Asonumaka George Wakama
There is so much misinformation and a lack of understanding of this for a long time and it had conditioned our thinking and opinions. I am sure when people are conversant with it – assuming they are able to read the process and understand clearly, what they have read – some of the comments people make in the public space will cease or at best minimize. We are in an era of ignorance. Unfortunately, ignorance has been upgraded to a fundamental human right in the public space.
Before we look at the burning Issues of the PIB that is annoying everyone down south, let’s establish some facts in advance:
Between 1904– 1962, Nigeria, in general, was a frontier Oil prospecting region for the colonial masters. Licenses were given to D’Arcy Exploration Company and Whitehall Petroleum. Neither company found oil of commercial value and they returned their licenses in 1923. A new license covering the entire country was awarded to a new firm called Shell D’Arcy Petroleum Development Company of Nigeria. The new firm was a consortium of Shell and British Petroleum (then known as Anglo-Iranian). The consortium was granted a license to explore oil all over the territory of Nigeria
The company began exploratory work in 1937. Between 1951 to 1957, others came into the fray and Shell’s territorial concessions were reduced to accommodate new players. They are namely:
Mobil in 1955,
Texaco in 1960,
Gulf Oil & Chevron 1961,
Agip & Elf in 1962
Drilling activities started in 1951 and the first test well was drilled in the Owerri area. Oil was discovered in non-commercial quantities at Akata, near Eket in 1953. Prior to the Akata find, the company had spent around 6 million pounds in exploratory activities in the country.
Shell-BP in the pursuit of commercially available petroleum found oil in Oloibiri, Nigeria in 1956. Other important oil wells discovered during the period were Afam and Bomu in Ogoni territory.
PLEASE NOTE: IN ALL THESE, OIL COMPANIES PROSPECTED FOR HYDROCARBON ON A SOLE RISK BASIS. THEY USED THEIR FUNDS TO GAMBLE. NIGERIA OR NIGERIANS IN WHATEVER CAPACITY NEVER FINANCED THE EXPLORATION OF CRUDE OIL IN NIGERIA. WE HAD ZERO INVESTMENT OF NIGERIA AND NIGERIANS. THE NIGERIAN GOVERNMENT AS OF THEN HAD ONLY LIMITED INVOLVEMENT IN THE OIL INDUSTRY. THE GOVERNMENT CONFINED ITS FINANCIAL INVOLVEMENT IN THE OIL INDUSTRY TO TAXES AND ROYALTIES COLLECTED FROM THE OIL EXPLORATION AND PRODUCING COMPANIES.
The companies were subsequently able to set their own price on the petroleum they extracted and dominated the industry to such a point that laws governing the oil sector were having a negative effect on Nigerian interests. As of then, taxes and royalties paid by the Oil companies were shared in the following ratio:
Producing Region 50%
Federal Government 30%
Other regions 20%
Indeed, Oil revenues played a major role in the decision of the Federal Government and the breakaway Biafra side to go to war. Following the war with Biafra, the Federal government felt it necessary to secure and gain more control over the oil industry – for a myriad of reasons. The Gowon’s military government decided in 1969 to promulgate the Petroleum Decree which dismantled the existing revenue allocation system that had divided revenue from oil taxes equally between federal and state government, instead favouring an allocation formula in which the federal government controlled the dispensation of revenues to the states
In May 1971, the Nigerian federal government, then under the control of General Yakubu Gowon, nationalised the oil industry by creating the Nigerian National Oil Corporation NNOC via a decree.
Nationalization of the oil sector was also precipitated by Nigeria’s desire to join OPEC, which was encouraging member states to acquire 51% stakes and become increasingly involved in the oil sector. The creation of the NNOC made government participation in the industry legally binding. Between 1972-70 the following occurred in quick succession:
1974: Participation in the oil industry by the government increases to 55%.
1975: Decree 6 increases federal government share in the oil sector to 80%, with only 20% going to the states.
1976: First exploration and development venture by NNOC undertaken and drills to uncover commercial quantities of petroleum offshore.
1978: Perhaps most importantly, the federal government created the Land Use Act which vested control over state lands in military governors appointed by the federal military regime, and eventually led to Section 40(3) of the 1979 constitution which declared all minerals, oil, natural gas, and natural resources found within the bounds of Nigeria to be the legal property of the Nigerian federal government
1979: In an effort to establish further control over the industry, the government merges and restructures the NNOC and the Ministry of Petroleum to form the Nigerian National Petroleum Corporation NNPC. NNPC exerted more power over the allocation and sale of concessions than the NNOC.
