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Breaking the Jinx of Amendment of Nigeria’s PSC Act

BY THE BOOK

By Waziri Adio

Waziri Adio introduced policy briefs in the course of his one term tenure as the Executive Secretary of the Nigeria Extractive Industry Transparency Initiative (NEITI) (2016 to 2021)

He wanted NEITI to go beyond publishing a bulky audit report year after year. He thought that NEITI could gain more traction with its recommendations and add more value by delving into policy research and analysis. “These smaller but well -researched reports would lay out not just policy prescriptions but also policy options”, he writes in his book ‘The Arc of The Possible’, a memoir of his years at NEITI, “and these reports could be used to engage actors to increase the chances of securing the necessary policy action”.

One of these reports did travel so well it could have had profound effect on Nigerian policy.

Here is Adio’s testimony:

 The policy brief on the need to amend the law governing the production sharing contracts (PSCs) had a more direct and more immediate impact. Entitled “1993 PSCs: The Steep Cost of Inaction,” the 28-page report posited that Nigeria lost between $16.03b and $28.61b in ten years for failing to trigger the time and price specific amendments mandated by Section 16 of the Deep Offshore and Inland Basin Production Sharing Contracts Act of 1999. Arriving at the losses after extensive work and modelling, the paper advocated for an urgent review of the 1993 PSCs. The report was published on 2nd March 2019. The amended law was signed by President Buhari on 4th November 2019. NEITI cannot claim sole responsibility for the amendment. That will be utterly immodest. In any case, other factors might be responsible for the short interval between the publication of the NEITI paper and the amendment of the Act, especially given that the law had been due for review as far back as 2004, then in 2008, and by 2013 and 2018, if the 2008 review had been done. What cannot be denied, however, is that NEITI’s empirical study and advocacy contributed to ripening the context for the desired action, in this case the amendment of the Act.

First, some background. To increase its oil reserves and production, Nigeria in the early 1990s embraced the PSC, a contractual arrangement pioneered by Indonesia in 1966. Nigeria wanted to venture offshore and at minimal cost to the public purse. At that time, Nigeria was struggling to meet its joint venture (JV) cash call obligations because of dwindling oil revenue which, on its part, was due to low oil prices. Part of the appeal of the PSC arrangement is that the operator brings both technical and financial resources in return for a handsome payoff when successful. To attract investors, especially at this time of low oil prices, uncertain and expensive technology, Nigeria frontloaded a lot of incentives and concessions including exemptions and lower royalty and tax rates. For example, while the tax rate for JVs was 85% of chargeable profit, it was 50% for the PSCs, and while royalty rates for JVs was 20%, it was 0% to 16.67% for the PSCs.

But these generous incentives were not meant to be in perpetuity. They were designed to have been overtaken by the time oil prices picked up and after certain years of operation. The PSCs were initially backed by agreements when they took off in 1993. By 1999 when the military was preparing to return to its barracks, Decree 9 of 1999 was promulgated to cover the PSCs, possibly at the instance of the PSC contractors.

This was on 23th March 1999, with the commencement date put as 1st January 1993 (to cover when the PSCs came into operation). The same decree was amended on 10th May 1999 to give more flexible terms to the contractors. The amended Decree 29 of 1999 became the Deep Offshore and Inland Basin Production Sharing Contracts Act, Cap D3, Law of the Federation 2004.

In Section 16, the law had two trigger clauses worth quoting in full. Section 16 (1) of the Act stipulated that: “the provisions of the Act shall be subject to review to ensure that if the price of crude oil at any time exceeds $20 per barrel, real terms, the share of the Government of the Federation in the additional revenue shall be adjusted under the Production Sharing Contracts to such extent that the Production Sharing Contracts shall be economically beneficial to the Government of the Federation.” Section 16 (2) elaborated and further stipulated that “Notwithstanding the provisions of subsection (1) of this section, the provisions of this Decree shall be liable to review after a period of 15 years from the date of commencement and every five years thereafter”. In 2004, the price of crude oil exceeded $20/barrel at 1993 prices, but the review was not done. The year 2007 marked the 15th year of the commencement of the 1993 PSCs but no review was done. On 27th July 2007, the Department of Petroleum Resources (DPR) issued a letter to the operators that the review would take effect from 1st January 2008. But no such review happened.

