In the most recent Oil and Gas Industry Report for 2021, released by the Nigeria Extractive Industries Transparency Initiative (NEITI), the Federal Government of Nigeria has disclosed that a total of 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.
PSCs are contractual arrangements where oil companies commit to funding operations for exploring, developing, and producing petroleum within a concession area over an agreed number of years. Successful companies are subject to Petroleum Profit Tax, royalties, and other government bonuses/levies, with the ability to recover their costs through ‘Cost Oil.’ Additionally, these companies pay Petroleum Profit Tax and royalties in-kind through NNPC’s arrangement of lifting crude oil and gas for tax, royalty, and share of profit oil, which is then remitted to designated accounts.
According to the NEITI report, during 2021, only 12 of the PSC oil blocks were productive, while a significant 17 blocks did not produce any crude oil. Furthermore, six blocks remained inactive, bringing the total number of unproductive and inactive oil blocks during the review period to 26.
Notable oil companies failing to produce crude oil from selected blocks included Esso E&P, Nigerian Agip Exploration, Shell Nigeria Exploration and Production Company, Texaco Nigeria Outer Shelf Limited, Star Deep Water Petroleum Limited, Statoil Nigeria Limited, among others. In contrast, the list of companies managing the six inactive PSC blocks included GEC Petroleum Development Company Limited, Nigerian Agip Oil Company, Monipulo Limited, and Esso Exploration and Production Limited.
NEITI’s observations on production from PSC blocks in 2021 revealed that only 12 out of the total blocks recorded production, while the remaining 23 did not produce at all. The total production from the PSCs for the year stood at 242.96 million barrels, representing 42.92% of the total production of 566.13 million barrels.
In response to this situation, NEITI recommended that the Nigeria Upstream Petroleum Regulatory Commission and NNPC Ltd should promptly review the technical, operational, and other constraints affecting production from the idle PSC blocks. The aim is to optimize production from these arrangements, and if issues cannot be resolved, consider license revocation and allocation to other interested parties.
NNPCL provided insight into the matter, noting that PSC blocks transition from exploration/appraisal phases to production over time. Some blocks still remain at the award status, as some contractors have not initiated budget/work programs due to various regulatory and business considerations. NNPCL expressed optimism that two to three blocks would soon attain production status.
The Federal Government collaborates with both indigenous and foreign oil firms to explore and produce Nigeria’s crude oil, particularly due to the high technology required for these operations. The Production Sharing Contract (PSC) is a significant partnership arrangement in this regard.