Nigerian oil sector

1. brief facts on the Nigerian oil and
gas sector
 Nigeria’s crude oil generally has a gravity of between 21
degree API and 45 Degree API.
 Its main export crudes are Bonny Light (37) Degree and
Forcados (31 degree).
 About 65% of Nigeria’s oil is above 35 Degree API with a
very low sulphur content

2. proven oil and gas reserves
1)37.2bn bbl as at the end of 2010, (EIA)
2) BP Statistical Energy Survey put the proved natural gas
reserves at 5.29 trillion cubic meters, 2.82% of the world’s
estimated reserve.

3. proven oil and gas reserves
3)Estimates of Nigeria’s undiscovered gas reserves range
from 300 – 600 TCF
 Nigeria has therefore been described largely as a gas
province with some oil.
 The gas quality is high particularly rich in liquids and
low in sulphur
However,
Due to the lack of gas infrastructure, 75% of associated
gas is flared and only about 12% is re-injected

4. division of the industry in Nigeria
In terms of structure, the industry is broadly divided into:
1)Upstream sector,
2)Downstream sector, and
3)Services sector.

5. division of the industry in Nigeria
The mid stream operations are usually included in the
downstream sector.
However, a distinction is now being made between the two
sectors.
 Mid stream covers the processing, storage, marketing and
transportation of crude oil, gas, gas-to Liquids and
liquefied natural gas

6. upstream sector
 This sector is characterized by exploration and production
of crude oil and gas (petroleum operations).
 The income of companies engaged in these activities is
subject to tax under the Petroleum Profits Tax Act, 2004
(PPTA), as amended.

7. upstream sector continued
 The sector is the single most important sector in the
economy,
 Account for over 90% of the country’s exports and about
 80% of the Federal Government (FG’s) revenue.

8. down stream sector
 Downstream Sector is categorized into:
1) Transmission and Conveyance
2)Distribution and Marketing

9. down stream sector
1)Transmission and Conveyance
 This involves the transportation of oil and gas to the
refinery and gas stations.
Transportation through:
 Pipeline network from the wellhead to the refinery or
plant.
 Tankers and purpose-built vessels are also used for this
purpose

10. down stream sector
2)Distribution and Marketing
Distribution involves the transportation of refined
petroleum products from the refineries through pipelines,
coastal vessels, road trucks, rail wagon etc to the
storage/sale depots

11. down stream sector
Supply of Petroleum products in Nigeria:
 Petroleum products are supplied in Nigeria principally
through the Petroleum Product Marketing Company’s
(PPMC)
 PPMC uses pipeline system, which links the refineries to
the about 21 regional storage/sale depots

12. oil service sector
 Oil Service Sector
 The classification of services under this sector is
summarized in the table below

13. oil production areas in Nigeria
Crude Oil is currently produced from three different basins:
1)The onshore Anambra
2)The offshore Benin/ Dahomey (deepwater and ultra-
deepwater)
3)The Niger Delta (shallow and deep offshore basins). The
Niger Delta and Benin basins are known to be the richest
basins and hold the vast majority

14. Types of fiscal arrangement in
Nigeria’s upstream sector
 The major forms of oil and gas arrangements in Nigeria’s
upstream sector are as follows:
1)Joint Venture (JV)
2)Production Sharing Contracts (PSCs)
3)Service Contract (SC)
4)Marginal Field Concession (MFC)

15. joint venture
 This is a standard agreement between the national oil
company Nigerian National Petroleum Corporation
(NNPC) and a multinational oil company (MOC).
 Under this arrangement, both NNPC and the MOC
contribute to funding oil operations in the proportion
of their JV equity holdings, and generally receive
crude oil produced in the same ratio

16. joint venture continued
Companies engaged in JV arrangement are
 Assessed to tax under the PPTA at the rate of 65.75% of
chargeable profits for the first five years of operation
(when the company is yet to fully recover its capitalized
pre-production cost), and
 85% thereafter.

17. joint venture continued
 The tax payable is modified by the provisions of the
Memorandum of Understanding (MOU) between the
parties.
 The MOU seeks to guarantee certain profit margins to the
MOC, when crude oil market price falls below certain
thresholds.

18. JV cont’nd
 Major operators in the JVs with the NNPC are Shell,
ExxonMobil, ChevronTexaco, Total Elf and Agip
 It is however important to note that the JV model is
currently being phased out in the oil and gas industry,
 This is due to mainly to the inability of the NNPC to fund
its share of JV costs.