NEITI had been flagging the need for the review of the terms of the PSCs in its annual oil and gas reports. But my interest in this as a potential subject for further analysis and advocacy increased when Ms. Chinenye Okechukwu, then the NEITI Remediation Officer, came to discuss it with me. Assiduous and always one of the first to get to work, Okechukwu had kept a file on the 1993 PSCs and this included the PSC law and the attempt to amend it, including a bill by Senator Theodore Orji. One thing that struck me after discussing with her and reviewing the documents was that those asking for the review of the PSC terms kept saying Nigeria was losing a lot of money without mentioning a specific amount. I reckoned there must be a way of calculating and naming that cost as well as the opportunity costs. I assembled a small team to do more research into the issue, including getting legal opinion on whether the money due from non-action would be deemed as owed or lost.

We settled for the latter position on the status of the money because our government was the one that failed to act, but we still felt that the major contribution that NEITI could make to put this issue on the front burner would be to calculate the extent of loss and use that to make a compelling case for an urgent review. It took us more than two years to crack this. We started work on how to calculate the cost of inaction on the 1993 PSCs in November 2016. This was initially through a partnership with S.S. Afemikhe and Co, a firm that was part of the consortium that laid the foundation for the NEITI audit reports. Unfortunately, this didn’t work out. NNPC gave us the usual talking down about not knowing what we were doing. The oil companies stonewalled by asking both NEITI and the consultants to sign confidentiality agreements. Without data from NNPC and the companies, we reached a dead-end. We shifted our gaze to other issues. But I did not take my eyes completely off the 1993 PSCs.

Along the line, I got introduced by the EITI Secretariat to Dr. Olumide Abimbola, then the head of research and development at Open Oil. The firm, which had done some work with NEITI in 2013, was promoting Aleph, a search engine on corporate filings by oil and gas companies around the world. In late 2016, we had an exploratory meeting in our office in Abuja with Abimbola, and we spoke about working together to develop an Aleph for the Nigerian extractive sector and doing training for our staff on financial modelling, one of Open Oil’s core areas of expertise. We agreed to discuss further and explore working on a joint fundable proposal. This nearly fell through the cracks. Meanwhile, we kept looking for ways to get data on the 1993 PSCs.

In October 2017, Open Oil tweeted about doing training on financial modelling for extractive sector contracts. I jumped on it and reached out again. I got in touch with Johnny West, the founder and director of Open Oil. After a series of emails and calls, we agreed to work together on two areas: training of NEITI’s staff on financial modelling and collaboration on modelling losses from the 1993 PSCs. We got lucky and got moving this time. West was able to pull in support from Adam Smith International (ASI) and DFID. We also got FOSTER to cover some of the costs. We got some data from DPR, from Extractive Hub, a DFID programme managed by ASI, and from NEITI’s subscription to Wood Mackenzie, paid for by the World Bank. We started with the training, which had a preparatory online component on Excel and FAST, the modelling standard adopted by Open Oil. I made sure the training was extended beyond NEITI to include interested government agencies like DPR, and our partners in civil society and the media. This was to ensure that such an important skill set, mostly desired by and abundant in the private sector, was well distributed not just within government but also in the not-for profit sector.

There was a substantial part of oil production from the 1993 PSCs that attracted 0% royalty and increasing that by 50% would still have yielded 0% royalty. Our position was that no production should attract 0% royalty.

After the training and the data mining, the team ran the model, coordinated by West and my embedded adviser on policy. The NEITI team that worked on the project included Murjanatu Gamawa, Asmau Dahiru Maibe, Chinenye Okechukwu, Deji Olowoporoku, Oswald Ojeifo, Bukola Moronkola etc. In the long time we worked on the policy brief, two important developments occurred: one, in August 2017, Dr. Ibe Kachikwu, then Minister of State for Petroleum Resources said that Nigeria lost between $21Billion and $60Billion for failing to review the terms of the 1993 PSCs; and two, the Supreme Court ruled on 17th October 2018 that the Attorney General of the Federation should recoup losses due to non-review of the PSC terms after price of oil crossed the $20/barrel threshold and pay the states their 13% after recouping costs. We had requested for details of the estimates by the petroleum ministry but we got no reply. And since the Supreme Court had ruled on the $20/barrel trigger, we chose to focus on the 15-year trigger instead.

