Nigeria loses oil revenue in repealing contracts with oil firms

Nov 13, 2008 01:00 AM

The Federal Government is losing multi-billion dollars of oil revenue, due to its failure to repeal the Memorandum of Understanding (MoU) it signed with oil companies in 1986.
The agreement was signed to encourage oil companies to embark on exploratory and production activities in 1986, when prices of crude oil drop to below $ 10 per barrel.

It was gathered that due to the falling prices of crude oil at the international market, oil companies operating in the country showed less commitment in exploring for hydrocarbon, in view of inadequate returns on investment. To encourage these companies without revising the Petroleum Act of 1969, the government signed the MoU, which gave the companies three incentives.
The first was what an industry source called "capping of government's take" from crude oil sales. This incentive also limited government tax on crude production.
The second incentive allowed the companies to sell crude oil at less than the actual price at the international market,while the third incentive was also in form of tax relief.

Government and the companies also reached an agreement to repeal the MoU, if the price of crude oil came up to $ 30 per barrel. However, it was gathered that when the price of crude oil came up to $ 30 per barrel around 2003/2004, the companies continued to enjoy the incentives contained in the MoU.
A study conducted by Office of the Special Adviser to former Minister of Finance, Dr Ngozi Okonjo-Iweala, and the Nigerian Extractive Industry Transparency Initiative (NEITI), made the companies to refund $ 350 mm, being the financial benefits they enjoyed under the first incentive in 2004.

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