19. production sharing contracts
 PSC model started in 1993 as the preferred petroleum
arrangement with MOCs.
 NNPC engages the MOC or the indigenous company as
Contractor to conduct petroleum operations on behalf of
itself and NNPC.

20. production sharing contracts
continued
 The Contractor takes on the financing risk. If the
exploration is successful, the Contractor is entitled to
recover costs on commencement of commercial
production
 If the operation is not successful, the Contractor bears the
loss

21. production sharing contracts
continued
 The first set of PSCs was signed in 1993
 Followed by those executed in 2001, after the 2000
licensing rounds.
 Several other models of PSCs have been signed since
then.
 The principles in the PSCs remain largely the same,
except for variation in the profit oil sharing formula and
cost oil recovery cap.

22. production sharing contracts
continued
 The PPT rate applicable to PSC companies is 50% of
chargeable profits for the contract area

23. service contracts continued
 Under this model, the Contractor undertakes exploration,
development and production activities for, and on behalf
of, NNPC or the concession holder, at its own risk.
 The concession ownership remains entirely with the
NNPC/ holder, and the Contractor has no title to the oil
produced

24. Service contracts continued
 The Contractor is reimbursed cost incurred only from
proceeds of oil sold and is paid periodical remuneration in
accordance with the formulae stipulated in the contract.
 The Contractor has the first option to buy back the crude
oil produced from the concession

25. Service contracts continued
 The Contractor is assessed to tax on its service fees under
the Companies Income Tax Act as amended (CITA) at
30%;
 while the concession holder (or the NNPC) is assessed to
tax under the Marginal Field Concession

26. marginal field
 The Federal Government (FG), in furtherance of its
Nigerian Content agenda, encourages MOCs to surrender
their marginal fields for assignment to indigenous
concession holders.
 To provide special incentives to marginal field operators,
the FG promulgated the Petroleum (Amendment) Act No.
23 and the Marginal Field Operations (Fiscal Regime)
Regulations 2005 on the development

27. marginal field continued
 This is defined as any field that has reserves booked and
reported annually to the DPR and has remained
unproduced for a period of over 10 years.

28. government objectives for
introducing marginal field
(I) Expand the scope of participation by small (indigenous)
players in Nigeria’s oil industry.
(ii) Increase the country’s oil and gas reserves base.
(iii) Provide opportunity for portfolio rationalization.
(iv) Enhance employment opportunity

29. Award of oil and Gas Exploration
Licenses
 Oil license are granted to companies by direct negotiation
and
 Discretionary allocation by the Federal Government of
Nigeria (FGN). This approach was prevalent prior to the
return of the country to democratic governance in 1999

30. Award of oil and Gas Exploration
License
 To facilitate more transparency and increased revenue
from award of oil licenses, the FGN has competitive
tenders as the preferred mode for the award.
 The Department of Petroleum Resources (DPR), under the
Ministry of Petroleum Resources, is responsible for
organizing oil bid rounds.
 The last bid round was in 2007.

31. Regulatory Agencies of oil
sector in Nigeria
 Ministry of Petroleum Resources
 Nigeria National Petroleum Corporation (NNPC)
 The National Petroleum Investment Management
Services (NAPIMS)
 Department of Petroleum Resources (DPR)
 Nigerian Investment Promotion Commission
(NIPC)
 National Maritime Administration and Safety
Agency (NIMASA)

32. Regulatory Agencies of oil sector in
Nigeria
 Nigerian Content Development & Monitoring Board
(NCDMB)
 Nigeria Customs Service Board (NCSB)

33. Regulatory Agencies of oil sector in
Nigeria
The key regulatory agencies are:
1)Ministry of Petroleum Resources
 policy formulation and provides the general direction to
other agencies in the sector for the exploration and
production of both oil and gas resources.
 oversees all other sectors including downstream,
midstream and oil services. The Minister of Petroleum
Resources supervises the Ministry.

34. Regulatory Agencies of oil sector in
Nigeria
2) Nigeria National Petroleum Corporation
(NNPC)
 The NNPC’s primary function is to oversee the
regulation of the oil industry, with secondary
responsibilities for upstream and downstream
development.
 The National Petroleum Investment
Management Services (NAPIMS), a subsidiary
of NNPC, supervises FGN’s investments in the
oil industry.

