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Nigeria: Terms being reconsidered

FISCAL TERMS for the country's oil producers have become "generous" at present high oil prices, according to Rilwanu Lukman, honorary adviser on petroleum to President Umaru Yar'Adua. Lukman says terms will be reconsidered as part of the reform of the country's oil and gas sector, which he is leading.

The review will cover the country's joint-venture (JV) arrangements, under which most of its 2.1m barrels a day (b/d) of production is lifted, and also the production-sharing contracts (PSCs) introduced in 1993. But existing contracts will not be abrogated, says Lukman. Changes will be negotiated as provided for under the contracts: "We may have to give more favourable conditions, we may have to reconsider some of our generous terms."

Lukman is a former oil minister and a former president of Opec, but also has industry experience as non-executive chairman of Afren – the UK-based firm he co-founded in 2004. Afren has interests in Nigeria (including in the joint development zone with São Tomé e Príncipe) and in Gabon, Congo (Brazzaville) and Angola, and says its production will be in the 15,000-20,000 b/d range by early 2008.

It is understood that the negotiations will centre on the memorandum of understanding (MOU) between the government and the producing companies, which, in effect, sets the profitability of their operations. MOU details have not been available for some years, but its purpose is to guarantee the companies a certain per-barrel profit margin when the oil price is within a defined range. High oil prices will have increased the margin – although, through its tax and royalty, the state takes most of the upside.

Also under review are funding arrangements for the interests of state-owned Nigerian National Petroleum Corporation (NNPC) in JVs with the producing companies. The JV operators – Shell, ExxonMobil, Chevron, Eni and Total – have been pressing for changes, because of the long-term problem of delays in receiving NNPC's shares of expenditures. NNPC holds 55% in the Shell venture and 60% in the others.

NNPC takes its shares of JV production – most of which is sold back to the operators, with the proceeds going to the state – and is responsible for its shares of costs. But the firm has to fight for government funding in competition with other state-owned entities and is notoriously slow in paying its cash-calls. Companies say delays in receiving NNPC's contributions put a brake on the amount of work they can undertake.

Earlier this year, the companies suggested that NNPC's cash-calls could be reduced, with the shortfall to be recovered by its partners taking an increased share of future production – but the idea does not seem to have found favour with the petroleum minister, Odein Ajumogobia. Also under consideration was the possibility of NNPC borrowing internationally to fund its contributions, but – with the country's large debt burden built up under the military governments only recently having been reduced – this option is not popular. A third option, under which NNPC and the oil companies borrow jointly, is being considered by Lukman's reform committee.

Under the country's PSCs, the contractor is responsible for all expenditures, with costs recovered from a stream of cost-oil from commercial discoveries. PSCs were successful in attracting large investments in deep-water areas – results include Shell's Bonga and ExxonMobil's Erha developments, both flowing, and Chevron's Agbami and Total's Akpo projects, both due for start-up in 2008.

PSCs provide the state with a stream of tax-oil, but profit-oil – split 70:30 in the contractor's favour for the first 350m barrels of production, with the state's share rising subsequently – does not start flowing until costs have been recovered. This has led to criticism in the Nigerian press that the country is not benefiting sufficiently from fields developed under PSCs.

Meanwhile, the future for NNPC – which the president said in August would be dissolved – remains unclear. According to the petroleum minister in September, the aim of the reform is to create a state-owned company that is accountable, commercially viable and able to grow its assets, including taking on overseas ventures. He envisaged that NNPC and existing agencies under the petroleum ministry would be replaced with five new entities – a national oil company, a petroleum directorate, a petroleum inspectorate, a national oil and gas assets holding company and a petroleum-products distribution agency.

Observers suggest that reducing NNPC's power, resulting from its access to cash and unaccountability, is another aim of the reform. The company, with over 11,000 employees, is widely regarded as a significant source of corruption in the country. 

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