Nigeria currently operates two contract models to aid funding and exploration of oil and gas projects. These are:

  • Joint Ventures (JV) under Joint Operating Agreements (JOAs) between international oil companies (IOCs) and NNPC, with NNPC representing the interest of the Nigerian government; and
  • Production Sharing Contracts (PSCs) with IOCs.

The principal contract model for the purpose of exploration and production of resources was the joint venture arrangement. The JVs typically govern onshore/shallow water projects. This was introduced in 1986 following the global oil glut. Under this arrangement, each of the partners to the JV has an obligation to contribute financially, to the extent of the percentages held in the contract, towards the exploration and development of the oil and gas blocks. These are called cash calls. All parties are entitled to their share of oil after fiscal deductions have been made, including royalties paid to government and petroleum profit tax. NNPC, possessing majority of the shares in these arrangements, however, has been unable to fund its equity participation in the joint ventures (JV) This has led this arrangement to be increasingly unmanageable.

To end this situation, the Production Sharing Contracts (PSCs) were introduced in 1993 and was backed by the Deep Offshore and Inland Basin Production Sharing Contracts Decree No. 9 of 1999 as amended, referred to as the PSC law This law amends both the general Petroleum Act 1969 (as amended) and the Petroleum Profit Tax Act (as amended). These pre-existing petroleum laws are to be read in conformity with the PSC law. In other words, the PSC law prevails in the event of any inconsistency between the provision of the PSC law and any other pre-existing law The PSCs typically, but not always, govern deep-water projects.

Under this arrangement, NNPC enters into an agreement with the International Oil Company (IOC). However, NNPC does not have a contractual financial obligation to aid the exploration and exploitation of oil blocks The IOC singly explores, exploits and bears all the risks and costs of exploiting oil and gas deposits which are covered by its license. In the event that there is no commercial discovery of oil in area covered by the license, the IOC does not recover any cost. However, in the event of a commercial find, the IOC is entitled to recover its investments through “cost oil”. After the payment of royalty oil and tax oil to the government, the parties to the PSC share the “profit oil”.

Crude oil swap deals are used to make sure that there is a constant supply of refined petroleum products to meet the energy demand in the country. NNPC has a mandate to supply the country with petroleum products. Hence, it is allocated 445,000 barrels of crude per day to achieve this. However, because the Nigerian refineries run at very low 18-20% capacity, Nigeria usually has about 222,500 barrels of oil left from its allocation of 445,000 barrels per day NNPC thus allocates the rest of the crude oil to oil trading companies through a “swap arrangement” which mandates the company to supply Nigeria refined petroleum products in exchange for crude oil.

Crude swaps occur in two forms:

a. A trader lifts cargo of NNPC oil for export. Instead of paying cash for the oil, trader brings back refined petroleum products purchased from a 3rd party as in-kind payment. This transaction contractually should occur within 30 days of the date on the oil cargo’s bill of lading; or

b. A foreign refinery lifts, transports and refines cargoes of Nigerian crude, then ships the results back to PPMC. Again, the oil is paid for (mostly) in kind rather than with cash. This should occur within 35days of the date on the oil cargo’s bill of lading.

While this arrangement has proved useful as a stopgap measure to ensure stable inflow of petroleum products in Nigeria, there are reports that show that the swap deals are plagued with corrupt practices principally because there are limited or no information available the swaps The Joint House Committee on Petroleum Resources Upstream Downstream and Justice, in 2014, made a critical observation showing that some trading companies would sometimes lift crude oil without supplying appropriate petroleum products.Also, recent analysis shows that Nigeria loses money in logistics costs from refining the crude abroad and the use of several smaller vessels to deliver the products from the mother vessel that is usually berthed in Lome These unclear issues have led to the advocacy for abolition of swap deals or for better transparency and accountability of the entire process