In the eventual study, NEITI used the data it could gather on oil production figures, oil prices and applicable fiscal regimes for its modelling. The study focused on the seven producing fields from the 1993 PSCs: Abo (OML125), Agbami-Ekoli (OMLs 127 & 128), Akpo and Egina (OML 130), Bonga (OML 118), Erha (OML 133), Okwori and Nda (OML 126) and Usan (OML 138). We used the terms of the 2005 PSCs as the benchmark. The study elaborated on the issues at play, examined the changing structure of oil production in Nigeria, profiled each of the seven fields, discussed the modelling assumptions and findings (including the reason for coming up with the two scenarios and the range), addressed the issue of profitability for companies and explored the opportunity costs of the losses. The policy brief concluded by asking the Federal Government to urgently review the terms of the PSCs given the extent of the losses, and to carry the state governments and the contractors along in the review.

It was an impressive piece of work. I consider it the most important achievement of NEITI under my watch. I do so because this policy brief brought together many elements of my aspiration for the organisation: showing that it is possible to do cutting-edge and staff-led work outside the audits, getting some staff and other stakeholders to acquire an important and transferable skill set, pushing ahead doggedly despite obstacles, seeking and securing empowering partnership, and contributing to the desired change in the sector. As usual, we did a lot of media outreach on the report and sent copies to all critical stakeholders. Shortly after we sent out copies of the report, I received a letter from the late Chief of Staff to the President asking for a copy of the full model. I sent it immediately.

Many people may not remember this, but there had been a move to amend the Act in May 2019. Shortly before the expiration of the tenure of the 8th Assembly, the House of Representatives invited stakeholders, including NEITI, to a public hearing on the proposed amendment on 21st May 2019. Basically, the amendment proposed a 50% increase in royalties payable on the PSCs. On the surface, this looked like an improvement. But what it missed was that there was a substantial part of oil production from the 1993 PSCs that attracted 0% royalty and increasing that by 50% would still have yielded 0% royalty. Our position was that no production should attract 0% royalty. Other germane issues were also not addressed. I chose not to attend the public hearing to avoid headlines like: “NEITI disagrees with Presidency on PSC Act’ or ‘Adio tackles Buhari on PSC Act amendment. Instead, I opted to discuss with the chairman of the committee. Our team attended as observers. But we quietly submitted a 13-page position paper. I also shared the same paper with the late CoS and followed up with a summary of our observations.

Luckily, the proposed amendment couldn’t be done before the expiration of the term of the 8th Assembly. But while presenting the 2020 budget proposal to the 9th National Assembly on 8th October 2019, President Buhari said: “We need to quickly review the fiscal terms for deep offshore oil fields to reflect the current realities and for more revenue to accrue to the government. The Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Bill 2018 was submitted to the 8th National Assembly in June 2018 but was unfortunately not passed into law. I will be re-forwarding the Bill to this Assembly very shortly and therefore urge you to pass it. We estimate that this effort can generate at least 500 million US dollars additional revenue for the Federal Government in 2020, and over one billion dollars from 2021.”

The president kept his words. He sent the bill to the National Assembly two days later. But he didn’t just forward the earlier bill, he sent a new bill that proposed royalties to be paid on all oil productions irrespective of water depth, and for royalties to be paid based on a combination of water depth and oil price. The bill was passed by the Senate on 15th October 2019; the House of Representatives concurred on 29th October 2019; the President signed the amended bill on 4th November 2019. This broke the 15-year jinx on the 1993 PSCs and is a major achievement of the Buhari Administration. Kyari, the late CoS to the President who played a frontline role in the amendment, wrote an Op-Ed on it entitled: “A New Deal for Nigeria.” Asiwaju Bola Tinubu, the National Leader of the ruling party and a former oil industry executive wrote an article with the title: “The Coming Prosperity.” I appeared on Arise News to give detailed background on the issue, and I also wrote an article for THISDAY, entitled: “Putting the PSC Act Amendment in Perspective.”

Not everyone was excited by this development.

