Production Sharing Contracts have been extensively used in the oil and gas industry as an alternative means of financing exploration activities and it will become more popular due to the recent ban by the apex bank on further lending to specified companies.

1. As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
CENTRAL BANK OF NIGERIA AND ALTERNATIVE FUNDING ARRANGEMENTS FOR OIL
AND GAS COMPANIES1
The nature of the Oil and Gas industry in Nigeria makes it unattractive for commercial
lenders to agree to finance such projects when they are embarked upon by smaller
companies.
Even when such financing is available, it comes with high interest rate for loan servicing
such that default is not particularly uncommon.
Lending is even more uncommon when the project is purely exploration or import based
because of the inherent risks involved in participating in such activities.
On the 17th of September 2012 the Central Bank through a circular
BSD/DIR/GEN/AMC/05/048 dated September 17, 2012 barred Nigerian Banks from further
giving loans to 113 companies and their directors. Amongst this companies are oil and gas
companies. This has ostensibly closed the window of future credit facilities to these
companies at least for now.
Regardless of the difficulty in securing loans oil and gas exploration projects have
developed alternative means of finance through the use of Drilling Funds, Illustrative
Agreements, Royalty Purchase, Sale Purchase Agreements, Farm Out Agreements and
Production Sharing Contracts.
Production Sharing Contracts have been extensively used in the oil and gas industry as
an alternative means of financing exploration activities and it will become more popular
due to the recent ban by the apex bank on further lending to specified companies.
1
As it appeared in MY_IP Column of This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com

2. As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
Production Sharing Contract (PSC)
In a PSC, the NNPC engages a competent contractor usually an International Oil Company
(IOC) to carry out petroleum operations on NNPC’s wholly held acreage.
Primary Legal Regime regulating Production Sharing Contracts
DEEP OFFSHORE AND INLAND BASIN PRODCUTION SHARING CONTRACTS DECREE NO 9
1999 ACT. CAP. D3. LFN 2004.
This is in addition to the individual contracts signed with the individual companies.
History of production sharing contracts
Indonesia led the way in 1966 through Permina, the state oil company.
Reviewing a PSC
Our analysis is based on publicly available information such as model PSC terms published
in Nigeria and other countries petroleum legislation, websites and in Barrow’s world
petroleum Agreements 2004. It might be wise to use a basic checklist that covers issues
like; who are the Parties to the contract? What exactly, is the subject of the PSC? What is
the preferred Choice of Law?
Are the essential safety clause properly worded? What are the provisions for risk
allocation and indemnity clauses?
CONTRACT REVIEW AND ENVIRONMENTAL PROTECTION
Contract terms determine how much Nigeria as a producing country earns from it natural
resources; and they can strengthen the regulatory power of government to enforce
environmental, health and other standards, where they are not well established…
Basic contract review and negotiation can help stem the tide of pollution and
environmental degradation...by making sure we negotiate and include clauses that enact
stringent conditions for environmental protection.

3. As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
Agreed damages clause for pollution
Insert a clause stipulating the minimum fine for every barrel spilled, especially after a
certain period of grace.
Examples of Key Provisions in a PSC:
Parties to the contract: The parties are usually the International Oil Company (IOC) and
the national oil company (NOC).
Description of contract area: The contract area has to be delineated into blocks and
authorised for Exploration and Production by the Federal Government.
Duration of contract: The PSC stipulates the validity period of the contract. The
International Oil Company (IOC) must ensure that all commercial discoveries are
exploited within the contract period.
Management and Supervision of the operations: The Model PSC provides for a
Management Committee to provide the direction in respect of all matters pertaining to
the petroleum operations.
Funding of the operations:
The (IOC)/contractor in a PSC is responsible for funding the exploration work and bears
exploration risk if no oil or gas is discovered.
National Interest Provisions/ local content:
A PSC usually contains clauses relating to the transfer of technology, training of local
employees and the exercise of a preference for local contractors.

4. As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
Production Sharing: The PSC provides for how the (IOC)/contractor will recover his costs,
the allowable percentage of recovery and how production will be shared.
Tax: The PSC states the taxes that the International Oil Company (IOC)/contractor would
be subjected to.
Stabilisation Clause:
Modern stabilisation clauses tend towards mutual agreement before legislative changes
that affect the contract are carried into effect. Where a state acts contrary to its stability
guarantee in the PSC, such acts tend to justify the award of damages for contractual
breaches.
Settlement of Disputes:
Disputes between the parties arising from the PSC are settled by arbitration by an
independent expert or, in the event there is no reconciliation, by arbitration.
Choice of Law:
Parties are allowed to choose the law that would govern the contracts and any disputes
that may arise.
The umbrella clause might also be useful
This means that the contracting state is under interstate obligation to observe
investment commitments, allowing the International Oil Companies (IOC’S) the right to
resolve breaches of state contracts under international law by an international
arbitration.
ABANDONMENT/DECOMMISSIONING
Under this clause IOC is under obligation to properly clean up after operations.

5. As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
Benefits of Production Sharing Contracts
Control
PSC’S give the host government and its National Oil Company a high degree of control
and participation, (well this is in comparison to the limited control given to a non-
operator under a JOA).
Frees up cash flow
Even after production begins and the NOC is required to finance the project payments
are made from crude oil production rather than cash.
Reliance on the technical expertise of IOC’S and perhaps Tech Transfer
However the Nigerian experience is that we have been unable to achieve technology
transfer through the use of technology transfer clauses.
Government profits…
Government shares potential profits without having to make a direct investment
Demerits of PSC’S; the Nigerian Experience
Artificial Expenses
The IOC may decide to slow down the pace of production, be wasteful or extravagant in
its exploitation especially when the operator knows his expenses would be fully met by
the crude produced.
Mild Sanctions
PSC’S are contracts, thus violating contractual provisions is less costly than violation of a
regulation.

6. As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
As it appeared in This day Lawyer Section, in This day Newspaper (a fore most Nigerian
Newspaper) on the 13th of November 2012.
folawusu@yahoo.com
Minefield of Exceptional Situations
Making contracts into law creates a legal infrastructure of exceptional situations.
Less Exposure for Government
Government generally has less knowledge about potential of the oil field than the oil
company.
Governmental Conflict Of Interest
Government has to balance the desire for higher profits with the enforcement of
environmental and other regulations, and most times it succumbs to the desire for more
profit at the expense of proper enforcement of the law.
Emergence of Social Normative Norms in Oil Pollution?
Lax enforcement of the law in the area of environmental degradation results in host
community hostility targeted at the International Oil Company.
Conclusion
Negotiating a Production Sharing Contract requires legal knowledge, foresight and
common sense. The information contained in this piece should help inform the
Government and International Oil Company (IOC)/contractor as to some possible
alternatives, and possibly foster frank discussion between the Government and the Oil
Company prior to signing any agreements.
Olufola Wusu Esq. © 2012
Commercial Lawyer, Oil and Gas Contracts Specialist and I.P. Consultant