A GUIDE TO THE TAXATION

OF OIL OPERATIONS

January 2007
Content 5. Taxation of Oil Operations

1. The Nigerian Oil Industry 5.1 Changes in Licence and Petroleum Interests
5.1.1 Abandonment and Restoration
1.1 Overview of the Nigerian Oil Industry 5.1.2 Participation
1.2 Regulatory Agencies 5.1.3 Unitisation
1.3 Forms of Petroleum Contracts 5.1.4 Carry Agreements
5.1.5 Underliftings and Overliftings
2. Petroleum Act and subsidiary legislation made thereunder 5.1.6 Assignment
5.1.7 Farmout Agreements
2.1 Mineral Oils (Safety) Regulations 5.1.8 Production Payments
2.2 Petroleum Regulations 5.2 Transfer Pricing / Intercompany Transactions
2.3 Petroleum (Drilling and Production) Regulations 5.3 Taxation of Marginal Fields
2.4 Petroleum Refining Regulations
2.5 Crude Oil (Transportation and Shipment) Regulations 6. Review of proposed amendments to the PPT Act
2.6 Petroleum Profits Tax Act (PPTA)
2.7 Deep Offshore and Inland Basin Production Sharing 7. Local Content
Contracts Act
2.8 Oil and Gas Export Free Zone Act 7.1 Local Content Policy
2.9 Niger Delta Development Commission (NDDC) Act 7.2 Measurement of Local Content under the Report
7.3 Categorisation of Service Companies
3. Petroleum Profit Tax (PPT) Act 2004 7.4 Value Matrix
7.5 Core Compensation and Job Categorisation
3.1 Introduction 7.6 Policy Thrust
3.2 Administration of PPT 7.7 Regulatory Initiatives
3.3 Imposition of PPT and Chargeable Persons 7.8 Potential Impact on Foreign Oil Service Companies
3.4 Computation of PPT
3.5 Compliance Procedures 8. Memorandum of Understanding (MOU)
3.6 Assessments
3.7 Objections/Appeal Procedures 8.1 Computation MOU Credit under the 2000 MOU
3.8 Offences and Penalties 8.2 Computation Tax Reference Price (TRP)
3.9 Deep Offshore Inland Basin Production Sharing Contract 8.3 Computation of Applicable Guaranteed Notional Margin
(GNM)
4. Royalties 8.4 Summary of 2000 MOU

4.1 Royalty Rates 9 The Nigerian Natural Gas Industry

4.2 Computation of Royalty Payable
9.1 Upstream Gas Operations
9.2 Downstream Gas Operations

2
10 Review of the proposed Gas Fiscal Reform Bill

10.1 Upstream Gas Operation

10.2 Downstream Gas Operation

11 Oil and Gas Free Zones

11.1 Review of Oil & Gas Export Free Zone Act No. 8, 2004
11.2 Procedural Incentives to Companies Resident in the
Zone
11.3 List of free trade zones

12 Niger-Delta Development Commission (NDDC)

12.1 Major Functions of the NDDC

12.2 Evaluation of the provision vis-à-vis E&P Company’s
activities

13. Organization of Petroleum Exporting Countries (OPEC)

13.1 Overview of OPEC

13.2 Member States
13.3 Operations of OPEC
13.4 Implications of Quota Restriction
13.5 OPEC Price Band

Glossary

3

1. THE NIGERIAN OIL INDUSTRY
1.1 Overview of the Nigerian Oil Industry
Oil was first discovered in Nigeria in commercial quantities by Shell-BP
at Oloibiri (Yenagoa Province, now Bayelsa State) in 1956. At that time,
the ownership of mineral resources in Nigeria resided with the British
(the Nigerian colonial masters) and was regulated by the Mineral Oil
Ordinances of 1914. However, following from Nigeria’s independence in
1960, the government began to exercise greater control of this industry
which was fast becoming the mainstay of the country’s economy. The
Mineral Oil Ordinances of 1914 was therefore repealed and the Petroleum
Act 1959 (the Act) was enacted. The Act introduced major changes,
especially in matters such as duration, rent and royalties, technology
transfer, etc. Also, by virtue of the Act and the 1979 Constitution of the
Federal Republic of Nigeria, the Federal Government (FG) acquired
exclusive ownership of petroleum and mineral resources, and the right to
exploit and participate in joint exploration and production (E&P)
activities with multinational oil companies operating in the country.
In 1971, Nigeria joined the Oil Producing and Exporting Countries
(OPEC) as its 11th member. In the same year, Nigerian National Oil
Corporation (NNOC) was established as an instrument for accomplishing
government’s policy objectives with respect to oil. The NNOC (which
operated concurrently with the Ministry of Petroleum Resources) was
empowered to enter into new beneficial oil arrangements with interested
companies in Nigeria, on behalf of the FG. However, in 1977, the FG
thought that a higher standard of goals and policies set for the oil industry
was best achieved by a single entity. The NNOC and the Ministry of
Petroleum Resources were therefore merged to form what is known today
as the Nigeria National Petroleum Corporation (NNPC).
1.1.1 Upstream Sector of the Oil and Gas Industry
This involves all the activities carried out in the exploration,
development and production of crude oil from its natural state.
It is essentially referred to as “petroleum operation”, and the
companies engaged in these activities are called Exploration and
Production (E & P) companies. The income of these companies
is subject to tax under the Petroleum Profits Tax Act (PPTA),
2004, as amended.
The distinguishing features of this sector include:
 capital intensive operations;
 high business risks;
 unconventional accounting methods; and
 complex tax reporting/ returns system.
a. Oilfield Formation
Most geologists today agree that crude oil was formed over
millions of years ago from the remains of tiny aquatic plants
and animals that have been exposed to the combined effects of
time and temperature. Oil is therefore a product of the
degradation of organic matter remains of plants and animals.
Sulphur rich fossil organic matter is known to form oil sooner
than other organic matter because of the weaker atomic
carbon-sulphur bonds compared with the stronger carbon-
oxygen bonds present in other organic matter.
In Nigeria, crude oil exists onshore below the ground at a
depth of not more than 200 meters, while offshore at a depth
of about 200 meters water depth.
1.1.2 Activities in the Upstream Sector
The activities in the upstream sector can be grouped into the
following:
- Mineral Right Acquisition
- Exploration
- Drilling and Development
- Production
4
  Mineral Right Acquisition
With the abrogation of the Mineral Oil Ordinances of 1914
and the enactment of the Petroleum Act, 1969, (now
Petroleum Act, 2004 edition Laws of the Federation of
Nigeria), all mineral rights were vested in the Federal
Government. The Federal Government therefore acquired
exclusive ownership of petroleum and mineral resources and
the right to exploit and participate in joint exploration and
production (E&P) activities with multi-national oil companies
operating in the country. Concessions are issued to E&P
companies in form of oil licences and leases.
The Petroleum Act provides for the grant of three forms of
licences:
(i) Oil Exploration Licence (OEL)
This is a licence granted to a company to explore for
Petroleum. OEL is not exclusive to the licencee. Thus,
another oil exploration grant may be made to another licencee
to cover the same area.
(ii) Oil Prospecting Licence (OPL)
The Act defines OPL as a “licence granted to a
company, under the Petroleum Act, for the purpose of
winning petroleum or any assignment of such licence”.
The area covered by the OPL must be compact, not
being an area in excess of 2,590 square kilometers
(1000 square miles) 1 . The duration is as determined by
the grantor, but in no case shall it be in excess of 5
years for JV companies and 10 years for Production
Sharing Contract (PSC) companies.
The OPL gives the licencee the exclusive right to
explore and prospect for petroleum within the area of
grant. The licencee is also entitled to carry away and
1 2
The 2005 Licensing Bid Round guidelines reduced the size of an OPL to 1,250 square kilometers
dispose of the petroleum won and saved during its
prospecting operations.
(iii) Oil Mining Lease (OML)
This is a lease granted to a company under the Petroleum
Act for the purpose of winning petroleum or any
assignment of such lease.
The area covered by an OML must be compact and must
not exceed 1,295 square kilometers. The life of an OML
is usually for a maximum of 20 years but renewable upon
the approval of the grantor.
 Exploration and Drilling
Exploration activities involve identifying areas that may
warrant evaluation and evaluating those areas considered to
have petroleum prospects. This could be achieved through
seismic surveys and interpreting data, as well as drilling
exploratory wells. The process is capital intensive and the
chances that oil will be found at the end of the exercise may be
low and somewhat uncertain. However, with the advent of
state of the art exploration techniques, the average exploration
success rate has moved from a cumulative of 11% to currently
over 60%. 2
The principal costs incurred at this stage include:
(i) Cost of geological and geophysical studies, rights of
access to properties to conduct those studies and
salaries and other expenses of geologists, geophysical
crews and others conducting those studies.
(ii) Costs of carrying and retaining undeveloped properties,
such as rentals, legal costs for title deeds, stamp duties
and the maintenance of lease records.
Discover a new Nigeria- Publication of the Shell Petroleum Development Company
5
 1.1.3 Crude Oil Grades
(iii) Dryhole contributions and bottomhole contributions.
Crude oil is one of the main end products of petroleum exploration.
(iv) Costs of drilling and equipping exploratory wells. It is a mixture of thousands of different hydrocarbons. They are
classified according to their molecular weight. Therefore, there are
(v) Other associated costs such as resettlement of local as many different grades of crude oil, as there are oil reservoirs.
communities, compensation for economic crops,
surface rights and road building. Nigeria’s crude types have been known to be light and low in sulphur
therefore have very high yield of gasoline. Due to these desirable
 Development characteristics, Nigeria’s crude oil grades are rated one of the best in
the world. Crude oil is categorized by its American Petroleum
This involves the development of oil wells after hydrocarbons Institute’s (API) gravity, which measures the specific gravity, of the
have been found in commercial quantities. crude oil relative to the density of water.

Banks are usually able to assist with funds at the development Nigeria’s main export blends 3 are: Bonny Light and Forcados
stage. The funds are used to drill development wells and among others and their characteristics are as follows (together with a
develop the oil field including construction of flow stations comparison with other countries’ export blend):
and pipelines. If evaluation during drilling strongly indicates
the presence of oil, tests may be carried out to determine the Crude Oil Grades
productibility of the well. Further wells known as “appraisal
wells” may be necessary to determine the extent of the Crude Type Specify-API Gravity Sulphur
reservoir and the flow rate of oil and gas. Bonny Light 0.8398 – 370 API 0.14
Qua Iboe 0.8398 – 370 API 0.14
 Production Escravos 0.8448 – 360 API 0.14
Brass River 0.8063 – 440 API 0.07
This involves the lifting of oil and gas to the surface, Bonny Medium 0.8984 – 260 API 0.28
gathering, treating, field processing and storage. It also Forcados 0.8708 – 310 API 0.2
involves the maintenance of facilities and monitoring of the Algeria
production of hydrocarbons. Saharan Blend 440 API 0.1

Examples of production cost include: Angola

Soyo 340 API 0.2
(i) costs of personnel engaged in the operation of wells and Tukula 320 API 0.2
related equipment and facilities; Egypt
(ii) repairs and maintenance of floating, production, storage Suez Blend 320 API 1.5
and offloading (FPSO) platform; Gabon
(iii) materials, supplies, fuel consumed and services utilised Mandji 300 API 1.1
in such operations and royalties.

