SPECIAL REPORT: How Nigeria loses trillions of Naira to deep offshore oil explorations

djfamous The failure of the Nigerian government to review its fiscal policies governing the exploration of oil in deep, offshore waters has caused the country a loss in oil revenue amounting to trillions of Naira, PREMIUM TIMES can report. A calculation of the royalty payments on four randomly selected deep offshore oil blocks – Bonga, Agbami, Akpo, and Erha – showed that Nigeria would have, at a conservative three per cent royalty, netted just over N1 trillion between 2010 and 2017. And at a five percent royalty – the rate currently being proposed by lawmakers at the House of Representatives – the revenue over the same eight-year period will rise to almost N2 trillion. Nigeria’s Deep Offshore and Inland Basin Production Sharing Contract Act (1993) is the legislative framework guiding deep offshore oil production, covering acreages greater than 200 metres in water depth. Enacted in 1993, the fiscal policy stipulates a zero per cent royalty from oil companies for explorations above 1,000 metres water depth. Prior to the period, oil exploration and production operations were mostly on land, swamp, and shallow offshore. At the time the Act was enacted in 1993, then as a Decree, deep offshore oil exploration and production were uncharted territories in Nigeria and, as a result, there was a need to encourage upstream investors to put risk capital in that direction. The first commercial deepwater discovery in Nigeria, the Bonga oil field, was awarded to Shell Nigeria Exploration and Production Company (SNEPCO)in 1993, but production did not start till 2005. Drilling at a water depth of 1,030 metres, the Bonga field (Oil Mining Lease, OML, 118) is operated by SNEPCO (55 per cent) under a production sharing contract with the Nigeria National Petroleum Corporation. Other partners include Esso (20 per cent), Eni (12.5 per cent), and Elf Petroleum Nigeria (12.5 per cent). According to Shell, the Bonga oil field has produced over 600 million barrels of oil to date. After Bonga’s success, several other deepwater oil explorations followed in quick succession including Agbami ( Chevron), Erha ( ExxonMobil), and Akpo, Egina, and Usan (Total) among others. But the inability of the Nigerian government to collect royalty payments from deepwater oil operations has seen the country miss out on key sources of revenue even as it struggles to fund its annual budget. India, for instance, collects five per cent royalty on deepwater offshore production for the first five years of commercial operation and ten per cent thereafter. Analysts say the 1993 Deep Offshore contract was entered into at a time Nigeria, under the late dictator Sani Abacha, was burdened by sanctions and needed money for key infrastructure projects. “It may not have been the best approach but you may want to look at the rationale for setting that,” said Dauda Garba, an expert in resource governance. “At the time those contracts were signed, offshore oil prospecting and exploration and production were very novel in Nigeria.” The granting of Production Sharing Contracts in the deep offshore saw Nigeria’s crude oil reserves increase to 36 billion barrels (bbls), with production now averaging 548,000 bbls/day. There were, indeed, efforts to amend the decree in 1999, when the sanctions on Nigeria were lifted after Mr Abacha’s demise, to reflect that if crude oil exceeds to a barrel or after 15 years after the initial contracts were signed, the agreement should be renegotiated in a manner that will be favourable to Nigeria. Crude oil prices averaged .33 in 1993 and had risen to .44 by 1999. Royalty payable in respect of deep offshore production sharing contracts Oil-rich Waters In January 1999, Chevron struck oil at the Agbami OML 127 and 128, some 113 kilometres offshore the Niger River Delta at a water depth of 1,372 metres. But commercial production did not start until July 2008. Operated by Star Deep Petroleum Limited, a Chevron affiliate, alongside a consortium of other firms, the Agbami field is the largest deepwater discovery to date in Nigeria with estimated recoverable reserves of 900 million barrels. One month after Chevron struck oil, and at a water depth of 1,200 metres, ExxonMobil struck oil in the Erha oil and gas field. Commercial production began in March 2006 at a rate of 190,000 barrels of oil per day. By 2000, Total E&P had discovered the Akpo field situated on OML 130 about 200 kilometres from Port Harcourt. Drilling is at a water depth of 1,100 to 1,700 metres. As the oil companies continued to hit more oil in the deep waters, analysts say a review of the country’s offshore regulations to reflect the current times would see more revenue accrue to the government. Infograph: Oil production by stream

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