AN APPRAISAL OF PETROLUEM SHARING CONTRACTS IN NIGERIA

SUMMARY

There is no gain saying that the new PSCs have attracted the oil companies because of the fiscal and legal regime. The oil companies are given a higher profit share for the more marginal, high-risk projects. By these agreements, the oil companies are offered more favourable terms for frontier areas in a bid to secure their level of oil production in the next century. Any further innovation in the area of cost would continue to attract capital flow into the industry and also provide incentive for the foreign oil companies. By these new PSCs, Nigeria has shown a preference for these forms of arrangement. Although other forms of agreement do exist in Nigeria, they are relegated to the background. The Nigerian government’s preference for PSCs is understandable since they provide it with the needed cash flow for the industry and the foreign oil companies are attracted to them because of their attractive fiscal provisions. It can be claimed that under Production Sharing Contracts the host country enjoys a better leverage than the contractor. In addition, the other important features of a PSC that makes it particularly attractive to the host government include the fact that the philosophy of permanent sovereignty finds fuller expression in a PSC than any other alternatives. The ability for the PSC to combine these features with other stipulations such as domestic market obligations, taxes and loyalties, and power of termination, which are common in concessions, makes it particularly attractive and the preferred granting instrument for the host government. The PSC also places an emphasis on the mutuality of interest in the relationship. Both parties in a PSC express their commitment to carry out the contract in accordance with the principles of goodwill and good faith. The fact cannot be denied that a substantial improvement has been achieved by the PSC over all previous arrangements, which substantially ignored the importance of these principles. Despite these factors, it is surprising that the investor finds the PSC acceptable. The only reason for this being so can only be put down to the fact that the investor has little or no choice, since he needs the host government’s oil and the host government, in turn, needs his capital and technology. Also, the PSC enables both the host country and the investor to allocate risk where appropriate.