3
Source: Understanding the Nigerian Oil Industry NNPC publication 1986

6

1.1.4 Major operators
Until recently, multinational companies (MC) dominated the
upstream economy. These companies operate under joint venture
arrangements and production sharing contracts with the Federal
Government. The MCs, which constitute the major player include:
Shell Petroleum Development Company, Exxon Mobil, Chevron,
TotalfinaElf and Nigerian Agip Oil Company
However, in recent times, some indigenous E&P companies have
sprung up. Under the indigenous arrangement, the Federal
Government is usually not involved but reserves the right to
participate when it deems necessary. Most indigenous companies
operate in conjunction with foreign technical partners, who in most
cases are responsible for providing the funds and expertise
required. Some of these indigenous operators include
Consolidated Oil, Moni Pulo Limited, Solgas Nigeria Limited and
Express Petroleum and Gas Company, amongst others.
1.1.5 Downstream Sector of the Industry
All operations involved in the conversion of crude oil produced
into usable forms e.g. Premium Motor Spirit (PMS), kerosene, etc
are generally referred to as downstream operations. It also
includes activities such as pipelines and storage, petrochemical
sales and services, marketing and refinery activities. Companies
engaged in these activities are assessed to tax under the Companies
Income Tax Act (CITA), 2004, at the rate of 30% of assessable
profits.
The principal regulators in the downstream sector include the
Petroleum Inspectorate of the NNPC, the Department of Petroleum
Resources and the Pipeline and Product Marketing Company
Limited (PPMC).
The key activities in the downstream sector are discussed below:
(i) Transmission and Conveyance
This involves the transportation of oil and gas to the refinery and
gas stations. The pipelines usually run from the wellhead to the
refinery or plant. Tankers and purpose built vessels are also used
for this purpose.
(ii) Refining
Refining is simply the breaking down of the hydrocarbon mixture
of crude oil into useful petroleum products. This is done through
distillation, cracking, reforming and extraction process.
The products of the refining process include: PMS, Household
Kerosene (HHK), Aviation Turbine Kerosene (ATK), Automotive
Gas Oil (AGO), known as diesel etc.
Nigeria has four refineries, two situated in Port Harcourt and one
each in Warri and Kaduna. The refineries are all wholly owned by
the NNPC, however the Government intends to privatize the
refineries and has called for investors to acquire the refineries. The
number of refineries is however expected to increase soon, with
the government’s effort at liberalizing the sector and encouraging
private refineries. Though licences have been granted to a number
of petroleum refinery companies, and State Governments, none has
yet become operational. The capacity utilisation of the existing
refineries is however, low, necessitating the importation of refined
products from outside Nigeria to meet growing demand for
petroleum products.
(iii) Distribution and Marketing
Distribution and Marketing of refined petroleum products are
complementary activities. Distribution involves the transpiration
of refined petroleum products from the refineries through
pipelines, coastal vessels, road trucks, rail wagon etc to the
storage/sale depots.
7
 Petroleum products are supplied in Nigeria principally through
PPMC’s pipelines system, which links the refineries to the 21
regional storage/sale depots.
The five pipelines currently in use by the PPMC are referred to as
2A, 2B, 2C, 2D, and 2E 4 systems.
Oil marketing on the other hand, involves the procurement of
refined petroleum products by marketers and the selling of
products through a network of stations, peddling trucks and vessels
(for sales on land and water). Marketers lift products from PPMC
depots and deliver to their various retail outlets. They also import
refined products from outside of Nigeria to meet the demands of
their customers. There are however, guidelines issued by the
Department of Petroleum Resources on the importation of products
to prevent importation of substandard products.
The Federal Government currently regulates the prices of refined
products. The Petroleum Product Pricing Regulatory Committee
(PPRC) is responsible for fixing the prices of petroleum products.
1.1.6 Major Operators
There are two groups of operators (marketers in the down stream
sector namely: the “Majors” and the “independent” marketers.
(a) The Majors
The Major marketers dominate the marketing of petroleum
products in Nigeria. They account for about 64% 5 of the total
petroleum products sold. These companies include: Agip Nigeria
Plc, Mobil Oil Nigeria Plc, Chevron Oil Nigeria Plc, and TotalFina
Elf Nigeria Plc.
The Majors operate under a trade association called the Major Oil
Marketer Association of Nigeria (MOMAN). They have an edge
over the independent marketers in the areas of capital base,
4
Source: ADCG Report 1996
5
Source: Agusto Report, 2002
management, range of products, technical assistance from foreign
partners and experience.
(b) Independent Marketers (IM)
This group of marketers consists of indigenous petroleum
companies. They operate under the trade name Independent
Marketers Association of Nigeria (IPMAN). The first sets of
licences were issued in 1980 and today we have over 2000
companies in this group.
Though companies in this group are no threat to the Majors in
terms of size, the group is gradually gaining market share in the
industry. Some of the well known IMs include: Zenon, Oando,
Honeywell Oil, Fowobi etc.
1.1.7 Oil Service
E&P companies worldwide depend greatly on oil service
companies for carrying out almost all aspects of field operations.
This is because, in most cases, these E&P companies do not have
the technical and engineering know-how required for oil and gas
prospecting. Infact, most of the engineering and technical systems
required are patented. Also, E&P companies have discovered,
over time that it is more economical to engage the services of
specialists instead of hiring men, equipment and material on a
permanent basis.
Scope of Services
Services in the oil industry include, but are not limited to, the
following:
 Logging
 Fishing
 Cementing
 Seismic survey
8
(a) Logging (d) Seismic Survey

This is the process of acquiring information about properties in the This is an enhanced survey method that gives the explorationist the
well and/or some property in the formation surrounding the well. precise details on the structure and stratigraphy beneath the
These properties are the primary physical parameters such as surface. It is best described as taking the photograph of the
permeability, porosity, water and oil saturation, which are used in subsurface. The picture obtained is the picture of the ground
the evaluation of petroleum reserves in a field. showing how various earth minerals are arranged sequentially
down several kilometers into the earth. It is useful in decision
The document usually generated from logging operations is a well- making in field appraisal and development for the evaluation of
log, which is a grid scaled in algorithmic divisions. The production acreage.
logarithmic grid serves to enhance resolution or magnify resistivity
readings in the low resistivity range and eliminates the need for 1.1.8 Major Operators
back-up galvanometers and associated curves in the high resistivity
range. The Nigerian Oilfield service industry is composed of small 6 but
very active players. These companies operate under the Petroleum
(b) Fishing Technology Association of Nigeria (PETAN). Some of the
prominent companies and their respective areas of operation are
A fish is a foreign object (such as a tool or pipe) lost in the listed below 7 :
borehole, which obstructs routine functions performed in the well
and must be removed or by-passed. Fishing, is therefore, the  Frank’s International Oilfield Services Construction
process of retrieving the object lost in the well bore. The fish  Halliburton Energy Services Construction
retrieved is usually placed in a shallow hole dug into the ground
 BJ Services Company Nigeria Limited Construction
and filled with mud.
 Baker Hughes Nigeria Limited Construction
(c) Cementing  Anadrill Nigeria Limited Drilling
 MI Drilling Fluids Limited Drilling
Cement is a powder consisting of alumina, silica, lime and other  Baroid of Nigeria Limited Drilling (rigs & materials)
substances, which hardens when mixed with water. It is  Ciscon Limited Drilling (rigs & materials)
extensively used in the oil industry to bond casing to the walls of  Dowell (Nigeria) Limited Oil filed services
the well.
 Dresser-Rand Nigeria Limited Oil filed services
Cementing is the process of fixing the casing firmly in the hole  Vigeo Limited Supplies
with cement, which is pumped through the drill pipe to the bottom  Negris Limited Supplies
of the casing and up into the annular space between the casing and
the walls of the borehole. After the cement sets (hardens) in the
annular space between the well bore and casing, drilling operations
continues. The casing can be perforated through the cement to
allow reservoir fluids to enter the well after well completion.

6
This is in comparison to the E&P companies
7
ADCG report, 1996

9
 must be drilled through the impermeable rock. Since the gas in
1.1.9 Natural Gas these reservoirs is typically under pressure, they escape freely on
their own from the reservoirs.
Natural gas is a fossil fuel. Like oil and coal, it is formed from the
remains of plants, animals and microorganism that lived millions (a) Trends in the gas industry
of years ago. It is a combustible mixture of hydrocarbons gases
containing primarily methane but could include ethane, propane, In Nigeria, natural gas has largely produced in association with
butane and pentane. crude oil. This has been the case as little or no prospecting has
been made exclusively for gas.
The composition of natural gas can vary widely, but below is a
chart 8 outlining the typical makeup of natural gas before it is Nigeria’s proven gas reserve is currently estimated at 159 trillion
refined: cubic feet making it the tenth largest in the world. The level of
natural gas is about 22 billion barrels of its crude oil equivalent 9 .
%
Component Formula However, despite the availability of gas in substantial quantities, it
Composition
Methane CH4 70 – 90 has not been commercially exploited as most of it is currently
Ethane C2H6 0 – 20 flared. It is estimated that about I billion cubit feet of gas is flared
Propane C3H8 0 – 20 in Nigerian 10 annually representing 40% of gas produced. This has
Butane C4H10 0 – 20 resulted in environmental degradation resulting and there has been
Carbon Dioxide CO2 0–8 increasing pressure from environmentalists on the need to protect
Nitrogen N2 0–5 the environment. Consequently, Government has committed itself
Oxygen O2 0 – 0.2 to increasing the utilisation of gas and ending all gas flaring by
Hydrogen Sulphide H2S 0–5 2008. To enforce compliance, Government increased the royalty
for gas flaring from N0.50 for 1,000 cubic to N10 for 1,000 cubic
Rare Gases A, He, Ne, Xe Trace
feet in 1998.
Natural gas is considered “dry” when it is almost pure methane,
In order to exploit the country’s vast gas reserves, the Federal
having most of its associated hydrocarbon removed. The gas is
Government in 1985 set up the Nigeria Liquefied Natural Gas Ltd
colourless, shapeless and odourless in the form.
(NLNG) as joint venture with 4 shareholders – NNPC (49%), Shell
(25.6%), Elf (15%), and Agip (10.4%). Shell is the technical
Natural gas is known to be one of the cleanest, fastest and most
manager to the LNG project. The project, which is exported-
useful energy sources in the world. Unlike other fossil fuels,
based, is aimed at converting natural gas into its liquid form for
natural gas is clean burning and emits lower levels of potentially
purpose of transporting it over long distances to areas where the
harmful by-products into the air. It is used residentially,
market exists. The company’s first shipment to Europe was in
commercially and industrially.
1999. The company has already negotiated a number of long-term
(22.5 years) purchase agreements negotiated with some European
In most cases, natural gas exists in association with oil. It is found
national companies. These companies are ENEL (Italy) ENAGAS
in reservoirs underneath the earth. To successfully release natural
(Spain), BOTAS (Turkey), GAZ DE (France) and TRANSGAS
gas, which is found closer to the earth’s surface than oil, a hole
9
Source: www.nlng.com
8 10
Source:www.naturalgas.org Source: www.nlng.com

