Generally, petroleum exploration/production contracts attempt to find a satisfactory middle ground in negotiations between investors i.e. the State, National Oil Company, Local Oil Companies or Foreign investors. The objective of the State is mainly to maximize wealth from its natural resources by encouraging appropriate levels of exploration and development activity, while the objectives of the oil companies are to build equity and maximize wealth by finding and producing oil and gas reserves at the lowest possible cost and highest possible profit margin. These negotiations take place in a multi-country legal environment beset by erratic economic behaviour, especially as regards oil prices.
Some of the Companies operating PSCs in Nigeria are Statoil, SNEPCO, ExxonMobil, Esso, Elf, Nigerian Agip Exploration Limited, Addax, Conoco and Petrobas, Star Deep Water, Chevron, Oranto Philips. The royalty rates under the PSCs vary depending on the area of the concession and are graduated on a sliding scale depending not on production, but on water depth as shown below
Further to the enactment of the Deep Offshore and Inland Basin Production Sharing Contracts Act, (1999) as amended in Nigeria, the Production Sharing Contract (PSC) arrangement governs the understanding between the NNPC and all entrants and participants in the Inland, Shallow, Deep amd ultra deep-water acreages. Its main features are:
§ The contractor bears all costs of exploration and production without such costs being reimbursable if no find is made in the acreage.
§ Cost is recoverable with crude oil in the event of commercial find, with provisions made for:
a. Tax Oil: This is to offset actual Petroleum Profit Tax, Royalty and Concession Rentals due and payable or deductible within an accounting period or year
b. Cost Oil: To reimburse the contractor for capital investments and operating costs.
c. Profit Oil: The balance after deduction of Tax Oil and Cost Oil, which is to be shared between the NNPC and the contractor in predetermined proportions.
Onshore | Inland Basin[1] | Swamp/Shallow Waters | Shallow Offshore | Deep Offshore |
20% | 10% | 0 - 100m: 18.5% | 100 - 200m: 16.67% | 201 - 500m: 12% |
501 - 800m: 8% | ||||
801 - 1000m: 4% | ||||
Over 1000m: 0% | ||||
[1] means any of the following Basins, namely, Anambra, Benin, Benue, Chad, Gongola, Sokoto and such other basins as may be determined, from time to time, by the Minister
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