By 1979, the NNPC had also gained 60% participation in the oil industry. These created a new set of fiscal regimes, where the initial Concessionary Contracts given to the IOCs gave way to new forms of contracts namely:
JVA ( Joint Venture Agreement )
PSC( Production Sharing Contract)
SC( Service Contract)
Let me give a brief description of the fiscal regime of each: In JVA – both the NNPC and the IOCs share and splits the cost and profits in a predetermined manner. In PSC- The IOCs and later day integrated Oil companies bears the costs and recovers the costs before sharing profits with NNPC. SC – The IOC is hired as a service contractor to provide a specific service for NNPC (NPDC) primarily aimed at enhancing the capacity of NPDC (payments for this contract will be in a pre-agreed format) which could be on cost recovery or profit oil share. Please note NPDC is the upstream company of the NNPC group of companies
In a nutshell Under JVA, NNPC is to contribute 60% of the upstream costs – After cost recovery, it collects 60% of the upstream profits. However, this is only on paper
IN REALITY, NNPC COLLECTS BETWEEN 45- 51% INSTEAD OF 60%. THIS IS DUE TO ITS INABILITY TO MEET ITS FINANCIAL JV OBLIGATIONS. THEREFORE, THE FINAL COLLECTION ( 45 TO 51%) WILL BE SUBJECT TO THE PRICE OF CRUDE OIL IN THE INTERNATIONAL MARKET.
Bear in mind the theoretical 60% upstream profits of NNPC is now split with Nigeria in a 20:80 format – 80% of this 60% upstream goes to Nigeria and the 20% of this 60% upstream profits is retained by NNPC. The 80% is what Nigeria shares as the FAC allocation. The NNPC makes do with just 20% of 60% upstream profits to run its upstream operations which create a problem for NNPC as a group and NPDC in particular on account that its operations and investment activities are hampered.
Similarly, with its 20% float, its ability to meet its obligations to its JVA partners –is hampered. Creating a situation where the JVA partners are forced to bear 100% of the cost, recover the costs, then give out the agreed profit share of 60% to NNPC-
In order to formalize this new responsibility, the PSC fiscal regime was birthed. Whereas, the SC is an internal arrangement relating to NNPC operations, where it contracts IOCs and others to do some jobs for it due to its limited capacity to undertake these functions on its own and the profits made from these activities are shared in an agreed payment format between NNPC and the IOC or company in question.
Your understanding of all these will give you an insight as to what NNPC actually earns and what it gives to Nigeria and why NNPC is technically and financially hampered to undertake its assigned responsibilities.
Talking about the Frontier basin, have it in mind that apart from the Niger Delta, Frontier Oil exploration is technically defined as everywhere else in Nigeria and the deepwater horizon. I don’t wish to go into deeper legal semantics but have it in mind that Frontier Acreages ARE NOT LIMITED TO THE NORTH.
WHEN YOU KNOW THIS, IT WILL ASSIST IN HOW YOU DEFINE YOUR ANGER AND DIMENSION THE USUAL ANTI-NORTH SENTIMENTS BY THE MOST VOCIFEROUS CRITICS AND OPPOSITION TO THE BILL MOUTHS WITHOUT HAVING A FULL VIEW, BECAUSE THEY ARE ALSO INADVERTENTLY OPPOSING WHAT IS BENEFICIAL TO THEM.
Let us drill down to examine Frontier Exploration activities, investment characteristics and fiscal regimes.
1. Deepwater Frontier: Preferred by the IOCs and Integrated Oil companies with financial muscle. Investment outlay is sole-risk play. NNPC is absent. The fiscal regime is PSC in nature
The Deepwater horizon is experiencing a boom with a 5% growth rate with new offshore discoveries it is proving to be a more attractive proposition to the Oil majors and those with sense.-
However, Nigeria & NNPC in particular can’t afford their counterpart financial contribution in terms of exploration Costs to optimize – the play at the deep offshore Horizons that may even blow up our hydrocarbon reserves tremendously.
2. Inland Frontiers, especially up NORTH: The IOCs and Integrated players have shunned it. NNPC is sole risk taker. The fiscal regime, for now, is a quasi SC mode but entirely an NNPC sole risk play.
3. Inland Frontiers down SOUTH ( SW & SE ): Integrated oil companies plays as the main risk-takers. IOCs and NNPC’s participation are limited. The Fiscal Regime is PSC mode with the Integrated Oil companies players as sole risk players.
Success stories: Folawiyo Oil has discovered Oil in Lagos, in the near future, Ogun, Ekiti and Osun states may discover Oil and sizeable gas deposits.