10
(Portugal). Trains 1 to 5 of the NLNG Plant have been completed
and are on stream. Train 6 is estimated to come on stream in late
2007.
There is also the Escravos gas to liquid project, which is being
developed by Chevron. The objective is to recover associated gas
from the company’s offshore fields. Other major gas projects
currently under way are the OSO NGL (Natural Gas Liquids) by
Mobil/NNPC joint venture which produces about 110,000bbls/day
of condensate, and the Olokola LNG project, which is a joint
venture between Shell, Chevron, British Gas and the NNPC. .
In addition to the above projects, the Trans West African gas
pipeline has been completed. The pipeline will supply natural gas
to Benin Republic, Togo and Ghana.
(b) Obstacles to Gas Exploration
Some of the factors that have accounted for the underutilisation of
Nigeria’s gas resources through the years are as follows:
(i) The absence of a ready market for gas, both internally and
externally.
(ii) The non-deregulation of the gas sub-sector, especially in
relation to appropriate pricing of gas to public utilities.
(iii) The relative expensiveness of gathering associated gas in
Nigeria, given the difficult (swampy) terrain in most of the
oil fields, the small size of the fields and the fact that gas
supplies from such fields cannot be guaranteed, since this is
dependent on the continued production of oil from the
fields. Gas flaring therefore appears to be a better option.
(iv) Government’s preoccupation with political rather than
economic issues in its allocation of resources, and general
approach to the industrial sector.
(v) Unattractive fiscal terms.
11
Fiscal regime of natural gas in Nigeria - Paper prepared by George Nnona, an ex-Andersen Nigerian manager
However, changing circumstances have compelled government to
take a fresh look at the natural gas sub-sector and address some of
the factors, which contribute to its sub-optimal performance. This
has taken the form of fiscal incentives and policy measures, both
general and specific, articulated in recent legislation and
ministerial pronouncements to encourage the exploitation of gas.
The key fiscal measures are covered in the next sub-section.
(c) Fiscal Incentives for Gas Exploration 11
(i) Nigeria LNG (Fiscal Incentives, Guarantees and
Assurances) Act,(as amended), 2004 edition, Laws of the
Federation of Nigeria
The most extensive and most publicised set of special
incentives to a specific gas initiative is that given by the
Act. This legislation grants the Nigeria LNG Limited, the
Joint venture vehicle for the Nigeria Liquefied Natural gas
project, a 10-year tax relief period as a pioneer company.
In addition, the legislation completely exempts the
company, its contractors and subcontractors, from all
customs duties, taxes, levies and imposts of a similar nature
in respect of imports pertaining to the projects.
Under the Guarantees and Assurance in the second schedule
to the Act, the company and its shareholders (NNPC, Shell
Gas BV, CLEAG Limited (Elf), and Agip international
(BV) are exempted from several regulatory approvals.
(ii) Condensate Project Act
Another set of special incentives aimed at a specific export-
oriented gas initiative is that contained in the Condensate
Project Act (No. 15 of 1990). The Act is aimed at
facilitating the operations of the joint venture partners
(Mobil and NNPC) in relation to the Condensate Project,
which is for the recovery of natural gas liquids from an
11
 offshore field for processing and export. The Act permits
the NNPC to borrow money in any currency desired for the (c) Exemption from tax of all dividends distributed during
purposes of the project, and to pledge its fund and assets for the tax holiday where
the project. It also empowered NNPC to create escrow
accounts in other countries for the purpose of paying capital (i) the investment for the business was in foreign
and interests on money received from the project. currency, or
(ii) the imported plan and machinery in the period was
This Act particularly aims at facilitating the external not less than 30% of the Company’s equity share
financing of the project, by ensuring that payments due to capital
external project creditors are not impeded by the constraints
of the Nigerian regulatory environment. This Act was (d) Accelerated capital allowances after the tax holiday as
indeed a substantial boost to the project. follows:

(iii) The Finance and Miscellaneous Taxation Act (Decrees - 90% annual allowance with 10% retention for
No. 18 of 1998 and No. 30 of 1999) investments in plant and machinery; and
- 15% additional investment allowance which will not
The Acts grant the following fiscal incentives to companies reduce the value of the asset.
engaged in gas utilisation (i.e. marketing and distribution of
gas for industrial and domestic purposes) as well as all gas (e) Deductibility of interest on loans for gas projects
development projects (including industrial projects that use provided the approval of the Federal Ministry of
gas, namely: power plants, gas-to-liquid plants, fertilizer Finance is obtained before the loan is taken.
plants, gas distribution and transmission pipelines):
For upstream gas activities, the following fiscal incentives
(a) Taxation under the more favourable provisions of the are made available:
Companies Income Tax (CITA) with a current
corporate tax rate of 30%, as against the provisions of (a) All investment necessary to separate gas from the
the petroleum profits tax Act (PPTA) with a rate of reservoir into usable products are now to be treated as
85%; part of the oil field development.

(b) An initial tax holiday period of 3 12 years, with a
possible renewal for another 2 years.
As an alternative to the initial tax-free period, an
additional investment allowance of 35% (which will not
reduce the value of the asset) is allowable. Where the
Company opts for this alternative, it would forfeit the
additional 15% investment allowance as stated in (d)
below;
12
Though the initial tax holiday period of 3 years was extended in the 1998 budget, this has not been gazetted into law.
(b) Capital investment facilities to deliver associated gas in
usable form at utilisation or designated custody transfer
points is to be treated as part of the oil field
development.
(c) Transfer of gas at 0% Petroleum profits tax (PPT) and
0% royalty.
Also worthy of note are the incentives available under the
Oil and Gas Export Free Zone Act No. 8 of 1996. These are
discussed extensively under section 2.

12
 The NGC is also actively developing a number of initiatives
(d) The Nigerian Gas Company including the West Africa Gas Pipeline, being managed by
Chevron, The Trans Nigeria Pipeline Project, which will provide
13
The Nigerian Gas Company Limited (NGC) was established in gas supply to a series of Independent Power Projects being planned
1988, as subsidiary of the NNPC. The company was charged with throughout the country, and the development of compressed
the supply of natural gas to the domestic economy and initially natural gas as an automotive fuel.
performed the task of sole transmitter and distributor of gas in
Nigeria. However, the distribution phase has recently been ceded (e) Shell Nigerian Gas Limited
to two distribution companies; Shell Nigeria (SNG) Limited and
Gaslink Nigeria Limited. Shell Nigeria Gas Limited (SNGL) is a wholly owned subsidiary
of Shell Petroleum Development Company. The Company’s
NGC currently operates 8 gas supply systems in Nigeria, namely: objective is to promote the development of a domestic gas market.
SNGL intends to construct gas delivery lines to the factory gate,
 Sapele – supplying gas to the National from where prospective users will provide required infrastructure
Electric Power Authority (NEPA within their premises.
power station at Ogorode, Sapele
 Aladja – supplying the Ajaokuta Steel The target clients of the gas supply are:
plant
 factories which have a high energy consumption
 Northern Pipeline System
 companies which already use natural gas as feedstock
 Imo River-Aba Industrial System  companies looking for a clean and reliable source of fuel
 Obigbo North-Afam – supplying another NEPA station
at Afam 1.2 Regulatory Agencies
 Alakiri-Onne – supplying gas to the National
Fertiliser Company (NAFCON)
1.2.1 Nigeria National Petroleum Corporation (NNPC)
 Alakiri-Ikot Abasi – supplying gas to the Aluminium
Smelter plant (ALSCON) at Ikot In 1971, Nigeria joined the Organisation of Oil Producing and Exporting
Abasi Countries (OPEC), as its 11th member.

 Escravos-Lagos Pipeline – supplying gas to NEPA power
plant at Egbin.
NGC operates a total of 1,100 kilometres of pipelines, ranging
from “4 to 36”, with a capacity of 2 billion cubic feet of gas per
day. The Company also has 14 compressor stations and 13
metering stations.
13
Source: NGC website
In the same year, Nigerian National Oil Corporation (NNOC) was
established as instruments for accomplishing government’s policy
objectives with respect to oil. The NNPC (which operated concurrently
with the Ministry of Petroleum Resources) was empowered to enter into
new beneficial oil arrangements with interested companies in Nigeria on
behalf of government. However, in 1977, the government thought that a
higher standard of goals and policies set for the oil industry was best
achieved by a single entity. NNOC and the Ministry of Petroleum
Resources were therefore merged to form what is known today as Nigeria
National Petroleum Corporation (NNPC).

13

The NNPC was established by the NNPC Act 1977. The Act sets out
certain duties for the NNPC:
(a) Duties
The NNPC at its inception, was charged both with the responsibility of
engaging in oil and gas operations on behalf of the FG and regulating the
operations of the industry. Its specific duties were:
 undertaking such activities as are necessary or expedient for giving full
effect to the provisions of this Act.
(b) Structure
NNPC was initially made up of two broad divisions; the Commercial
Division and Petroleum Inspectorate Division. In March 1998, the NNPC
underwent structural reorganization and became a fully commercialized
entity 14 , by virtue of the Commercialization and Privatisation Act

 exploring and prospecting for, working, winning or otherwise acquiring, The new NNPC group comprises the Group Managing Director’s office and
possessing and disposing of petroleum; 4 Directorates namely:

 refining, treating, processing and generally engaging in the handling of (i) Refineries and Petrochemicals;
petroleum for the manufacture and production of petroleum products and (ii) Exploration and Production;
its derivatives; (iii) Finance and Accounts; and
(iv) Corporate Services.
 purchasing and marketing petroleum, its products and by-products;
The NNPC has 10 wholly owned subsidiaries, 2 partly owned subsidiaries
and 16 associated companies with financial autonomy to manage their
 providing and operating pipelines, tanker ships or other facilities for the
businesses within the ambit of the enabling laws. The subsidiaries operate
carriage or conveyance of crude oil, natural gas and other products and
as strategic business units. 15
derivatives, water and any other liquids or other commodities related to
the Corporation’s operations;

 constructing, equipping and maintaining tank farms and other facilities for
the handling and treatment of petroleum and its products and derivatives;

 carrying out research in connection with petroleum or anything derived

from it and promoting activities for the purpose of utilising results of such
research;

 doing anything required for the purpose of giving effect to agreements

entered into by the Federal Government with a view to securing
participation by the Government or Corporation in activities connected
with petroleum;

 generally engaging in activities that would enhance the petroleum

industry in the overall interest of Nigeria; and
14
NNPC was to operate as a profit making commercial enterprise without subventions from the FG.
15
The subsidiaries operate as strategic business units e.g. Pipelines and Products Marketing (PPMC), Nigerian Petroleum
Development Company (NPDC) and the Nigeria Liquefied Natural Gas Company Limited (NLNG) amongst others.

