PROPOSAL FOR THE CREATION AND INCLUSION OF A ‘RISK OIL CLAUSE’ IN THE NIGERIAN PRODUCTION SHARING CONTRACT AS AN INCENTIVE TO ENCOURAGE INVESTORS TO EXPLORE FOR OIL IN NEW FIELDS

Abstract

Production Sharing Contract is one of the ways in which a contractor, International Oil Company or perhaps an Investor as the case may be can acquire the right to explore for oil and produce hydrocarbon products in a particular given area. It is a contract that depicts a share of production between a National Oil Company or a Host Country and the Investor after all the necessary deductions have been made as agreed between them. One of the typical features of the PSC is that the risk of exploration is borne by the Investor and in an event that there is no finding, the Investor gets nothing for its trouble. However, if there is a finding, the Investor will recover its cost of investment in what is termed as the cost oil. It is common knowledge within the oil and gas industry that the more oil is produced, the shorter the life time of the reservoir, hence the need for the investor to continually search for other ways of oil production in order to balance its account record for its shareholders. This study makes a proposal for the creation and inclusion of a ‘risk oil clause’ in the Nigerian production sharing contract as an incentive to encourage investors to explore for oil in new fields.