Joint Venture Arrangements (JV)
A joint venture arrangement is defined as where one or more foreign oil companies enter into agreement with NNPC for joint development of jointly held oil mining licences and facilities. Each partner in the joint venture contributes to the costs and shares the benefits or losses of the operation, in accordance with its proportionate equity interest in the venture. One company is designated as the operator and is responsible for the day-to-day running of the venture. All budgets, work programmes and any contracts awarded must, however, be agreed by all parties.
Joint ventures are the agreements in place for shallow water and onshore exploration and for downstream ventures. Joint ventures have been subject to problems of the NNPC not contributing its share of the costs. This has resulted in exploration and production having to be cut back due to underfunding.
Production Sharing Contracts (PSC)
Because of the difficulties faced by the NNPC to fund joint venture operations and the need to increase Nigeria’s oil reserves, the federal government introduced the Production Sharing Contract. In these cases the NNPC engages a competent contractor to carry out petroleum operations on NNPC’s wholly owned acreage. The contractor undertakes the initial exploration risks and recovers his costs if and when oil is discovered in commercial quantities. If no oil is found, the company receives no compensation.
Under the PSC, the contractor has the full right to only cost oil (ie oil to recoup production cost) and equity oil (oil to guarantee return on investment). He can also dispose of the tax oil (oil to defray tax and royalty obligations) on NNPC’s behalf. The balance of the oil, if any, is shared between the parties (profit oil).
Almost all deepwater exploration is subject to this type of contract.