14
NNPC subsidiaries and their activities 16 17
Name Activities
Duke Oil Limited International sale of crude oil and
petroleum products in the spot market
Eleme Petrochemicals Company Manufacture and sale of petrochemical
Limited products both locally and
internationally
Integrated Data Services Limited Provision of services in seismic data
acquisition, processing and
interpretation as well as
petroleum/reservoir engineering, data
evaluation, computer and other ancillary
service in Nigeria and the Africa sub-
region
Kaduna Refining and Processing of crude oil into refined
Petrochemicals Company petroleum products and manufacture of
Limited Linear Alkyl Benzene, tins and drums
for domestic consumption and export
National Engineering and Acquisition of engineering technology
Technical Company Limited through direct involvement in all
aspects of engineering in the oil and gas
and non-oil sectors of the economy
Nigerian Gas Company Limited Gathering, transmitting and marketing
of Nigeria’s natural gas and its by-
products to major industrial and utility
gas distribution companies both locally
and in neighbouring countries
Nigerian Petroleum Exploration and production of crude oil
Development Company Limited and gases
Pipelines and Products Transportation of crude oil to the
Marketing Company Limited refineries and moving of white
petroleum products to existing domestic
and West African markets
16
Source: Nigeria Gas Association Journal, 2002
17
The partly owned subsidiaries are Hyson Nigeria Limited and Calson (Bermuda) Limited
Name Activities
Port Harcourt Refining and Processing of crude oil into refined
Petrochemical Company Limited petroleum products at minimum cost
locally but at competitive prices
internationally
Warri Refining and Processing of crude oil into refined
Petrochemicals Company petroleum products and manufacture
Limited and marketing of petrochemical
products
In addition to the above, the National Petroleum Investment Management
Services (NAPIMS) 18 ), a division of NNPC monitors government investment
in the upstream sector. The detailed description of its activities is given in the
next paragraph.
1.2.2 National petroleum Management Services (NAPIMS)
The National Petroleum Investment Management Services is the upstream
arm of the NNPC, which oversees the government’s investments in the Joint
Venture producing Companies (JVC’s), the Production Sharing Companies
(PSC’s) and the Service Contract Companies (SC’s).
NAPIMS also engages in exploration services in basins where the
multinationals have been reluctant to venture (e.g. Chad Basin). The stated
roles of NAPIMS are:
 Maximize Petroleum Profit Tax (PPT) and guarantee a high rate of return
through efficient cost reduction mechanism
 Ensure that a reserve base is maintained and that reserve targets are met.
Current target is 40 billion barrels by 2010
 Ensure that production targets are also met – current target is 4 million
bpd by 2010.
 Encourage gas utilization and commercialization.
18
The body charged with optimizing the benefits accruing to the FG from its investment in E & P activities.
15
 Promote local content input in engineering and construction, supplies, and
materials utilization through in-country technological capability.
 Promote transfer of managerial skills and technology.
 Diversify the country’s revenue base in the hydrocarbon sector through
development of gas initiatives.
 Ensure gas flare out by 2008 as agreed with major producers.
 Negotiate and manage all third party operating agreements.
1.2.3 Ministry of Petroleum Resources
The Ministry of Petroleum Resources started as a hydrocarbon section in the
Ministry of Lagos Affairs in the 1950s and was later upgraded to a Petroleum
Division within the Ministry of Mines and Power. In 1970 the division
became known as the Department of Petroleum Resources (DPR). In 1971, a
new body known as the Nigeria National Oil Company was established to
engage in Commercial activities in the Petroleum industry.
In 1975 the DPR was upgraded in status to a full fledged ministry known as
the Ministry of Petroleum Resources (MPR) in 1975. However, in 1977, the
Ministry was fused with the NNOC to form the Nigerian National Petroleum
Corporation (NNPC) by the NNPC Act no. 33 of 1977
The Act provided for a Petroleum Inspectorate Division in NNPC to regulate
the activities of the petroleum industry. This Inspectorate Division was
however, barred from engaging in commercial transactions. From 1977 there
was no Ministry of Petroleum Resources until 1985 when the Ministry was
recreated. In 1988, following the commercialization of NNPC, the Petroleum
Inspectorate Arm of NNPC was excised and merged with the Ministry of
Petroleum Resources. The Inspectorate Division formed the nucleus of the
present DPR, which is the technical arm of the Ministry
1.2.4 The Department of Petroleum Resources (DPR)
DPR effectively took over the activities of the former Petroleum Inspectorate
Division of the NNPC. The DPR is charged with the supervision of all
operations carried out under licences and leases in the petroleum industry.
The DPR is generally known as the agency that registers all companies
seeking to carry out business in the oil and gas industry. A DPR registration
certificate is a pre-requisite for all bid submissions in Nigeria.
Its functions include; but are not limited to the following:
 enforcing safety and environmental regulations;
 processing all applications for licences to ensure compliance with laid-
down guidelines;
 keeping and updating records on petroleum industry operations,
particularly on matters relating to petroleum reserves, production and
exports, licences and leases as well as rendering regular reports on them
to the FG;
 advising the FG and relevant agencies on technical matters and public
policies which may have impact on the administration and control of
petroleum; and
 ensuring timely and adequate payment of all rents and royalties as and
when due.
1.3 Forms of Petroleum Contracts
The early forms of contract in Nigeria were the concession agreements
where multinational companies were granted the rights to exploit and
market mineral resources recovered within the concession area 19 . In return,
such E & P companies were expected to pay royalty/rent to the FG.
However, with the enactment of the Petroleum Act, and Nigeria becoming a
member of OPEC, the need to share in the ownership and control of
operations in the oil industry became paramount to the FG. This motive
gave rise to the following forms of agreement with multinational oil
companies:
1. Joint Venture Agreement
2. Production Sharing Contract 20
3. Risk Service Contract
19
The concession area were usually very large and duration of the agreement very long. For instance, the concession granted
Shell-BP was for 40 years and covered 357,000 sq. ml
20
Introduced in early 1990s due to the FG’s inability to meet its cash call obligations to E & P companies under the JV
structure.
16
1.3.1 Joint Venture (JV) Arrangement the JV partners. Contributions towards exploration, development and
production costs are made through cash calls, based on work programs
There are two variants of this type of arrangement, the equity share and budgets presented by the Operator, and approved by the OMC.
participation and the non-equity share participation.
Each partner under the arrangement can lift and dispose separately its
(a) Equity Share Participation Agreement share of crude, subject to the payment of Petroleum Profits Tax and
royalty. The commercial aspect of JV arrangements is covered in the
Under this arrangement, a separate legal entity in the form of a limited Memorandum of Understanding with the NNPC.
liability company (LLC) is formed by a multinational company (ies)
and the FG, through its agency (NNPC or NAPIMS). The new A schedule of the major JVs and the respective interest of the partner is
company draws, as may be agreed, from the financial and human shown below:
resources of the shareholders. The Management Board representation
of the company is usually based on the parties’ equity interest. The Operator Other Partners Daily Production
parties are entitled to dividends to the extent of their equity interest in (bbls)
the company. Shell – 30% NNPC - 55% 900,000
TotalFinaElf – 10%
Most of the companies which fell into this classification are oil service Agip – 5%
companies 21, in which the NNPC acquired 36 percent equity or more Mobil (Exxon Mobil) – 40% NNPC – 60% 520,000
by virtue of the Nigerian Enterprises Promotion Decree of 1977. It is Chevron – 40% NNPC - 60% 420,000
of note that NNPC also has equity joint venture agreement with Elf (TotalFinaElf) – 40% NNPC - 60% 125,000
Shell/Agip/Elf for the purpose of gas liquefaction, which led to the Nigeria Agip Oil Company – Phillips – 20% 145,000
formation of the Nigerian Liquefied Natural Gas Company (NLNG).22 20% NNPC – 60%

(b) Non-Equity Share Participation Agreement

Under this form of JV, the FG, through the NNPC, enters into a Joint
Operating Agreement with a multinational company or companies.
Although, a new LLC is not formed, the JV partners agree to hold jointly
all rights and interest under the JV, and to meet expenses in the
proportion of their participating interest. One of the partners (usually the
foreign technical partner) is designated the ‘Operator’. The Operator’s
duties amongst others, includes the implementation of work program and
budgets, and the provision of technical and advisory services.
The Operator is subject to the overall supervision of the Operating
Management Committee (OMC), comprising duly appointed members of
1.3.2 Production Sharing Contract (PSC)
Under this arrangement, the NNPC enters into a contract with a foreign
company designated “the Contractor.” The Contractor would engage in E & P
activities, but it has no title to the crude oil produced therefrom. The
continuation of the contract and the recovery of its costs incurred would
depend on the discovery of oil in commercial quantities from the allocated
block. The Contractor therefore, bears all risks. If oil is found in commercial
quantities, the Contractor recoups its investment and cost of operation after
royalty payment to the Federal Government, but before payment of petroleum
profits tax (PPT). The profits are shared between the NNPC and the
contractor on a predetermined ratio.

21
NNPC shareholding as at 1989, Schlumberger (40%), Bariod (36%), Hyson (51%)
22
NLNG was incorporated in February, 1990 as one of the subsidiaries of the commercialized NNPC with the respective
shareholding being NNPC (60%), shell (20%), Agip (10%) and Elf (10/%).

17
The Contractor is allowed to market the portion of the production allocated In a RSC, the Contractor does not derive its income from petroleum
to cost oil 23 and its share of profit oil 24 , but at the price fixed by the NNPC. operations, as it’s carrying out that operation for and on behalf of another
party. Consequently, the Contractor is subject to tax under the Companies
The concession under this arrangement is located in the deep offshore or Income Tax Act (CITA), at 30% of its assessable profit.
inland basins. Examples of this arrangement include those signed between
the government (represented by NNPC) and Esso, SNEPCO and Star Deep. The tale below summarises the major differences between the various forms
of agreement.
Under a PSC, all qualifying capital expenditure (QCE) imported for E & P
activities by the Contractor automatically becomes the property of the FG Major differences between JVs, PSCs and RSCs
on arrival into the country. They may not also be disposed except with the
prior consent of the FG, through the appropriate agencies. However, the
JV PSC RSC
Contractor could claim all available capital allowances on them for the
purpose of PPT returns. 1. Origin
NNPC and foreign The primary period of
1.3.3 Risk Service Contract Existing 100 per cent partner started as co- the agreement varies
concessionaire (foreign ventures upon the between 2-3 years and is
This form of petroleum contract is also called ‘operation or work contract’. partner) had to execution of the PSC. renewable for additional
The duration covered by the contract does not exceed five years and the accommodate the new No prior interest by two years.
contract area relates only to a single block. The Contractor, as in the PSC, partner (NNPC) in the the foreign partner in
has no title to oil produced. The concession ownership remains entirely venture as a participant. the title to the
with the NNPC. concession.

The Contractor undertakes exploration, development and production

activities for, and on behalf of, the NNPC or the concession holder, at its
own risk. It therefore provides risk capital and technical expertise for the 2. NNPC’s Interest in the
petroleum operations. In return, the Contractor is reimbursed only from Venture
funds derived from the sale of available oil produced, and is paid periodical The concession The concession
remuneration in accordance with the formulae stipulated in the contract. This is limited to the ownership remains ownership remains
The NNPC has the right to market the oil produced and may pay any related working interest and entirely with NNPC. entirely with NNPC. The
cost in cash or in kind. However, the Contractor has the first option to buy does not affect the However, on agreement covers only a
back the crude oil produced from the concession. The option can be foreign partner’s equity production its interest single concession or
exercised even after the life of the contract. ownership. It is and title attach to block.
understood by the parties roughly 65 per cent
This kind of agreement exists between NNPC and Agip Energy and Natural that NNPC has undivided of the Participant’s
Resources, and between SOGW/Atlas and Nexen Oilfield Services Nigeria interest in the Oil or the Profit Oil.
Limited. concessions and in the This increases to 70
assets and liabilities of per cent on the joint
the venture to the extent venture’s attainment
of 60 per cent effective of 50,000 barrels
23
Cost oil: This is made up of the contractors operating costs recovered and capital investments. 1st July, 1979. daily production.
24
The balance after deduction of cost oil and tax oil (actual tax plus royalty).

