Production sharing contracts: Minister resists pressure to overlook payment arrears to FG

The Minister of Justice and Attorney General of the Federation, Abubakar Malami is resisting pressure from vested interests to overlook the payment of monies due to the federal government from production sharing contracts on crude oil exploration.

Like the Comptroller-General of Customs and the Chairman of FIRS, Malami is also keen on helping the federal government shore up its revenue and is determined to recoup arrears of revenue due to Nigeria from production sharing contract agreements on crude oil dating back to 1993.

Credible sources estimated the arrears of revenue in the region of $62 billion over the years. “This money is the share due to Nigeria as profit from oil exploration, giving proper adjustments in profit calculation as dictated by price of crude oil in the market”, a top government source said Sunday.

The bone of contention is the interpretation, operation and enforcement of Production Sharing Contracts (PSCs), dating back to 1993. Originally enacted as a Decree, the relevant clauses in the law, which became an Act, are Section 16 (1) and section 16 (2). The law is known as the Deep Offshore and Inland Basin Production Sharing Contract Act.

Section 16 (1) stipulates that if at any time the price of crude oil exceeds $20 per barrel in real terms, the share of the Federal Government of Nigeria in the additional revenue shall be reviewed to make it economically more advantageous to Nigeria, while Section 16(2) specified that the Act may be reviewed after 15 years from its commencement and every five years thereafter.

Our source explained further: “The contract stipulates that if oil is found and produced, the oil companies which have invested tremendous funds will allocate a fraction of the oil for royalty, another portion for cost of their investment and another percentage for tax and then the final fraction becomes the profit oil. At the time these contracts were entered, the price of crude oil was at $9.50 per barrel.

“The Production Sharing Contracts were entered in good faith for the purpose of putting the Nigerian economy on a solid platform while also taking care of the business interest of the contracting parties. The agreement was investor-friendly   considering the enormous capital involved in oil exploration.”

Other industry analysts have argued that sub-section 1 of Section 16 does not require the intervention of the National Assembly. Instead it imposes a duty on the oil companies and contracting parties, led by NNPC, to voluntarily review the sharing formula so as to make it more economically advantageous to the Federal Republic of Nigeria. In order words, it’s an inescapable duty binding on all the contracting parties.

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