The Nigerian government has disclosed that 23 oil blocks, managed by both international and local oil companies under Crude Oil Production Sharing Contracts (PSCs) with the Nigerian National Petroleum Company Limited (NNPC), failed to produce crude or remained inactive in the year 2021.
This revelation comes from the latest Oil and Gas Industry Report for 2021, released by the Nigeria Extractive Industries Transparency Initiative (NEITI), a federal government agency.
PSCs are contractual arrangements where oil companies commit to funding operations for petroleum exploration, development, and production within specific concession areas. Successful operations require these companies to pay Petroleum Profit Tax, royalties, and other levies to the government. The companies can recover their costs, often referred to as ‘Cost Oil,’ in-kind.
Under the PSC framework, companies also pay Petroleum Profit Tax and royalties in-kind through the NNPC’s arrangement for lifting crude oil and gas, which is then used for tax, royalty, and profit oil sharing based on predetermined ratios. The proceeds from the sale of profit oil are remitted directly to the Federation Account.
PSC agreements relieve the government of the financial burden of exploration and production, with companies bearing these costs.
According to the NEITI report analyzed by The Punch, in 2021, 12 out of the PSC oil blocks recorded production, while 17 blocks did not produce any crude. Additionally, six blocks were classified as inactive, resulting in a total of 26 blocks that either remained inactive or did not produce during the review period.
The report highlighted that the PSC arrangements, despite contributing significantly to total production volumes, operated in only 34 percent of the allocated blocks. To address this situation, NEITI recommended that the Nigeria Upstream Petroleum Regulatory Commission and NNPC Ltd promptly review technical, operational, and other constraints that have hindered production in idle PSC blocks. If these issues cannot be resolved, the report suggests the possibility of license revocation and allocation to other interested parties.
NEITI also reported the responses from NNPC Ltd, stating that some PSC blocks were still in the exploration and appraisal phase, with contractors possibly not yet initiating budget or work programs for various regulatory and business reasons. NNPC expressed optimism that two to three blocks would soon attain production status.
The Nigerian government collaborates with both indigenous and foreign oil companies to explore and produce the country’s crude oil, given the high level of technological expertise required. The PSC framework represents a significant aspect of these partnerships.