18
 JV
3. Cash Call obligations
Partners to the joint
venture contribute to
capital and operating
costs in the ratio of their
respective participating
interests – current ratio is
NNPC – 60 per cent and
foreign partner – 40 per
cent.
4. Tax Rates
(a) 85%
(b) 65.75% (1st five
years)
5. Marketing Rights
Each party markets its
equity or participating
interest share of the
available crude oil
production from the
concession.
PSC RSC JV PSC RSC
6. Examples
Addax Petroleum Agip Energy Resources
Contractor initially The contractor provides Shell Nigeria
bears all the joint all the funds and ConocoPhillips
venture expenses. technical expertise. He is Mobil
NNPC only pays its reimbursed only from
share through the funds derived from the
allocation to sale of available oil
Contractor of cost oil. production. NNPC has
The reimbursement the right to market the oil
of such costs (in produced and may pay
kind) only occurs on the cost in cash or kind.
the discovery and The Contractor does not
production of have title to the oil
commercial oil produced.
reserve. No
reimbursement at all
when there is no
production i.e. the
investor bears all the
investment risks.
50% Technically speaking, the
Contractor does not
operate within PPTA
1990. In practice,
however, the tax rate is
85%.
Contractor is allowed Marketing rights lie with
to market the portion NNPC. However, the
of the production Contractor has the first
allocated to cost oil option to buy back the
and Contractor’s crude oil produced form
share of Participant’s the concession. The
Interest Oil, but at the option can be exercised
price fixed by NNPC. even after the life of the
contract.
19
2. PETROLEUM ACT AND SUBSIDIARY
LEGISLATION 2.2 Petroleum Regulations

The Petroleum Act This regulation covers the: Importation, Shipping, Unshipping and Landing
of Petroleum. It provides for regulations governing the following:
The Petroleum Act (and its pursuant Regulations) is the main legislation
governing matters related to petroleum exploration and production in  Storage of Petroleum:
Nigeria. The Act amongst others:
 Licence for storage,
(i) Vests entire ownership and control of all petroleum in, under or upon  Issue of licences,
any lands (including water) in the State.  Storage sheds etc

(ii) It also governs the issue of oil exploration licenses, oil prospecting  Transport of Petroleum:
licenses and oil mining leases
 Licence for transport,
(iii) The DPR permit is granted on the basis of service lines applied for and  Issue of licence,
is renewable annually.  Permit to operate kerosene peddling truck etc

(iv) The Ministry of Petroleum Resources is the supervisory ministry.  Liquefied Petroleum Gas (LPG):

(v) DPR oversees industry regulation.  Licences for importation of LPG,

 Storage of LPG,
(vi) A DPR permit is required by all service providers to operate in the  Fire precautions etc
Nigeria Oil and Gas industry.
 Fuelling of Aircraft:
(vii) The DPR permit is granted on the basis of service lines applied for and
is renewable annually.  Precautions while fuelling,
 Operation of fuelling vehicles
2.1 Mineral Oils (Safety) Regulations  Offences and penalties etc

This regulation covers from the safety perspective, the duties of licensees
and lessees; managers and employees for operations in the Nigeria Oil and
Gas industry. It also details the safety requirements/ procedures for drilling,
production, storage, transmission and loading operations; precautions
against fire outbreaks and requirements for reporting accidents, amongst
others.
2.3 Petroleum (Drilling and Production) Regulations
This regulation deals with the requirements for application for oil
exploration licence, oil prospecting licence and oil mining lease. The
regulations provides in detail for the requirement for obtaining licences and
the obligations of the lessees and licensees, including:

20
  Requirements to be observed by ships to be used in transportation of
crude oil;
 Requirements
 Declaration of capacity of receptacle (ship, tanker or vehicle) holding
 Application forms, the crude;
 Registration of licences and lease,
 Approval of applications etc  Documentation requirements of receptacle; and

 Obligations of Lessees and Licensees  Penalty for non-compliance.

 Recruitment and Training of Nigerians,
2.6 Petroleum Profits Tax Act
 Exploration and drilling,
 Field Development,
The PPTA provides the legal basis for the imposition of taxes on the income
 Reports , Accounts and records,
of companies engaged in petroleum operations. The Act defines itself as:
 Fees, Rents and Royalties etc
“An Act to impose a tax upon profits from the winning of Petroleum in
2.4 Petroleum Refining Regulations Nigeria, to provide for the assessment and collection thereof and for
purposes connected therewith.”
These regulations cover the following areas:
The PPTA covers items like:
 Licence to construct / operate a refinery
 Enlargement / modification of refineries  Imposition of tax and ascertainment of chargeable profits
 Appointment of competent persons to manage and supervise refineries  Ascertainment of assessable tax and of chargeable tax
 Observance of good refining practices  Chargeable persons
 Observance of fire and safety regulations  Accounts and assessments
 Medical facilities and first aid services  Appeals
 Reporting requirements  Collections, recovery and repayment of tax
 Offences  Offences and penalties
 Fees etc
2.7 The Deep Offshore and Inland Basin Production
2.5 Crude Oil (Transportation and Shipment) Sharing Contracts Act
Regulations
The Act specifies the royalty rates applicable on production from PSC
This regulation covers the requirements for transportation and shipment of fields. It is described as:
crude. It provides for:
“An Act , among other things, to give effect to certain fiscal incentives given
 The specification of ships utilised in crude transportation; to the oil and gas companies operating in the Deep Offshore and Inland
Basin areas under production sharing contracts between the Nigerian

21
National Petroleum Corporation or other companies holding oil (iv) up to 25% maximum production may be sold in the Customs territory
prospecting licenses or oil mining leases and various petroleum exploration of the EFZ against a valid permit and on payment of appropriate
and production companies”. duties; 26

Deep Offshore”, according to the Act, means “any water depth beyond 200 (v) rent free land at construction stage, thereafter rent shall be as
metres”. The rates are graduated as follows: determined by the Authority; and

Area Rate (%) (vi) foreign managers and qualified personnel may be employed by
companies operating in the EFZ without expatriate quota requirements.
In areas from 201 to 500 metres water depth 12
In areas from 501 to 800 metres water depth 8 2.9 Niger Delta Development Commission Act
In areas from 801 to 1,000 metres water depth 4
In areas in excess of 1,000 metres water depth 0 The Act set up the Niger Delta Development Commission Act (NDDC).
The Act establishes the Governing Board of the NDDC.
2.8 Oil and Gas Export Free Zone Act
It provides amongst others for the following items
The OGEFZA was enacted pursuant to the Free Trade Zones (FTZ) scheme,
conceived by the Federal Government (FG) in 1992 to facilitate a friendly  NDDCs source of funds
climate for local and foreign investments 25 . The OGEFZA provides the  NDDC’s expenditure
regulatory frame work for the designation of FTZs. The Act also
 Establishment of monitoring committee
established the Oil and Gas Export Free Zone Authority.
 Evaluation of the provision of the Act vis-à-vis E&P
Several incentives are granted to enterprises within the EFZ. These  Company’s activities
incentives include:  Tax treatment of the contribution from oil and gas companies .
 Contribution to host communities.
(i) exemption from all Federal, State and Local Government taxes, levies  Applicability to companies in exploratory stage.
and rates and import duties on any capital and consumer goods, raw
materials components or articles to be used in respect of any approved
activity within the EFZ;

(ii) repatriation of foreign capital investment (profits and dividends) in the

EFZ at any time;

(iii) exemption from application for import and export licences;

26
Please note that the FG has recently announced a policy change allowing up to 100% exportation into the Customs territory,
25
The Nigeria Export Processing Zones Act, (NEPZA) 1992 is the equivalent legislation for the non-oil sector. although this is yet to be enacted into law.

22
3. THE PETROLEUM PROFITS TAX ACT, 2004
3.1 Introduction
The Petroleum Profits Tax Act, 2004 (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”.
Any other activity not covered by the above definition is liable to tax under
the Companies Income Tax Act (CITA), 2004. Such activities include:
 Refining
 Marketing
 Petrochemical Sale and Marketing
 Liquefied Natural Gas
 Oil Field Services
3.2 Administration of Petroleum Profits Tax (PPT)
The tax is administered by the Federal Board of Inland Revenue (“The
Board”), through its administrative arm, the Federal Inland Revenue
Service (FIRS). The Board has the following powers, amongst others:
1. To carry out such acts as may be deemed necessary and expedient for
the assessment and collection of tax
2. To sue and be sued in its official name
3. To acquire, hold and dispose any property taken as security for, or in
satisfaction of any penalty, tax or judgment debt due from a
company 27 .
4. It may authorize any person within or outside Nigeria to perform or
exercise any of its powers or duties or receive any notice or other
document to be served upon or delivered or given to the Board.
5. The Board shall be subject to the authority, direction and control of the
Minister and any written direction, order or instruction given by him.
3.3 Imposition of PPT and Chargeable Persons
The tax is levied on the profits of a company engaged in petroleum
operations during an accounting period.
Chargeable persons under PPTA are corporate bodies engaged in petroleum
operations. Individuals on their own or jointly as partners are not allowed
to engage in petroleum operations. However, two or more companies can,
as partners or in joint venture, engage in petroleum operations. The tax
liability arising from the joint operation shall be apportioned among the
companies as the minister may deem fit.
Non-resident companies engaged in petroleum operations in Nigeria are
assessable to tax either directly or in the name of their manager. For a
company being wound up, the receiver or liquidator is liable to the tax.
3.4 Computation of PPT
In order to ascertain the tax payable by an E&P company, the following
computations are necessary:
 Revenue
 Adjusted Profit
 Assessable Profit
 Capital Allowances
 Chargeable Profit
 Assessable Tax
27
The Board must account for any such property to the Minister of Finance.
23
3.4.1 Revenue (e) any expense incurred for repairs of premises, plant,
machinery or fixtures employed for the purpose
The revenue 28 of a company engaged in petroleum operations is
taken to be the aggregate of: (f) all expenses previously classified as tax offsets attributable
to royalties on locally disposed oil, non-productive rents,
(a) the proceeds of all chargeable oil sold by the company in customs and excise duties on essentials.
that period;
(g) repairs and renewals of premises, plant, machinery or
(b) the value of all chargeable oil disposed 29 by the company in fixtures employed in the operations.
that period; and
(h) bad debts incurred during the period as well as specific
(c) all income of the company that period incidental to and provisions for doubtful debts. The Board is to be satisfied
arising from any one or more of its petroleum operations. that such debts have become bad or doubtful of collection.

3.4.2 Adjusted Profit (i) any expenditure incurred in connection with the exploration
and drilling of the first two appraisal wells, whether or not
To obtain the adjusted profits for an accounting period, all out the wells are productive.
goings and expenses incurred by the company wholly, exclusively
and necessarily, in its petroleum operations for that period, (j) any contribution to an approved pension, provident or other
whether within or outside Nigeria, are deducted from the revenue. retirement benefit scheme.
The following allowable expenses are specifically listed by the
Act: (k) liability incurred by the company during the period to the
federal, state or local government in Nigeria by way of
(a) rents incurred by the company during the period in respect stamp duty, tax or any rate, import fee or other like charge.
of land or buildings occupied for its operations.
(l) intangible drilling costs directly incurred in connection with
(b) all royalties incurred in respect of crude oil or drilling, appraisal or development.
casinghead petroleum spirit.
(m) education tax
(c) compensation incurred for disturbance under an oil
prospecting licence or oil mining lease. (n) scholarship expenses (as decided by the Supreme Court in
September 1996 in the case between Shell and FBIR).
(d) interest payable on monies borrowed and employed as
capital by the company on its operations (either from third (o) such other deductions as may be prescribed by any rule
parties or related entities) made under the Act.

28
This originally included the value of all chargeable natural gas. This was expunged by virtue of the Finance and
Miscellaneous Tax Provision Decree No 18 of 1998.
29
This is the value of oil determined for the purpose of royalty, after making adjustment for cost of extraction of the oil and
any cost incurred in transporting and storage of the oil between field of production and place of disposal.

