September 24, 2012by Olufola Wusu0



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.


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


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 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.

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.


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.



Under this clause IOC is under obligation to properly clean up after operations.



Benefits of Production Sharing Contracts


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.



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.


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

Megathos Law Practice

Olufola Wusu is a Legal Practitioner, Contracts Specialist and Intellectual Property consultant

He can be reached at

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by Olufola Wusu Esq

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Olufola Wusu

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