Oil & Gas

Major Industry Policies

Production Sharing Contract (PSC)

In view of the burden of funding joint venture operations (cash calls) by the NNPC and the need to increase Nigeria’s oil reserves from the present 20 billion barrels and also to develop other sectors of the economy begging for government attention, the federal government decided to introduce the Production Sharing Contract (PSC). This policy is designed to transfer exploration risks and funding of exploration and development efforts on new acreage to the interested oil companies.

The essence of PSC is that NNPC engages a competent contractor to carry out petroleum operations on NNPC’s wholly held acreage. The contractor undertakes the initial exploration risks and recovers his costs if and when oil is discovered and extracted.

Under the PSC, the contractor has a right to only that fraction of the crude oil allocated to him under the cost oil (oil to recoup production cost) and equity oil (oil to guarantee return on investment). He can also dispose of the tax oil (oil to defray tax and royalty obligations) subject to NNPC’s approval. The balance of the oil, if any (after cost, equity, and tax), is shared between the parties (profit oil).

The current direction in the petroleum operations in the country is the production sharing contract.

Examples below detail the number of blocks held by named operators operating PSC with NNPC.

(i)   Statoil/BP                    (3 Blocks)
(ii)  Ashland                       (2 Blocks)
(iii) Abacan                        (1 Block)
(iv) Esso Expt.                    (1 Block)
(v)  Agip                            (1 Block)
(vi) Shell                            (5 Blocks)
(vii) Elf                              (2 Blocks)
(viii) Mobil                         (1 Block)
(ix)  Chevron                      (7 Blocks)
(x)  Conoco                        (1 Block)
(xi) Allied Energy         (1 Block operated by Statoil)
Examples Of Some Specific Provisions Of A PSC Contract:

(a) The term of the contract is for 30 years (inclusive of 10 years exploration and 20 years OML period). However, the contract may be terminated if at the end of the 6th year (from the effective date of the contract) the agreed Work Programme has not been substantially executed, or either party gives a notice of not less than 90 days for termination of the contract (on grounds permitted by the contract terms). Termination of the contract will also take place if no petroleum is found in the contact area after 10 years from the effective date of the contract.

(b) Work Programme: The minimum work programme during the exploration period shall be as follows:

Contract Years Amount to be Expended
(i)  1 - 3 $24 million
(ii) 4 - 6 $30 million
(iii) 7 - 10 $60 million

If during any period of the contract years, the contractor spends less than the required expenditure, an amount equal to such under-expenditure shall be carried forward and added to the amount to be expended in the following period of contract years.

(c) Management Committee must be established within 30 days from the effective date of the contract. The Committee is made up of 10 persons appointed by the parties on a 50/50 basis.

The NNPC appoints the Chairman of the Management Committee while the contractor appoints the Secretary who will be a non-member of the Committee.

(d) Recovery of Operating Costs and Crude Oil Allocation: The available crude oil from the contract area shall be allocated in accordance with the Accounting Procedure, the Allocation Procedure and other applicable provisions of the contract.

(e) Royalty: Royalty rates in offshore is graduated as follows:

Area/Water Depth Rate
In areas up to 200 meters water depth 16.67%
From 201 to 500 meters water depth 12%
From 501 to 800 meters water depth 8%
From 801 to 1000 meters water depth 4%
In areas in excess of 1,001 meters 0%



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