24
 The following deductions are specifically disallowed by the
Act: the owner of the QCE (asset) at the end of that accounting year,
and the QCE was in use for the purposes of the petroleum
(a) any capital withdrawn or any sum employed or intended to be operations carried on by it.
employed as capital.
The PPTA recognizes four types of QCE on which capital
(b) any capital employed in improvements as distinct from repairs allowances can be claimed. These are:

(c) any sum recoverable under an insurance or contract of (a) Plant – capital expenditure on plants, machinery and
indemnity fixtures.

(d) any amount in respect of income tax, profits tax or other (b) Pipeline and Storage – capital expenditure on pipelines and
similar tax, whether charged in Nigeria or elsewhere. storage tanks.

(e) fixed assets depreciation (c) Building – capital expenditure on the construction of
buildings, structures or works of a permanent nature.
(f) any contribution to an unapproved pension, provident
or other similar schemes. (d) Drilling – capital expenditure in respect of acquisition of
rights in or over petroleum deposits, searching for, or
(g) any expenditure for the purchase of information relating to the discovering and testing deposits, and construction of any
existence and extent of petroleum deposits. works or structure which are likely to be of little use when
petroleum operation ceases.
(h) any disbursements or expenses not wholly and exclusively
incurred for the purposes of the business 3.4.4.1 Types of Capital Allowances

3.4.3 Assessable Profit (a) Petroleum Investment Allowance (PIA)

The Assessable Profit of an E&P company for any accounting
year is obtained by deducting from the Adjusted Profit, any
amount of loss 30 incurred in a prior accounting period. The
amount of loss recouped cannot, however, exceed the adjusted
profit.
3.4.4 Capital Allowances
This is an allowance granted to an E&P company in the first year a
QCE was incurred for the purpose of its operation. The applicable
rates depend on the fiscal regime (contract form) under which the
E&P company operates.
The following rates are applicable to companies in JV operations.

An E & P company is eligible to claim capital allowances (CA) in

respect of any qualifying capital expenditure (QCE) only if it was

30
Under PPTA, losses can be carried forward and relieved against future profits indefinitely. There is no time limit for
recouping losses as under CITA.

25

QCE in respect of
Onshore operations
Offshore operations:
Up to and including 100m of water depth
Between 100m and 200m water depth
Beyond 200m water dept
Companies that operate PSCs are either entitled to a PIA or an
Investment Tax Credit (ITC) 31 depending on when the PSC was
signed. For PSCs signed after 1993, PIA at the rate of 50% of
qualifying capital expenditure would apply. For PSCs signed by
1993, ITC at the same rate would apply.
(b) Annual Allowance
Annual allowance is granted to a company which has acquired QCE,
in lieu of depreciation. The current rates are 20% in the 1st four
years and 19% in the fifth year. The balance of 1% of the cost is
retained in the books until the QCE is sold.
(c) Balancing Allowance/Charge
Balancing allowance is granted to a company where, on disposal of a
QCE owned by it and exclusively used for its business, the tax-
written-down-value (TWDV) on disposal exceeds the sale proceeds.
On the other hand, where the sale proceeds exceed the TWDV of the
QCE, the excess, known as the balancing charge, is treated as income
to the company in that accounting period. The balancing charge
should, however, not exceed the total CA claimed to date on that
QCE.
31
Treated as a credit against tax payable and not a charge against income.
3.4.4.2 Restriction on Capital Allowance
Rate (%)
5 CA claimable by an E&P company is restricted to the lower of:
10 (a) Actual computation and
15
20 (b) 85% of assessable profit less 170% 32 of Petroleum Investment
Allowance (PIA).
In practice however, the 170% PIA adjustment is usually
disregarded, as it seeks to discourage further capital investment in the
sector by E&P companies. Therefore, the CA is simply restricted to
the lower of actual CA and 85% of assessable profits.
3.4.5 Chargeable Profit
This is obtained by deducting allowable capital allowances from the
assessable profit.
3.4.6 Assessable Tax
3.4.6.1 PPT Rates
The applicable tax rate is 85% for an E&P company in JV with the
NNPC. However, where the company is in its first five years of
petroleum operation, the applicable rate is 65.75%.
The PPT rate for companies operating PSCs with the NNPC
is 50% flat for the contract area, irrespective of the duration of the
contract as provided under Section 3 of the DOIBPSC Act.
32
This is actually a disincentive to incur capital expenditure as the more the capital expenditure incurred by the company in
any year the less the capital allowances it can claim. There is a need for the Board to revisit provision and make amends.
26
 retained in the book as provided for in paragraph 6 of the second
3.4.6.2 Format for the Computation of Assessable Tax schedule to this Act shall be 65.75% of the chargeable profit for
this period”
For JV Companies
$ $ The underlined portion of the section suggests that:
Sales Proceeds + Incidental Income x
Less: Royalties x (1) Pre-production expenditure would be capitalised on
Operating Cost x commencement of petroleum production;
Intangible Drilling Cost x
Tangible Drilling Cost x (2) The capitalised pre-production expenditure would be
Education Tax x (x) amortised by way of capital allowance as provided for in
Adjusted Profits x paragraph 6 of the second schedule to the PPTA
Less Unrelieved Losses (x)
Assessable Profits x Paragraph 1 (Interpretation) to the second schedule of the PPTA
Less: Capital Allowances as restricted x defines “qualifying expenditure” for the purpose of capital
Petroleum Investment Allowance x (x) allowances (and PIA) as:
Chargeable Profits x
Assessable Tax/Chargeable Tax x (a) capital expenditure (qualifying plant expenditure) incurred
on plant, machinery and fixtures;
For Companies Operating PSCs
$ (b) capital expenditure (qualifying pipeline and storage
Sales Proceeds + Incidental Income x expenditure) incurred on pipelines and storage tanks;
Less: Royalty Oil (x)
Income net of Royalty Oil x (c) capital expenditure (qualifying building expenditure)
Less Cost Oil (Opex, Educ. Tax, IDC, CA, ITA) (x) incurred on the construction of buildings, structures or
Chargeable Profits x works of a permanent nature; or
Assessable Tax @ 50% x
Less ITCs (PSCs signed in 1993) (x) (d) capital expenditure (drilling expenditure) …incurred in
Tax Oil x connection with, or with petroleum operations in view of …
Profit Oil (Chargeable Profits less Tax Oil & ITC) x
while;
3.4.7 Tax Treatment of Pre-production Expenses
Paragraph 5 states that:
Section 21 (2) of the PPTA states:
“where a company has incurred any qualifying capital expenditure
“…where a company has not yet commenced to make a sale or a wholly, exclusively, and necessarily for the purpose of petroleum
bulk disposal of chargeable oil under a program of continuous operations, carried out by it, there shall be due to that company, …
production as at 1 April 1977, its assessable tax for any an allowance (in this schedule called “Petroleum Investment
accounting period during which it has not fully amortised all pre- Allowance” ) at the appropriate rate …”:
production capitalized expenditure due to it less an amount to be

27
 If Paragraph 5 is read in conjunction with Section 21 (2) and
Paragraph 1, it can be concluded that since pre-production
expenses are now to be treated like capital expenditure under the
Second Schedule, all allowances applicable to capital expenditure
would apply to them, i.e. PIA and capital allowances would be
applicable.
3.4.8 Signature Bonuses
A signature is paid for acquisition of rights or interest in an oil
concession. For the purpose of cost oil recover under PSC
signature bonus is not included. However, based on the provisions
of paragraph 1(d) of the second schedule of PPTA, which defines
qualifying drilling expenditure for capital allowance purposes, to
include, “the acquisition of, or of rights in or over, petroleum
deposits”, signature bonuses are considered as part of qualifying
drilling expenditure. Thus for PPT purpose, it can be recovered by
way of capital allowance.
3.5 Compliance Procedures
3.5.1 Returns
The PPTA provides that every company engaged in petroleum operations
should file two sets of returns:
3.5.1.1 Estimated Tax Return
This return is to be filed not later than two months after the
commencement of each accounting period, i.e. February of
every year. The return contains an estimate of the PPT
liability for the accounting year. In preparing this return, an
E&P company bases its calculations on the approved budget
for the year.
The projected price per barrel used by the FG in its annual
budget usually constitutes the reference price of crude oil for
the purpose of the PPT returns.
Revised estimated return may be submitted if at any time
during such an accounting period, the company becomes
aware that the initial estimate submitted requires revision,
failing which the initial return may result in overpayment of
tax at the end of the year.
3.5.1.2 Final Tax Returns
An E&P company is expected to file, within five months from
the end of an accounting period, its actual returns in the
prescribed format 33 .
Accounting period in relation to a company engaged in
petroleum operations is defined as:
(a) a period of one year commencing on 1 January and
ending on 31 December of the same year, or
(b) any shorter period commencing on the day the
company first makes a sale or bulk disposal of
chargeable oil under a program of continuous
production and sales, domestic, export or both and
ending on 31 December of the same year; or
(c) any period of less than a year being a period
commencing on 1 January of any year and ending
on the date in the same year when the company
ceases to be engaged in petroleum operations.
3.5.2 Tax Payment
The estimated PPT liability for an accounting year is payable in 12 equal
monthly installments, plus a final installment. The first installment is due
and payable not later than the third month of the accounting period (i.e.,
March). Subsequent installments will be due and payable not later than the
last day of each month.
33
The Returns would contain the signed audited account, final tax computations and a declaration signed by a duly authorised
officer of the company that the information contained therein is true and complete.
28
The audited accounts of an E&P company is expected to be finalized and
the actual (final) tax returns filed by May of the subsequent year.
Therefore, the actual PPT liability, based on the audited accounts is
computed, and compared with the estimated PPT. Where the actual PPT is
higher than the estimated PPT, an additional assessment is raised for the
difference. The assessment is due and payable within 21 days from the
date of the service of the assessment notice for such accounting period.
Where the actual PPT is lower than the estimated PPT, the overpayment
(tax credit) is carried forward to offset the PPT liability of the subsequent
tax years.
3.6 Assessments
There are 4 types under the PPTA, namely
1. Original Assessments
This is issued where the E & P Company files its annual returns,
and it is acceptable by the Board
2. Best of Judgment Assessment
This is issued where:
 a company fails to submit its returns within the statutory time
limit.
 in the opinion of the Board, the returns submitted does not
reflect the true tax liability of the company
3. Additional Assessments
This is issued where after carrying out an audit; the Board
discovers that tax has not been charged on a company liable to
tax or that the tax assessed is less than the amount, which it
ought to have been assessed.
4. Revised Assessments
This is issued where a tax payer objects to an assessment or it
has been a subject of appeal and an agreement is subsequently
reached on the tax payable and the original assessment is
amended in accordance with the grounds of objection or
amendment.
3.7 Objection/Appeal Procedure
A chargeable person (E&P company) may object to an assessment if he is
of the opinion that the assessment is excessive. The following conditions
must hold for an objection to be valid:
 It must be in writing
 It must be made within twenty-one days from the date of
service of the notice of assessment
 It must contain the amount of chargeable profits of the company for
the accounting period in respect of which the assessment is made, the
amount of the assessable tax and the tax which such person claims
should be stated on the notice of assessment.
If the person so assessed and the Board reach an agreement on the amount
of tax liable to be assessed, the assessment shall be amended accordingly,
and the notice of the agreed tax payable shall be served upon such person.
If the person to be assessed fails to agree with the Board on the amount of
the tax, the Board shall give such a person notice of refusal to amend the
assessment. The Board may revise the assessment to such an amount as it
may determine, and serve a notice of the revised assessment upon the
person. If the person is still not satisfied, he may appeal to the appropriate
Body of Appeal Commissioner.
The procedure to be followed for the appeal to be valid includes:
1. It must be made within 30 days of notice of refusal to amend assessment
29
2. It must be in writing and addressed to the Board and the Secretary of
Section of Act Offences Penalties
the Body of Appeal Commissioners
3. It should specify the following particulars Section 51 Failure to deliver accounts or Same as Section 51 above
information or to keep the
 The official number of the assessment and the accounting period required record.
for which it was made. Section 51 (c) Failure to attend to a notice or Same as Section 51 above
 The amount of tax charged by the assessment summon served or to answer
 The date upon which the appellant was served with notice of any question lawfully asked.
refusal of the Board to amend the assessment as desired. Section 51 (d) Failure to submit any return Same as Section 51 above
required
 The precise grounds of appeal against the assessment.
 An address for service of any notices, etc.
Other offences under the PPTA include:
All appeals shall be heard ‘in camera’.
- Failure to furnish additional information required by the Board
If the applicant is still aggrieved by the decision of the Appeal - Falsification of accounts
Commissioners, he may appeal to the Federal High Court. Again, he is - False statements and returns
required to first give notice in writing to the Board within thirty days after - Impersonation
the date upon which such decision was given of his intention to appeal
against the decision.
3.9 Deep Offshore and Inland Basin Production Sharing
Further appeal against the decision of the Federal High Court shall liable to Contracts Act (DOIBPSC)
the Federal Court of Appeal. However, further appeal is possible only if the
tax assessed is up to N1,000. The DOIBPSC is the enactment which gives effect to the fiscal incentives
granted to oil and gas companies operating in the Deep Offshore and Inland
3.8 Offences & Penalties Basin areas under PSCs with the NNPC. These PSCs stipulate a different
fiscal regime than that contained in the PPTA. “Deep Offshore” has been
defined as any water depth beyond 200 metres.
The offences under the PPTA and the associated penalties are as follows:
The DOIBPSC imposes tax at the rate of 50% of chargeable profits 34 of
Section of Act Offences Penalties exploration and production companies for the duration of the PSC. The
Section 46 Instalment of tax due not paid A sum equal to 5% of the fiscal regime applicable to any PSCs is specific to the oil and gas licensing
at the appropriate time amount due and payable round during which the relevant OPL was awarded.
Section 51 Late submission of tax returns Fine of N10,000 and a
further sum of N2,000 for The incentives applicable under the Act include:
each day the offence  Tax rate of 50% of chargeable profits 35 for the duration of the PSC.
continues, and in default
of payment to
imprisonment for 6
months
34
Same as taxable profit
35 Same as taxable profit