The affected oil companies launched a vigorous campaign against the passage of and assent to the bill. They made presentations to high-level officials in government to dissuade the president from assenting to the bill after it was passed. They kept pressing even after the president had appended his signature. Apart from launching media offensives, they pulled in their diplomatic missions and even made a case to the EITI. They argued that they were not consulted, that the timing was wrong, and that the new rates would make Nigeria less competitive. I had many opportunities to engage and argue with representatives of oil companies on this issue while we were working on the policy brief, while the bill was being passed and after.

For example, on 4th December 2017, there was a high-level meeting between the Chairman and Executive Director of OPTS and the Chairman and the Executive Secretary of NEITI. We discussed four issues: the planned NEITI Data Automation project, the planned beneficial ownership register, status of metering of oil and gas production, and the need for a review of the terms of the 1993 PSCs as mandated by the law. The only contentious issue in the meeting was the last. OPTS had three positions that they wanted us to take on board: one, the oil companies were not the ones frustrating the review of the PSC terms; two, some of their contracts have stabilization clauses, which they would share with us; and three, NEITI should share its study for OPTS to make inputs.

My interest in this as a potential subject for further analysis and advocacy increased when Ms. Chinenye Okechukwu, then the NEITI Remediation Officer, came to discuss it with me. Assiduous and always one of the first to get to work, Okechukwu had kept a file on the 1993 PSCs..

When the policy brief was ready, we shared both the model and the paper with OPTS. We received their inputs and incorporated most of them, except the one on profitability. Our study showed that with the new royalty rates, the PSCs would still be very profitable, though with reduced margin.

Excerpted from The Arc of the Possible, A Memoir, by Waziri Adio. Published by Cable Books, Lagos, Nigeria.

 

 

 

 

 

 

 

 


Ukraine’s Origins and The Gas Crisis with Russia

By Daniel Yergin

BOOK EXCERPT: From ‘The New Map’, published in 2020, two years before the Russian invasion of Ukraine…

Russia’s supply of natural gas to Europe—about 35 percent of Europe’s total gas consumption—is at the centre of a geopolitical clash.

It comes with a basic question: Is this reliance and multibillion-dollar gas business an instrument of Russian power and influence, or is it a part of a mutually beneficial, geographically determined trading relationship?

Nowhere is this tension more evident than in the fissured and violent relationship between Russia and Ukraine. The consequences reverberate on energy markets, in relations with Europe, and on the relationship between Russia and the United States, with impacts ranging from the US military budget and the domestic strife over the 2016 US presidential election, to the rising hostility between the world’s two major nuclear powers, to the impeachment trial of Donald Trump in 2020. Indeed if one were to the single most important reason for the new antagonism between Russia West—and the new cold war-it is Ukraine and the bitter and unsettled questions resulting from the breakup of the Soviet Union and the way they have played out!

The linguistic root of “Ukraine” means “edge” or “border land.” The territory that became known as Ukraine is mostly an extended plain with few natural borders. Ukraine and Russia both assert a common origin in Kyivan Rus. This medieval kingdom was established by Viking warriors who intermixed with local Slavic tribes in what became known as the “Rus lands,” which were ruled from Kyiv (the capital of Ukraine today). Despite their shared lineage in Kyivan Rus, modern Ukraine and Russia clash bitterly over claims of common identity, as Russians portray it, versus separate identities, as Ukrainians assert.

Kyivan Rus disappeared from history when the Golden Horde, the Mongols, sacked Kyiv in 1240. The first maps of Ukraine, including its borders, were drawn around 1640, when it was part of the Grand Duchy that combined Lithuania and Poland. One map was labeled “General Description of the Empty Plains (in Common Parlance Ukraine).”

Fourteen years later, in 1654, a leader of the Cossacks in what today is Ukraine swore allegiance to the tsar of the eastern Slavic principality of Muscovy, which was “regathering” the Russian lands. Historians, politicians, and nationalists continue to argue today whether that allegiance to “Muscovy” was conditional, retaining autonomy, or absolute submission and incorporation into the gathered lands.!

Nationalist identity and fervor were developing in Russia’s Ukraine before World War I. This was at the same time that full-scale industrialization got underway in the Donbas region in southeastern Ukraine, drawing in Russian speakers from elsewhere in the empire. In 1918, shortly after the Bolshevik Revolution, an independent Ukraine was declared, but it disappeared in the chaos of the Russian Civil War. After the Bolshevik victory, Ukraine became a founding republic of the Soviet Union.

