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AN APPRAISAL OF THE FISCAL IMPLICATION OF OIL & GAS ASSET DISPOSAL IN NIGERIA*
There has been a surge in oil and gas assets divestment and acquisition in Nigeria in recent times
by the traditional and mostly established and experienced multinational oil companies to new
entrants who are mainly foreign independents, local and smaller companies. This development
has some advantages which include creating opportunities for local players to emerge,
development of technical competence of local companies and their ability to compete in the
international arena. The banking, and legal services sectors are also being exposed to asset
finance and documentation issues. Revenue is also being generated to the government through
tax and consent fees. While the advantages derivable from this trend are commendable, it is
expedient to examine the fiscal and regulatory treatment of such transactions.
Asset purchase could take any of the following forms with the distinguishing factor being the type
of consideration payable for each of them. These are:
 Monetary consideration where the buyer pays cash at completion;
 Farm-in where the consideration payable by the buyer is the performance of an obligation
relating to the field. This could take the form of actually paying for the performance of the
obligation or re-imbursement of the seller’s costs of the operator performing the
obligation.
 Earn-in this is another form of farm-in but refers specifically to a situation where the farm-
in relates to performance of a work obligation and where it is unlikely that consent to a
farm-out would be granted;
 Asset swap/exchange – this involves a situation where some or all of the consideration to
be paid by the buyer is the transfer of some other oil and gas interest to the seller;
 Farm-out is another form of asset divestment which according to Regulation 17 (4) of the
Oil Exploration, Oil Prospecting Licences and Oil Mining Leases Regulations made
pursuant to Section 2 (3) of the Petroleum Act is “an agreement between the holder of an
oil mining lease and a third party which permits the third party to explore, prospect, win,
work and carry away any petroleum encountered in a specified area during the validity of

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the lease.” Farm-out is therefore a recognised way to dispose oil and gas acreage under
our legal system.
The fiscal implication on any of the above depends on whether it is perceived as alienation or
assignment of an interest in a licence. The known tax payable upon a successful asset disposal
deal is capital gains tax accruing from the disposal under the Capital Gains Tax Act LFN, 2004 at
the rate of 10% - Section 2. The amount of capital gains is calculated after deducting expenses
associated with the disposal of the assets including deductions relating to any income, or profits
or gains or losses of the person making the disposal for the purposes of the Personal Income Tax
Act, the Companies Income Tax Act or the Petroleum Profits Tax Act. However, any money that
has been taken into account as balancing charge under the Personal Income Tax Act, the
Companies Income Tax Act or the Petroleum Profits Tax Act shall not be excluded as part of the
consideration for the disposal of the asset. A company may claim rollover relief and, therefore,
postpone the tax liability if the proceeds from the disposal are used to acquire an asset similar in
nature to the one disposed.
In addition to capital gains tax, asset disposal attracts stamp duty under the Stamp Duties Act
which requires instruments such as deeds of assignment, etc to be duty chargeable. An asset
purchase would allow the buyer to take the benefit of existing capital allowances under the
Petroleum Profit Tax Act Cap. P13 LFN, 2004 in respect of the assets depending on the contractual
and fiscal nature of the field acquired. On the other hand, sale of shares does not attract capital
gains tax pursuant to Section 30 of the Capital Gains Tax Act. A nominal stamp duty applies to the
share transfer documents. This constitutes an advantage to the seller but the buyer of the shares
would assume any Company Tax losses of the company being acquired and other historical
liabilities.
It is not clearly stated under the current Petroleum Act whether sale of controlling shares in a
company occasioning change in control of the company including its assets requires the consent
of the Petroleum Minister. Following the case of Moni PuloLimited V. BrassExploration Unlimited
& Ors (2012) 6 CLRN 153, the Department of Petroleum Resources (DPR) has now clarified the
legal and regulatory treatment of assignment of shares of an Oil and Gas Company and other
related transactions as regards oil and Gas assets through its Guidelines and Procedures for
Obtaining Minister’s Consent to the Assignment of Interest in Oil and Gas Assets issued on August
11, 2014 and made pursuant to Paragraphs 14-16 of the First Schedule to the Petroleum Act and
Section 17 (5)(d) of the Oil Pipelines Act (the Consent Guidelines). The Consent Guidelines states
what constitutes an Assignment in the following terms:
“Assignment as used herein involves the transfer of a licence, lease or marginal field or an interest,
power or right therein by any company with equity, participating, contractual or working interest in
the said OPL, OML or marginal field in Nigeria, through merger, acquisition, take-over, divestment
or any such transaction that may alter the ownership, equity , rights or interest of the assigning
company in question, not minding the nature of upstream arrangement that the assigning
company may be involved in, including but not limited to Joint Venture (JV), Production Sharing
Contract (PSC), Service Contract, Sole Risk (SR) or Marginal Fields operation”

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The Consent Guidelines further listed instances of assignment to include among others exchange
or transfer of Shares; private or public listing of a part or of the whole of the shares of a Company
which holds interest in an oil block in a Stock Exchange anywhere in the World. The Consent
Guidelines has not only ensured certainty as to the requirement of the Minister’s Consent to such
transaction but has gone ahead to clarify regulatory treatment of similar transactions including
private and public listing of Company’s shares anywhere in the World.
It should be noted that the Consent Guidelines do not clearly specify the fiscal treatment of such
acquisition of shares. Will the seller be subject to Capital Gains Tax or will the seller be merely
subject to payment of stamp duty on the share transfer document under the Stamp Duties Act? It
would appear that share disposal though regarded as an assignment will continue to attract
stamp duty as against capital gains tax. The Consent Guidelines are at best a subsidiary legislation
and cannot override the specific provisions of the Capital Gains Act excluding share and stock
transactions from the Act. The tax implication of the Consent Guidelines on acquisition of shares
therefore is that such a transaction will now be subject to payment of the prescribed fee and such
other fee or premium for the Petroleum Minister’s Consent pursuant to paragraphs 14 and 15 of
the First Schedule to the Petroleum Act.
There has been an issue as to whether or not oil and gas asset disposal is subject to Value Added
Tax Act. The Federal High Court in the case of CNOOC Exploration and Production Nigeria
Limited v. Attorney-General of the Federation, Federal Inland Revenue Service and South Atlantic
Petroleum Limited (FHC/ABJ/CS/605/07) appears to have resolved this issue when it held that
Value Added Tax (VAT) does not apply in cases of assignment of an oil and gas asset.
In conclusion, tghe clarification by the DPR regarding consent requirement for share transactions
is a step in the right direction as it has created certainty in the system. A new entrant who wants to
acquire assets through the shares acquisition process will now know in advance that the
Petroleum Minister’s consent would be needed. One of the major challenges for this additional
regulatory requirement for consent is the delay inherent in obtaining Petroleum Minister’s
Consent. It would be expedient for the Regulators to further provide by way of Guidelines,
timelines and steps which will guide the Petroleum Minister to expeditiously grant or decline
his/her consent. This will further engender transparency, confidence and certainty in the oil and
gas asset disposal process.
*Donald Ibebuike is a Partner in Foundation Chambers.