30
 Claim of Petroleum Investment Allowance (PIA) or an Investment Tax
Credit (ITC) 36 of 50% of qualifying capital expenditure depending on
when the PSC was signed. For PSCs signed in 1993, ITC is applicable,
while PIA is applicable to PSCs signed after 1993.
 Royalty rate of 10% for companies operating in the Inland Basin and
graduated royalty rates for companies in Deep Offshore operations.

36 Treated as a credit against tax payable and not a charge against income.

31
4. ROYALTIES 4.2 Computation of Royalty Payable
The Petroleum Act (1969) requires the holder of an OPL or an OML, to pay The Petroleum (Drilling & Production) Regulations Act of 1969 provides
to royalties to the FG as soon as production starts. This is usually in form that handling, treatment, storage and transportation expenses incurred on
of monthly cash payments 37 at an agreed percentage of the quantity of oil crude oil disposed are deductible in determining the royalty due on
produced, after making adjustments for treatment, handling and related production. Therefore, the actual amount of royalty payable is arrived at as
expenses. follows:

4.1 Royalty Rates (a) Determine the volume of chargeable oil (CGOIL) for royalty purpose
4.1.1 JV Operations as follows:

The royalty rates currently applicable are as follows: CGOIL = Q- (q1 + q2 + q3)
Where:
(i) on-shore production 20%
Q = quantity of crude oil produced by the company
(ii) offshore production q1 = internal storage/usage by the company
up to 100 metres water depth 18½% q2 = losses via evaporation, etc
q3 = returns to formation/closing stock
(iii) offshore production beyond
100 metres water depth 16⅔%
(b) Determine production revenue by applying the appropriate posted
4.1.2 PSCs price to the chargeable oil.

The Deep Offshore and Inland Basin Production Sharing Contracts

(c) Obtain the value of chargeable oil by deducting handling, treatment,
Act No 9 of 2004, specifies the royalty rates applicable on
production from PSC fields. “Deep Offshore”, according to the storage and transportation costs from the production revenue.
Act, means “any water depth beyond 200 metres”. The rates are
graduated as follows: (d) Apply the appropriate royalty rate on the value of chargeable oil to
obtain the royalty due
Area Rate (%)

In areas from 201 to 500 metres water depth 12 (e) Deduct from the royalty due, any production rentals payable by the
In areas from 501 to 800 metres water depth 8 company, to arrive at actual royalty to be paid.
In areas from 801 to 1,000 metres water depth 4
In areas in excess of 1,000 metres water depth 0 In practice, most oil companies do not deduct handling, treatment, storage
and transportation costs from production revenue to obtain chargeable value
of oil. This may be because of the delay in obtaining approval of the claim
from the Department of Petroleum Resources.
37
In most production sharing contracts, ‘royalty oil’ is allocated to NNPC. Payment is therefore in kind rather than in cash

32
5. TAXATION OF OIL OPERATIONS
5.1 Changes in Licence and Petroleum Interests
5.1.1 Abandonment and Restoration Costs
Abandonment relates to activities involved in giving up further exploration
activities in a well or field in which oil or gas has not been found in
commercial quantity. The cost incurred in the dismantling of production
facilities on abandoning the oil well, as well as those incurred in restoring
the well to its original ecological state, are called restoration &
abandonment costs.
Abandonment can also occur where the operators are of the view that oil or
gas is exhausted and can no longer be profitably produced. On the other
hand, restoration involves bringing the exploration site to its original
ecological state.
Due to the size and complex nature of oil wells, the costs could run into
several millions of dollars. The ability to cover such costs by insurance is
severely restricted. Therefore, the tax treatment is imperative for any E&P
company.
Usually abandonment cost will exceed taxable profit for the relevant
chargeable period. Consequently the risk exists that the tax payer may not
be able to claim a tax relief on the cost.
For accounting purpose, abandonment costs are estimated at the beginning
of the period and amortized as part of operating costs. However, since
“provisions” are generally disallowed for tax purpose, on the principle that
they have not yet been incurred, it implies that any provision for the above
amount would be disallowed.
E&P companies may, however, be able to obtain a tax-deduction for this
item, if they execute a plan for restoration and abandonment. Such plan
should provide for a fund, to which any provision for this cost can actually
be paid into, and managed by an external fund manager. On commencing
an abandonment and restoration programme, the company can draw down
on the fund (together with any accrued interest income) to finance the cost.
It is believed that if this approach is adopted, the yearly expenditure,
involving actual physical cash payment, should be deductible for the E&P
company’s PPT purpose.
5.1.2 Participation
In 2003, the Federal Government announced its intention to achieve
majority state participation in commercial deep offshore acreages, in which
the Government does not already have 100% interest. Under the Back-in-
Rights Regulations 2003, the Federal Government can acquire Five – Sixth
of the Nigerian ownership interest in the concession.
The policy is usually implemented through negotiation of participation
agreements with the oil companies. The terms of agreements of a
participation agreement may vary according to particular circumstances.
(Famfa and SAPETRO).
However, the conclusion of a participating agreement is tax neutral, based
on the compulsory nature of government participation.
5.1.3 Unitisation
This is an agreement between two or more E&P companies to jointly fund
the working of two or more oil concessions, where hydrocarbon
accumulations straddle the boundary between the concessions held by the
different parties. Usually, the E&P companies would form a single
structure for the concessions, and appoint among themselves, an operator
that would work the concession. The concessions will be operated as one
“unit”.
In the event that the oil companies cannot readily undertake to operate on
this basis, NNPC can compel them to do so. Unitisation usually occurs
after the appraisal stage and involves a re-allocation of participating
interest, as shown on the next page.
33
 carried party while the assignee is the carrying party. A production Sharing
Example: Contract (PSC) is a form of carried interest.

Participants OPL1 OPL2 The basic rule is that the taxpayer incurring the expenditure will receive the
A 60% - relevant tax relief and the tax payer receiving the production will be taxed
B 40% - on it. The Carrying party should be able to recover the cost of carrying the
C - 70% Carried Party from the proceeds of crude oil sale, after payment of royalty,
D - 30% but before payment of PPT. Consequently, the carried party would only
have a share of the profit oil only after the “carry costs” have been
Est. Production 160 40 recovered by the Carrying party.

Revised interest Production Percentage 5.1.5 Underliftings and Overliftings

A 96/200 48%
B 64/200 32%
C 28/200 14%
D 12/200 6%
The unit operating agreement will usually provide for a redetermination of
the participating factors since the initial participating ratio would have been
based on limited data about the reservoirs. The revision of the participation
factors may result in an adjustment of the participant’s share of production
and cost, and payments among the participators.
Unitisation is “tax free “in the sense that no taxable capital gain will be
imputed to the parties receiving a cash settlement. However, difficulties
can occur when unitization takes place after production has started and
expenditure claims have already been allowed by the tax authorities;
especially where individual returns are filed. In this situation, adjustments
may need to be made to capital allowances already claimed.
5.1.4 Carry Agreements
Carry agreements refer to an arrangement involving two or more parties, in
which a carrying party or the assignee finances the exploration and
development activities in consideration for a reward out of future
production (if any) and if necessary from the carried party’s or the
assignor’s share of such future production. The assignor is usually the
This usually occurs in connection with tanker loadings, particularly in
relation to a participator with a small license share. SAS 14 provides that
the company that underlifts must treat the underlift as receivable or stock
valued at the lower of cost and market value. The corresponding credit will
be to revenue. The party overlifting will account for it as payable and
exclude from income.
For PPT purpose, the participants are taxed on the basis of actual liftings.
5.1.6 Assignment
This occurs when a Participator assigns his license interest to another
company (as opposed to a farm out), subject to DPR approval.
The consideration for such an assignment may be:
(i) Cash
(ii) A retained source of production (net production interest)
(iii) Overriding royalty interest (share in gross production)
Section 6(1) of the Capital Gains Tax Act provides for the taxation of
capital sum received from an assignment. Consequently, such amount will
be taxed at 10%.

34
5.1.7 Farm out Agreement
5.2 Transfer Pricing/Inter-company Transaction
A farm out agreement usually arises when license holder is unable to
finance exploration and/or development alone. It is mainly a financing The World Bank has described transfer pricing as “process for goods,
arrangement services and intangibles and royalties for intangibles as well as cost
sharing agreements for research and development activities e.t.c, in
Farm out arrangements may include: transactions between related connected parties”. Simply put, a transfer
price is the price at which goods and services are transferred between
(i) partial or total reimbursement of past costs connected parties.
(ii) a carried interest
(iii) a front-end loan recoverable out of future production 5.2.1 Pricing Policies
A Licensee who surrenders part of his license is only entitled to production There is no universal pricing policy appropriate to all transactions among
related to retained interest after payout. entities. The concept of arm’s length pricing seems, however, to be the
overall guideline among tax authorities and international organisations.
There are mainly capital gains tax implications, which may however be The concept is, however, not easily applied in practice.
mitigated by rollover relief.
Multinational companies determine their pricing policy based on a variety
5.1.8 Production Payments of factors. The factors may include tax savings, competition or
circumventing foreign exchange controls. It should be noted that tax is not
This is mainly a method of financing oil developments.. The steps involved the most important factor in setting a transfer price. Policies will depend
are as follows: on the type of transaction, countries in which entities operate and the
multinational’s accounting policy.
 The lending banks would establish a shell company “A”;
Inter-company transactions of a multinational group generally fall into one
 Company A forward purchases oil from the field at an agreed price. of the following categories:
The oil company uses the advance payment to finance field
development; i. Sales and purchase of goods

 Company A sells the oil to the oil company at pre-arranged prices under
a long term sales agreement and applies proceeds to service its bank
borrowings.
Under this type of arrangement, Company A is only liable to tax under
CITA.
With respect to sale and purchase of goods, transfer pricing/arms length
transactions can only be straight-forward where a company sells its
product to both related parties and unrelated parties. However, in
circumstances where the company only sells its products to related
parties, the issue of arm’s length transaction becomes more
complicated. The search for a company with similar finished/semi-
finished goods would most probably be cumbersome.

