Lagos — Two to three months ago, I was sent a paper delivered by the Rivers State Governor, Rotimi Amaechi, on the Niger Delta and underdevelopment in the region. I went through it before passing it in on to my colleague and indefatigable News Editor, Yemi Adebowale, asking him to note the section where Amaechi had called for an increase in the derivation to the oil-producing states from 13 per cent to 50 per cent. As I handed it over to him, I suppressed a chuckle.

My amusement over the position of the Rivers governor had nothing to do with its novelty. He was simply restating the position of the Niger Delta since the National Political Reform Conference of 2005. Although the derivation principle is applicable to the sharing of proceeds derivable from natural resources for all states of the federation, it is the oil-producing states that benefit the most at present given that oil accounts for 90 per cent of the nation's revenue base.

Ever since the oil bearing states took their position on increasing the derivation formula from 13 to 50 per cent (not that this would solve their problems), the wave of insecurity and wanton destruction of oil industry infrastructure in the region has grown to unimaginable proportions. What once started out as a worthy cause to agitate against 50 years of underdevelopment in the region, has been taken over by criminals who kidnap innocent people and steal oil for personal gains.

This is worsened by the fact that the political leadership and authorities in the region have directly and indirectly encouraged and funded these criminal elements in their midst while paying lip service to restoring sanity. Self-serving reasons aside, it suits most of the governors of the oil-producing states to keep the criminals in their midst, as their unchecked destruction of the region will keep their agitation on the front burner and help to press home their demands for a higher share of oil revenues.

But if truth be told, all nine states and their myopic leaders have the most to lose by not weeding out the criminals in the region. Through their activities, these criminals have succeeded in shutting in almost a third of Nigeria's oil output in the Niger Delta, translating to over 600,000 barrels per day. A direct fall out of this is that the revenues accruing to the states, be it from the federation account proceeds shared by the three tiers of government monthly, or the "special" 13 per cent accruable to the nine oil-producing states, have suffered a corresponding reduction in direct proportion to the number of barrels that remain shut-in.

The irony is that government officials at the centre are not unaware that less and less money is going to the oil-producing states. As a matter of fact, the Federal Government, Ministry of Petroleum Resources, Nigerian National Petroleum Corporation (NNPC) and international oil companies are all in the know of the dwindling fortunes of the Niger Delta states. But they have all chosen to keep quiet about it because it suits them to do so. Alternatively, a concerted effort is being made to encourage oil exploration in the offshore basin of Nigeria's continental shelf where the IOCs are less susceptible to criminal attacks and disruptions to the their operations.

A perfect example was all the hue and cry that followed the so-called "attack" on Shell's Bonga facility last year. No one has openly admitted, least of all Shell that the attack on its Bonga field, located 120 kilometres offshore Nigeria, was more myth than fact. No actual attack took place on the facility; in fact, not a bolt on the huge drilling platform, crude pipelines, or the floating production storage and offloading vessel was destroyed last year. What Shell did was to pre-emptively shut down production when an identified speed boat came dangerously close to the installation.

Less than 10 days after that incident, production was back on stream without much fan fare. Yet, anyone with an understanding of oil operations would readily attest that production would not have resumed that quickly had the facility been physically attacked in any shape or form. For all we know, the speed boat that found its way within the vicinity of the Bonga oilfield may have simply been filled with a bunch of seafaring misfits who had ventured too far out to sea, and certainly not MEND or similar malcontents that tried to take credit for an attack that never took place.

Prior to 2005 when Shell commenced production from the Bonga oilfield, all of Nigeria's oil of 2.3 to 2.5 million b/d was produced from onshore and shallow oil concessions under joint operating agreements between the Federal Government and IOCs. But with funding shortfalls for joint venture operations and insecurity in the Niger Delta keeping a cap on output from onshore and shallow water ventures, the IOCs began to view the new frontier offshore basin as a better alternative to boost production and meet Nigeria's target of increasing out to 4 million b/d and reserves to 40 billion barrels by 2010. Reserves currently stand at 36 billion barrels.