Extracting Abia and Imo states from this equation, there are up to 50 oil wells in the Anambra region:
Aguleri has about 26 Oil-wells
Ogwu Ikpelle 16 wells
Ogwu-Aniocha 5 wells Anake 3 wells
Abagana 2 wells
Okija and Umunnachi- have a well each which are reportedly spilling due to gushing crude oil flows.
Aside from the known gas reserves of the Enugu basin, there is a possibility of new discoveries at Ebonyi State. Enugu basin was the biggest gas deposit until the new find at OML13 –at Akwa Ibom which has doubled Nigeria gas reserves from 107trillion SCUF (standard cubic feet) to 205 trillion SCUF of Gas.
This is turning out to be a love story we want to hear with more discoveries on the way if we have the will to proceed.
The main players in the SE are:
Orient Oil and Sterling Global Resource, an Indian firm in PSC with NPDC
NOW THAT WE UNDERSTAND WHAT THE FRONTIER EXPLORATION CAMPAIGN IS ABOUT, Let’s look at the existing Royalty regime (baseline royalty for Oil /condensates is 10%. For the Frontier and Inland basin it is 7.5%)
Gas is based on gases sales categorized:
Onshore is 7%
offshore is 5%
When you add the various taxes and profit oil components into the accrued revenues – in the existing format, we will come to a sad realization that, left for NNPC( NPDC), Frontier oil exploration inland up north and elsewhere will be an IMPOSSIBILITY to pursue without the proposed law.
Presently, NNPC spends an average of 28% -36% of its revenues (not profit) from upstream activities on frontier exploration. That is a significant amount of money for a broke company. For A country to build up its reserves, it has to explore for more crude Oil finds. Obviously, a financially impaired NNPC can’t carry out these activities without some form of laws backing it.
Definitely, a percentage of the cost will be passed on to the state. Only a country that is foolish will not look for new finds in a world occasioned by extinction of crude oil. As it is, Crude oil might have no significant value in the next 70years. It is ideal we find as much as we can any where it is within Nigeria in order to earn as much as we can from it now be it’s potential or realizable revenues before it becomes eroded.
Another thing we have to bear in mind is that more countries are discovering crude oil. Our market share is shrinking. Pricing are going down on account of increased output and diminishing global demand occasioned by a push for none fossil fuel alternatives/green renewable energy
if we insist now that we should not spend more money to find all that we can now it will be to our detriment in the long run
Obviously, a financially impaired NNPC cannot carry out these activities without some form of law backing it. THE PIB WILL ONLY ENSURE THAT NEW DISCOVERIES IN GENERAL AT NEW FRONTIERS, IN PARTICULAR, ARE POSSIBLE AND QUICKER TO FIND AND CONVERT TO REVENUES. THIS IS POSSIBLE IF THE NNPC( NPDC) REDUCES WHAT IT REMITS TO NIGERIA.
Presently, the funds available to NNPC is just 20% of its upstream profits. This is not adequate for NNPC to engage in its activities as regards exploration activities at the frontiers. The PIB laws seek to increase the retained Profit of NNPC by an additional 30% of its existing profit oil share,
Since everyone else has decided to pick and choose where they wished to invest and left things to NNPC to attempt to search for oil at all frontiers, the question that should be at the back of everyone’s mind is; Are we advocating that NNPC should NOT pursue frontier exploration activities in the North in particular but can do such elsewhere because of our misgivings about the North? Is that a fair thing to do?
We should realize that Frontier Exploration activities are not limited to the North as most people are erroneously thinking
Finally, the erroneous thinking we are having with the PIB is what I will term the fallacy of numbers. Please 30% additional profit retention means what NNPC gives to Nigeria from its share of JVA/PSC upstream profits have reduced from 80% due to Nigeria down to 50%, signalling to us that Nigeria as a country MUST DEPEND LESS ON NNPC for its revenues.
The PIB says it will set aside 3% of Industry operating costs to Host communities. This figure is not the same as 30% of NNPC upstream activities profits. In reality, a 3% Industry Operating cost when compared to the 30% of what goes to NNPC upstream alone gets as its share of Profits, this 3% of the Industry Operating expenses (OPEX) is relatively significant taking into cognizance that we have to deduct cost before profit sharing.
Let us at least have an understanding of numbers before we complain. A little detail that should not be lost to all is that NNPC is now a conglomerate with different subsidiaries. The profit element we are mentioning is that of NPDC, the upstream arm of NNPC, not the NNPC group as a whole.
I hope some things are clearer to you now and your needless anger is ebbing? I will address the other matters raised and I promised to make it short and hilarious this time. You can post your comments and questions on this. I am available to respond
