999 enacted “the Deep Offshore and Inland Sharing Contracts Act Decree in order to give effect to certain fiscal incentives for the oil and gas companies operating in the Deep Offshore and Inland Basin under production sharing contracts between the Nigerian National Petroleum Corporation (NNPC) and other companies holding oil prospective licences or mining licences and various petroleum exploration and production companies”. Falana noted that by virtue of section 5 of the Act, the payment of royalty in respect of the Deep Offshore production sharing contracts shall range from 4 to 12 per cent while no royalty shall be paid whatsoever in areas in excess of 1000 metres depth.

According to him, since a large quantity of the oil and gas produced by Nigeria is located beyond 1000 metres depth, the multinational oil companies have taken advantage of the Act to avoid the payment of royalties to the Federation Account.