35. Regulatory Agencies of oil sector in
Nigeria
3)Department of Petroleum Resources (DPR)
 Ensuring compliance with the terms governing the award of oil
licenses to companies engaged in petroleum operations.
 Monitors the oil companies’ operations to ensure consistency
with international industry standards and practices.
 Issues the annual permit (DPR Permit) to the companies,
without which they would be unable to operate in the industry.

36. Regulatory Agencies of oil sector in
Nigeria
4)Nigerian Investment Promotion Commission (NIPC)
 Registers all foreign investments in Nigeria.
 liaison between investors and government ministries,
departments, institutional lenders and other institutions
concerned with investments.

37. Regulatory Agencies of oil
sector in Nigeria
4)National Maritime Administration and Safety Agency
(NIMASA)
 Established by the NIMASAAct
 Monitor and promote the development of indigenous and
commercial shipping in international and costal shipping
trade
 Regulate and promote maritime safety, security and
marine labor amongst other duties.

38. Regulatory Agencies of oil
sector in Nigeria
5)Nigerian Content Development & Monitoring Board
(NCDMB)
 Implement the provisions of the Nigerian Oil and Gas
Industry Content Development Act
 supervising, coordinating, administering, monitoring and
managing the development of Nigerian Content in the
industry.

39. Some petroleum legislation in
Nigeria
 The Petroleum Act
 Petroleum Profits Tax Act (PPTA)
 Deep Offshore and Inland Basin Production Sharing
Contracts Act (DOIBPSCA)
 Tertiary Education Trust Fund Act (TETFA)
 Companies Income Tax Act (CITA)
ETC

40. Regulatory Petroleum Act
 This is the main legislation governing matters relating to
petroleum exploration and production in Nigeria. The Act
amongst others:
1)Vests entire ownership and control of all petroleum in,
under or upon any lands (including underwater) in the
State.

41. Regulatory Petroleum Act
2)Governs the issuance of oil exploration licenses, oil
prospecting licenses and oil mining leases.
3)Provides the basis for the issuance of DPR permit, along
service lines applied for (renewable annually).

42. Regulatory Petroleum profit tax
act(PPTA)
 Companies engaged in petroleum operation
are subject to tax under the PPTA.
 Their income is liable to tax at 85% (subject
to the incentives contained in the MOU as
relevant)
 65.75% within the first five years of
operation during which they are recovering
their capitalized preproduction expenditure

43. (Regulatory Petroleum profit tax
act(PPTA)
However, for petroleum companies operating
under PSC terms, the applicable PPT rate is
50% for the contract area

44. companies income Tax Act(CITA)
 Companies operating in all other segments of the oil and
gas sector are assessed to CIT at 30% of taxable profits
under CITA. Also, non-crude oil related income / profits
earned by petroleum companies are liable to CITA,
separately.

45. Tertiary Education Trust Fund Act
(TETFA)
 The Tertiary Education Trust Fund Act, 2011 requires
every company registered in Nigeria to pay 2% of its
assessable profit as Tertiary Education Tax (TET).
However, petroleum companies are entitled to a tax
deduction on the TET payable. Non-Nigerian
companies are not liable to pay the tax

46. Royalties
 The Petroleum Act (1969) requires the holder of an OPL
or an OML, to pay royalties to the FGN as soon as
production starts.

47. Royalties cont’nd
 This is usually in the form of monthly cash payments at an
agreed percentage of the quantity of crude oil/gas
produced, after making adjustments for treatment,
handling and related expenses.

48. Royalties Contnd
 The royalty rates currently applicable are as follows:
1. on-shore production 20%
2 offshore production
 up to 100 meters water depth 18½%
 100 to 200 meters water depth 162/3%
 In areas from 201 to 500 metre water depth 12%
 In areas from 501 to 800 metre water depth 8%

49. Niger Delta Development
Commission Levy
 The Niger Delta Development Commission Act requires
oil producing companies operating in Nigeria to pay an
annual contribution of 3% of their total annual budget to
the Commission.

50. NIMASAAct
 The Coastal and Inland Shipping (Cabotage) Act, No. 5 of
2003 regulates cabotage vessels operating within Nigerian
inland waters, coastal waters, Exclusive Economic Zone
and Islands within Nigeria.
 The fee to be paid into the fund shall be 2% of the contract
sum performed by any vessels engaged in coastal trade.

51. Other laws
 Capital Gains Tax (CGT)
 Value Added Tax Act (VAT Act)
 Deep Offshore and Inland Basin Production Sharing
Contracts Act DOIBPSCA

52. Read on the other laws