Today, these deepwater acreages contribute about 890,000 b/d to Nigeria's output at peak production, representing almost 40 per cent of budget production estimates for this year and some 50 per cent of Nigeria's OPEC production quota. The fields are the 250,000 b/d Agbami oilfield operated by Chevron; 185,000 b/d Akpo oilfield operated by Total; 230,000 b/d Erha oil field operated by Exxon/Mobil's offshore subsidiary Esso; and the 225,000 b/d Bonga field operated by Shell's offshore subsidiary Snepco.

All four are governed by production sharing contracts, lie in water depths of over 1,000 metres and are more than 100 kilometres off the Nigerian coast. Given their location, revenues accruing from oil produced in these deep offshore ventures are not subjected to derivation rationing, because the littoral states are not entitled to a share of the proceeds from oil produced in water depths in excess of 200 metres. This was clearly spelt in the law passed in 2005 abolishing the dichotomy between onshore and offshore oil in the application of the principle of derivation for the purposes of allocation of revenue allocation.

But beyond the gradual shift from onshore and shallow water ventures and its adverse impact on revenues to the Niger Delta states, are the PSCs which spell out the technical and fiscal terms for much of the new oil that is being brought on stream. First introduced in 1993, they cover much of the acreages in shallow and deep offshore areas and inland basins (Lake Chad) that were awarded to oil firms after 1993. Unlike the JOAs, they were considered relatively flexible and no financial burden was placed on the Federal Government to fund oil operations under the new contracts.

Oil companies, acting as contractors on behalf of the Federal Government, are therefore expected to take all the risks associated with oil exploration. In the event an operator is unsuccessful, it is entitled to a refund. If on the other hand the operator makes a commercial discovery, the operator is entitled to recover its cost (called "cost oil") which is paid back in the form of oil first before the Federal Government is entitled to a share of the profit ("profit oil").

At the time the first batch of PSCs was signed with the IOCs, they were hailed as the best thing that ever happened to the Nigerian oil and gas sector. The devastated Nigerian economy coupled with low oil prices through most of the 90s had made it increasingly difficult for the country to meet her share of joint venture obligations. The PSCs, thus, provided a way out of the funding quagmire.

However, the PSCs are not without their drawbacks, with the potential of depriving the country of several billions of dollars. The reason being that the first wave of PSCs covering the Bonga, Akpo, Agbami and Erha acreages are skewed in favour of the IOCs. As it stands, there is no way for the Federal Government to transparently determine how much was invested by the IOCs on any of the offshore facilities before it is entitled to a share of the profit after cost recovery.

Although the oil companies could argue that PSCs typically entail the government receiving more revenue as oil prices rise, and that after the period of cost recovery the sharing ratio for the profit oil changes significantly in favour of the government, but it is terms like this that make it compelling for the oil companies to milk the nation for all that they can. Consequently, expenses could be padded to include the most inane things such as entertainment, personal grooming, or valet costs.

Aside from the danger of over-invoicing under the PSCs, the government is not entitled to royalties on oil discoveries for water depths exceeding 1,000 metres, which translates to lost earnings that could have gone to the nation's treasury from Bonga, Agbami, Erha and Akpo. Just as critical are the investment tax credits and allowances available to the oil companies at the rate of 50 per cent of the value of their investment that would most likely be gold platted.

Aware of these loopholes in the PSCs, the government announced plans to renegotiate the contracts in 2007. But nothing has been heard from the Ministry of Petroleum or NNPC ever since. The oil sector reform being pursued by this administration could present the right platform to review unfavourable terms under the PSCs. The oil companies will certainly not like it. But the overriding interest should be that of Nigeria's before any other consideration.

As for the oil-producing states, it's about time they begin to smell the coffee. Even with 100 per cent resource control, instability and lawlessness in the region would deter the most thick-skinned of investors. Natural resources in other parts of the world that are in high demand are used to attract investors not keep them out. Under the prevailing laws of the Federal Republic, it is the oil states that stand to lose the most, not the Nigerian nation.