The amendment to the Production Sharing Contracts (PSC) which has been passed by the National Assembly may be one of the best things that will happen to government revenue.
When President Muhammadu gives his assent, the country stands to reap between $16 billion and $28.6billion that has long been there fir the taking.
Analysts at Afrinvest said, the terms of the original contract allowed for a review of terms in 2004 when oil prices crossed $20.0/bbl. in real terms and after 15 years (2008).
“However, failure to review terms has been costly, with the government estimated to have recorded a revenue shortfall of $16.0 billion — $28.6 billion between 2008 and 2017 according to the Nigerian Extractive Industry Transparency Initiative (NEITI).
“With this amendment, government’s revenue from these contracts is estimated to increase by $1.5 billion. Considering the FG’s fiscal deficit which is estimated at N4.0trillion, its share of N209.7 billion from this additional revenue will not make a dent”, the analysts said.
After a 10-year wait, a legislative bill initiated to amend the Deep Offshore and Inland Basin Production Sharing Contract of 1993 has been passed by the National Assembly and is currently awaiting presidential assent. It is expected the bill was given strong support from the presidency, which partly hastened the legislative process considering government focus on revenue increase.. The amendment of this contract provides new revenue sources for the government, which include a 10.0 per cent royalty for fields above 200 metres deep and 7.5 per cent for Frontier/Inland Basin as well as a price-based royalty when oil price is above $35.0/bbl. The amendment also allows for a review every five years.
Analysts said, this amendment is good for the government in revenue terms, especially as PSCs now account for most of the oil production in Nigeria at 42.6 per cent in the first half of 2019. However, this could also impose significant costs if it slows or discourages new investments which are desperately needed to exploit Nigeria’s oil and gas resources in the face of lower-for-longer oil prices.
In addition, the amendment could leave room for uncertainty and could affect investment decisions considering that offshore projects require a minimum lifespan of 20 years for profitable investment.
