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How Nigeria lost $28bn oil revenue — 99% of 2019 budget

In the last 10 years, Nigeria may have lost revenues as high as $28.61 billion, from failure to review the Production Sharing Contract (PSC) terms guiding oil production from seven deepwater fields in the country.

This projection was made in a policy brief released by the Nigeria Extractive Industries Transparency Initiative (NEITI) on Sunday.

The document titled “1993 PSCs: The Steep Cost of Inaction”, showed that the federal government was denied oil revenue that would have been earned between 2008 and 2017 if the contracts were reviewed in line with applicable fiscal terms.

PSCs are agreements where oil companies bear the risk and cost of exploring for hydrocarbon resources covered by its licence, and subsequently recovers its operational costs from what is produced.

The Nigerian National Petroleum Corporation (NNPC) enter these agreements with International Oil Companies (IOCs) through their Nigerian subsidiaries and sometimes with indigenous oil companies.

Under the fiscal terms of the agreements between the IOCs and NNPC, the companies are under obligation to pay royalty oil and tax oil to the Department of Petroleum Resources (DPR) after which the other parties to the contract share the profit oil.

Quoting section 16 (1) of the Deep Offshore and Inland Basin Production Sharing Contracts Act Cap. D3. LFN 2004, the NEITI brief showed that the fiscal terms for the PSCs between NNPC and IOCs “ought to have been reviewed” on two occasions.

First, in 2004 when real oil prices exceeded $20 per barrel, and most importantly, 15 years after the 1993 fiscal terms were launched, which should have been January 1, 2008.

AKPO, AGBAMI RECORD BIGGEST LOSSES

Using financial modelling analysis, the study examined oil production data from the seven fields, oil prices, and newer fiscal regimes, to arrive at estimated revenue figures for the period under review.

The seven deep water fields considered are Abo (OML 125), Agbami-Ekoli (OML 127 & OML 128), Akpo & Egina (OML 130), Bonga (OML 118), Erha (OML 133), Okwori & Nda (OML 126), and Usan (OML 138).

The field operators include, but are not limited to, Eni, Total, Shell, Chevron, Famfa Oil, Exxon Mobil, Petrobras, South Atlantic Petroleum and Addax petroleum.

The NEITI brief showed that under the fiscal terms of the 1993 PSCs, total revenue from the seven fields amounted to $73.78 billion.

If the terms of the 2005 PSCs had been used, however, total government revenue from these fields would have amounted to $89.81billion, meaning that $16.01 billion was lost in the review period.

Out of that, the Agbami field located in OML 127, operated by Chevron, Famfa Oil and Petrobras recorded the biggest loss.

Here, the government was denied revenue especially from profit oil and would have earned $22.15 billion instead of $17.72 billion, signifying a loss of $4.44 billion.

Depleting government revenues further, outdated fiscal terms on the Akpo field located on OML 130 and operated by Petrobras, South Atlantic Petroleum and Total, resulted in a loss of $3.22 billion.

Revenue was estimated to reach $9.54 billion instead of the $6.32 realised.

In percentage terms, there would have been a 50.91% increase in revenue from OML 130, if 2005 fiscal terms had guided the PSCs as against the 1993 fiscal terms applied.

In another scenario,  NEITI concluded that if the government was able to obtain profit share from all seven fields based on the terms of the 2005 fiscal regime, revenue would have hit $102.39 billion. This represents a loss of $28.61 billion.

In this scenario, revenues from Agbami would have increased to $31.51 billion, representing a huge loss of $13.79 billion within the 10-year review period.

LOST REVENUE COULD FUND MAMBILA POWER PROJECT

Based on the empirical evidence provided in its policy brief, NEITI said the billions of dollars in lost revenue would have been used to fund long-standing capital projects to deal with the nation’s infrastructure deficit.

“The lower threshold loss of $16.03bn to the Federation Account would have funded the Port Harcourt – Maiduguri rail line put at between $14bn to $15bn,” the NEITI document read.

“Other projects that the lost revenue could have been used to fund include the Mambila Power Plant of 3,050 MW at $5.72 billion, while the estimated cost of the Ibadan-Ilorin-Minna-Kano Standard Gauge line is $6.1 billion.

“The combined cost of these projects is $11.82 billion, which is less than the lower threshold of estimated losses.”

Other projects listed by NEITI includes “the Calabar-Lagos Rail line ($11 billion), Fourth Mainland Bridge ($1.4 billion), Badagry Deep Water Port Complex ($1.6 billion), and Lekki Deep Seaport ($1.2 billion).”

REVENUE LOST COULD FUND 2019 BUDGET

The higher estimated loss of $28.61 billion, according to NEITI, can fund 99 percent of the proposed federal government budget for 2019.

The N8.83 trillion naira budget ( ($28.80 billion) was presented by President Muhammadu Buhari to the national assembly in December 2018.

The total projected revenue, according to Buhari, is N6.97 trillion, consisting of oil revenue projected at N3.73 trillion, and non-oil revenue estimated at N1.39 trillion.

But with the loss recorded from the outdated PSCs, government may have to resort borrowing in its struggle to fund the capital projects outlined in the 2019 budget.

In its recommendation, NEITI charged the federal government to use relevant agencies to “immediately” review the “outdated PSC terms” with oil companies.

The NEITI brief noted that the affected companies “have expressed willingness to negotiate these terms” and should therefore be carried along in the review process along with state governments.

Oluwatoyin Bayagbon :