With breakup of the Soviet Union at the end of 1991, Ukraine was for the first time—aside from that fleeting moment at the end of World War 1—no longer an idea, a borderland, a province of an empire. Now, for the first time, it was a sovereign nation.

At independence, Ukraine was “born Nuclear,” for it inherited nineteen hundred nuclear warheads from the Soviet Union, making it the world’s third-largest nuclear state. In 1994, in what is known as the Budapest Memorandum, it gave up those weapons and transferred them to Russia. In exchange, Russia, Britain, and the United States solemnly promised to “respect” the “existing borders of Ukraine.”

ONE INSTITUTION MANAGED TO SAIL THROUGH THE MAELSTROM OF THE post-Soviet collapse intact, though somewhat battered—the ministry of natural gas. It, however, changed its name—to Gazprom.

It gained control of the big export pipelines—and the revenues that came from exports—and thus inherited the Soviet-era relationship with the major Western European energy companies.

Gazprom became the largest gas company in the world. It provided gas to keep Russia’s domestic economy going, even if bills went unpaid; it maintained its reputation as a reliable supplier to Western Europe, and it delivered desperately needed revenues to the national treasury.

Amid the chaos of the collapse, Gazprom represented not only continuity with the past but also Russia’s future economic integration with the West. Gazprom insisted it operated as a commercial organization, but for some outside Russia, it was not just a gas company. It was also the palpable ghost of the Soviet-American Cold War, the embodiment of resurgent Russian power, and the instrument for Russia to gain leverage over Western Europe and thus drive a wedge between Europe and the United States. At the heart of the gas issue was Ukraine.’

Natural gas, and the pipelines that carry it, had bound the two countries together—but now would set them against each other. Gas imported from Russia was Ukraine’s major energy source and critical to its own economy and fueling its heavy industry

In which direction would Ukraine look for its future? This fundamental question has inflamed relationships between Ukraine and Russia ever since the breakup of the Soviet Union. Would it continue to look east and remain under Moscow’s sway? Or west, toward Europe and the European Union and, from Moscow’s point of view, toward NATO and the United States?

Natural gas, and the pipelines that carry it, had bound the two countries together—but now would set them against each other. Gas imported from Russia was Ukraine’s major energy source and critical to its own economy and fueling its heavy industry. Moreover, the tariffs—that is, the fees—that Ukraine earned on the transmission of Russian gas to Europe through its pipelines and territory were a major source of government revenue.

But this was not a one-way street. Assuring access to Europe was critical for Gazprom, for the European market was its major source of revenues. That meant Russia also depended on Ukraine; as late as 2005, 80 percent of its gas exports to Europe passed through Ukraine’s pipe-lines. That, of course, had not mattered when Ukraine and Russia were both parts of the same country and were connected by what was called the “Brotherhood” gas pipeline. But now the Soviet Union was gone, and it mattered a lot. Ukraine and Russia were no longer brothers.

The breakup of the Soviet Union in 1991 quickly led to acrimony between the two countries over the price of Russian gas and the tariffs charged by Ukraine for passage through its pipelines. Yet the disputes were largely containable until the 2004 contested Ukrainian presidential election in which the “two Viktors” were pitted against each other. The initial winner in what was widely seen as a rigged election was Viktor Yanukovych, the sitting prime minister and a onetime boxer.

Yanukovych’s native language was Russian, and he was Moscow’s candidate. His opponent was the other Viktor—Viktor Yushchenko, a former prime minister and head of the central bank and a native Ukrainian speaker, for whom Europe was the great calling.

The stolen election ignited massive protests, which converged on Kyiv’s Maidan Square in what became known as the “Orange Revolution’—after the colors of Yushchenko’s campaign. In a court-imposed runoff, Yushchenko won. It was a shock to Moscow. Ukraine now had a president who wanted to look west. As if to drive home that point, his wife was an American of Ukrainian descent, a graduate of Georgetown University who had worked in the Reagan administration.

Excerpted from The New Map: Energy, Climate and the Clash of Nations, by Daniel Yergin. Published by Penguin New York, 2020.

 

 

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