Nigeria: Oil & Gas Fiscal Regimes in Summary

Introduction

Oil was first discovered in Nigeria in commercial quantities in Oloibiri in 1956. Following independence in 1960, there were intense exploration activities with consequent changes in policies and legislations.

By the late sixties Nigeria was already producing close to 2 million b/d. The increase in importance of petroleum led to the enactment of the Petroleum Act, 1969 that repealed the Mineral Oil Ordinances of 1914.Other legislations and amendments have since been enacted to guide ownership and operating conditions in the Petroleum Industry. Nigeria’s economy has become increasingly dependent on oil with crude oil exports currently accounting for about 90% of the nation’s export revenues.

The Petroleum Act unlike the Mineral oil ordinances introduced major changes, and dealt with issues such as license type, duration, rent and royalties and technology transfer.The 1979 Constitution of the Federal Republic of Nigeria gave the Federal Government exclusive ownership of petroleum and mineral resources, and the right to participate in joint exploration and production (E&P) activities with multinational oil companies operating in the country. The Nigerian National Oil Corporation (NNOC) was established as an instrument for accomplishing government’s policy objectives with respect to oil in 1971. In 1977, the NNOC and the Ministry of Petroleum Resources were merged to form the Nigeria National Petroleum Corporation (NNPC).

 

Type of Oil licenses

The Petroleum Act prescribed the following types of licenses:

Oil Exploration License (OEL): The OEL confers non exclusive rights to explore for petroleum using surface geological methods for a limited period specified by the minister of petroleum. Typically covers 12,959 sq KM.

 Oil Prospecting License (OPL): confers exclusive rights to surface and subsurface exploration for petroleum in a designated area of no more than 2,590 sq Km. An OPL holder has a right to all petroleum operations extracted during the prospecting period subject to paying the relevant taxes and royalties. The duration of the license is 5 years for Joint Venture operators and 10 years for PSCs.

Oil Mining Lease (OML): only holders of an OPL may apply for an OML. The OML grants exclusive right to explore, win, produce, transport and carry away petroleum from a leased area which is limited to half of the OPL. OML is usually for a maximum of 20 years but renewable upon the approval of the grantor. Minimum work obligation includes drilling of wells and commercial discovery of at least 25,000b/d of oil.

Legal frame work for taxation

The current legislation governing the taxation of oil companies includes:

The Petroleum Act,

The Petroleum Profits Tax Act (PPTA)

The Deep Offshore (Production Sharing Contract) Act (DOA)

The NDDC Act

The Companies Income Tax Act

The Capital Gains Act

The Value Added Tax Act

 

The Companies Income Tax Act, Capital Gains Act and Value Added Tax Act are not specific to the Oil industry.

 

The Petroleum Profits Tax Act (PPTA)

The Petroleum Profits Tax Act (PPTA) governs the taxation of companies engaged in petroleum operations.

 The Act defines petroleum operations as:

“the winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried by the company engaged in such operations, and all operations incidental thereto and sale of or any disposal of chargeable oil by or on behalf of the company”.

Generally, companies engaged in oil exploration and production (E&P) are liable to tax under PPTA.

The Companies Income Tax Act

The Companies Income Tax Act (CITA) governs the taxation of all companies other than companies engaged in petroleum operations.

CITA imposes tax upon the profits of any company accruing in, derived from, brought into, or received in Nigeria, in respect of a trade or business.

Generally, companies engaged in providing services to E&P companies are liable to tax under CITA.

 

 

 

Ownership and Control

 

The Federal Government felt it needed to share in the ownership and control of operations in the oil industry leading to the following contractual structure for oil exploration:

 

                    Joint Venture Agreement

            Petroleum Sharing Contract(PSCs)

     Risk Service Contract(RSCs)

The PSCs and RSCs were introduced subsequent to the JVs due to the FG’s inability to meet its cash call obligations to E & P companies under the JV arrangements.

 

Joint Venture (JV) Arrangement

The Oil companies and government (NNPC) operating under this arrangement contribute towards costs in line with their JV shareholding and subsequently share benefits based on their equity participation in an oil block. One of the companies would be the operator of the block.

There are two variants of this type of arrangement, the equity share participation and the non-equity share participation.

 

Petroleum Sharing Contract (PSC)

The NNPC contracts with a company (“the Contractor) to engage in E & P activities, with the contractor recovering its cost only from the crude oil produced therefrom.

 The continuation of the contract and the recovery of costs is contingent on the discovery of oil in commercial quantities from the allocated block. If oil is found in commercial quantities (typically >25,000b/d), the Contractor recoups its investment and cost of operation after deducting royalties, but before payment of petroleum profits tax (PPT). This cost is termed “cost oil”. The profits are shared between the NNPC and the contractor on a predetermined ratio.

The Contractor is allowed to market its cost and profit oil but at the price fixed by the NNPC.

Under a PSC, all qualifying capital expenditure (QCE) imported for E & P activities by the Contractor automatically becomes the property of the FG on arrival into the country.

 Risk Service Contract

This is akin to a “work contract’. Typically, a contractor contracts with the NNPC (and in some cases with a sole risk concession owner) to undertake certain E& P activities on its behalf and is paid for its services from the proceeds. The duration covered by the contract does not usually exceed five years and the contract area would mostly be limited to a single block.

 Attributes of the RSC and how it differs from the PSC

• The Contractor provides risk capital and technical expertise for the petroleum operations.

• The Contractor is reimbursed only from funds derived from the sale of available oil produced, and is remunerated periodically in accordance with the contract terms

• The NNPC or concession holder has the right to market the oil produced and may pay the cost in cash or in kind.

• Typically, the Contractor has the first option to buy back the crude oil produced from the concession.

E.g: NNPC and Agip Energy Nigeria Resources, SOGW/Atlas and Nexen Oilfield Services Nigeria Limited, Afren/Amni.


Olatunji is a Manager (International Tax & Advisory Services) with Saffron Professional Services(Member firm of Geneva Group International), Lagos, Nigeria.

E-mail:Oabdulrazaq@saffron-ng.com,Oabdulrazaq11@gmail.com