35
 Advantages
ii. Technology Transfers
 It offers the only available option when there is no market.
Transfer pricing under technology transfer is perhaps the most  Prices can easily be obtained from the costing system.
complicated. This is especially so where the technology transferred is
 A transfer price could be fixed especially when standard costing
unique. In this scenario, the determination of the value of such
approach is used, hence little or no externalities.
technology is peculiar only to the related companies.
Disadvantages
iii Provision of services

Management and administrative services are quite peculiar to specific
companies. In order to attach a representative price, a full
understanding of the functions of each entity would be required.
Consideration would be required for the identification of the type of
services rendered; determination of benefit effectively derived; and
evaluation of appropriate charge.
iv Financial Transactions
 Unpredictable fluctuations associated with standard costing
 A pre-specified mark up makes profit highly predictable leading to inefficie
 It treats each division as cost rather than profit centers.
(ii) Market Based Transfer Pricing
The price would be that which both the selling and buying
divisions are prepared to transact.

Inter-company lending becomes important and difficult to generalize to Advantages

arrive at arm’s length rate given considerations for cost of capital. A
company can raise finance using internal sourcing or external funding  Autonomy of division
depending on the cost of each source. However, where the sourcing is  Basis for performance evaluation
from one related party to another, this gives rise to transfer pricing  Objective and verifiable
concerns for the relevant authorities especially where the companies are
in different countries. Disadvantages
5.2.2 Methods of Transfer Pricing
 Accurate information about market price may not be readily
available
Some of the methods often adopted for transfer pricing include:
 Problem of unrealized profit in stock valuation when group account
(i) Cost Based Transfer Pricing method is being prepared.

The cost plus starts with the supplier’s cost to which is added
an appropriate margin. Cost, for the purpose of this definition,
could be full cost, variable cost, standard cost or cost plus
mark-up. The cost based method is commonly used to set
prices charged by a manufacturing company and in particular,
a contract manufacturer.
(iii) Negotiated Transfer Pricing Method
Under this method, the buying and selling divisions will agree in
advance to use mutually acceptable transfer price. It is a good
motivational method for managers but great time is wasted during
negotiation.

36

(iv) Arbitrary Method
Top management for all divisions determines transfer price.
Though it promotes uniformity, it however erodes independence
normally desirable for autonomous divisions.
5.2.3 Tax Impact of Transfer Pricing
Sometimes, related parties involved in a transfer pricing
situation may exist across country borders thus giving rise to
issues relating to the taxation o f the companies global profits.
Where countries tackle the taxation of such multinational
companies in isolation, a huge double taxation burden would
arise on these companies thus making foreign investments
unattractive.
Member countries of the Organisation for Economic
Cooperation and Development (OECD) recognised this
potential for double taxation, thus leading to the publication of
the OECD transfer pricing guidelines. However, despite
attempts by many countries to formulate acceptable and
workable transfer pricing methodologies, international transfer
pricing is still fraught with uncertainty and inconsistency thus
creating challenges for multinational companies with local tax
authorities of countries in which they operate.
5.2.4 Relevant Tax Provision in Nigeria
There is no specific legal provision on transfer pricing in
Nigeria. There are, however, some general provisions and
guidelines, which may apply to transfer pricing. These
include:
Joint Operating Agreement (JOA)
 The charge to joint accounts in respect of general services
should:
a. represent a fair allocation of actual costs relative to actual
services provided and benefits enjoyed by the Joint
Venture.
b. not exceed the amount which would normally be charged
by an affiliate to any other company within the
group.
c. not duplicate any other amount charged to operator.
 Maximum amount for home office charges contained in the
JOA/PSC
Companies Income Tax Act (CITA), as amended
Section 22 of CITA discusses artificial transactions. It provides
that where the Federal Board of Internal Revenue (Revenue) is of
the opinion that a transaction, which reduces tax payable, is
artificial, it may disregard such transaction and determine tax
payable, as it considers appropriate.
Generally, a transaction may be deemed to be artificial or fictitious
if made between persons, one of who has control over the other
and the Revenue is of the opinion that the transaction has not been
made on terms expected to have been made by persons engaged in
the same or similar activities, dealing with one another at arm’s
length.
This provision of CITA is in line with the recommendations of
the OECD with regards to transfer pricing.
Petroleum Profit Tax Act (PPTA), as amended
Section 15(1) of the PPTA also discusses artificial transaction with
similar provisions to the one under CITA discussed above.
In addition, an amendment to Section 10 of PPTA by Decree no 30
of 1999, allows interest on inter-company loans as tax-deductible,
for companies engaged in crude oil production. The interest must
however reflect terms prevailing in arm’s length transactions.
37
 Hence, interest on loans from parent companies to subsidiaries or
associates, for example, will be allowed for tax purposes, if the
interest amount is comparable to what obtains in the open market.
Capital Gains Tax Act (CGTA), as amended
Artificial transaction is also provided for under CGTA. The
provisions are similar to the provision of CITA discussed above.
Statement of Accounting Standard (SAS) 17 – Accounting in the
petroleum industry: downstream activities
SAS 17 briefly discusses transfer pricing within the context of
accounting in the petroleum industry. The SAS recognizes the
following methods used for transfer pricing decisions:
(i) market based pricing
(ii) cost-based pricing; and
(iii) negotiated pricing
The standard requires companies to disclose in the financial
statement, the policy adopted with regards to transfer pricing.
5.3 Taxation of Marginal Fields
In recent times, the FG has come under great pressure to increase
indigenous participation in the oil and gas industry by relocating marginal
fields, belonging to multinational companies, to indigenous concession
holders. In response to this call for increased participation, the government,
in 1996, promulgated the Petroleum (Amendment) Act No. 23 on the
development of marginal fields.
5.3.1 What is Marginal Field?
The Act does not define marginal fields. It however provides the criteria
for determining which fields are marginal. Section 16A (2) of the first
schedule provides that:
‘the Head of State, Commander-in Chief of the Armed forces may cause the
farm-out of marginal field, if the marginal field has been left unattended for
a period of not less than 10 years from the date of the first discovery of the
marginal field’.
The above suggests that where non-producing fields have been left
unattended for not less than 10 years, they qualify as marginal fields, and
therefore can be compulsorily assigned by the Government without the
consent of the concession holder.
The DPR’s “Draft Guidelines for Farm-out of Marginal Fields” 38 also
mandates all oil companies to update their portfolio of underdeveloped
fields and report to the DPR on periodic basis.
A Marginal Field is thus, any field that has reserves booked and reported
annually to the DPR and has remained unproduced for a period of over 10
years.
5.3.2 Features of Marginal Fields
The DPR’s “Draft Guidelines for Farm-out of Marginal Fields”13 further
expatiates the provisions of the Decree. It identifies marginal fields as
follows:
a. fields not considered for development by leaseholders because
of economics.
b. fields that have had an exploratory well drilled on strata and
have been reported as oil and/or gas discovery for more than 10
years.
c. fields with high gas and low oil reserves.
d. fields with crude oil characteristics different from current streams,
which cannot be produced through current technology.
e. fields abandoned by leaseholders for upwards of 3 years for
economic reasons.
f. fields that the present leaseholders may consider for farm-out due to
portfolio rationalization.
38
Source: Marginal filed development in Nigeria Ike Oguine
38
5.3.3 Objectives of the Marginal Field  Premium – signature bonus of $150,000.

(i) Expand the scope of participation in Nigeria’s oil industry.  Environmental consideration.
(ii) Increase the oil and gas reserves base.
 Local content.
(iii) Promote indigenous participation in the oil industry.
 Commitment to social projects.
(iv) Provide opportunity for portfolio rationalization.
 Specific fields being bidded for.
(v) Enhance employment opportunity.
 Financial capability.
5.3.4 Enabling Legislation
5.3.7 Structure of Consideration to Leaseholders
a. Petroleum Act;
 Overriding royalty payment for Farmor (percentage of income).
b. Petroleum (Amendment);  Tariff payment ($/bbl).

c. Petroleum (Drilling and Production) Regulations; 5.3.8 Fiscal Regime

d. Associated Gas Re-injection Act; and There is no specific tax legislation for Marginal Fields, however, the PPT
Act modified by the MOUs, will apply. The tax rates are as set out in the
e. Petroleum Profit Tax Act. Deep Offshore and Inland Basin Production Sharing Contracts Act, as
follows:
5.3.5 Classifications of Marginal Fields
 Year 1-5 65.75%
a. Oil companies are to carry out field studies and update their
 Year 6-11 85%
portfolio of underdeveloped fields.
 Application field by field
b. Status of fields to be reported to DPR on a periodic basis.
Investment Tax Allowance is also applicable as follows:
5.3.6 Criteria for Evaluation of Application for Marginal Fields
 Onshore 10%
The application for assignment must be made to the Minister of Petroleum  0-100m 15%
Resources and approved by the Head of State, and must show the following:  100-200m 20%

 Company’s details.

 Evidence of the company’s technical and managerial capability.

39
Royalty Rates for marginal fields are as follows: Area Rate (%)

Terrain Onshore Offshore Offshore100<2 In areas from 201 to 500 metres water depth 12%
Land/SWP WD<100m 00m In areas from 501 to 800 metres water depth 8%
Prod<2000 bopd 6.50% 2.50% 1.50% In areas from 801 to 1,000 metres water depth 4%
2000<Prod<5000 15% 7.50% 3% In areas in excess of 1,000 metres water depth 0%
bopd Inland Basin 10%
5000<Prod<1000 20% 12.50% 5%
0 bopd (v) Royalty Oil will be allocated to NNPC or concession holder in such
10000<Prod<150 20% 18.50% 10% quantum to generate an amount of proceeds equal to actual royalty
00 bopd and concession rental payable (S.7)
15000<Prod<250 20% 18.50% 162/3%
00 bopd (vi) The PSC contractors will be reimbursed its cost incurred to date of
Prod>25000 20% 18.50% 2
16 /3% production through cost oil.
bopd
(vii) Tax Oil will be allocated to NNPC or the holder to generate an
5.3.9 Review of Production Sharing Contracts amount equal to actual PT liability payable (S.9).

The Deep Offshore and Inland Basin Production Sharing Contracts Act,
governs PSCs. Below is a summary of the key provisions of the Act.
(i) The Act provides that an OPL relating to PSCs in the deep offshore
and inland basin shall be determined by the Minister of Petroleum
Resources, and will be for a minimum period of 5 years and an
aggregate period of 10 years (Section 2)
(ii) The PPT rate applicable to the contract area in the PSC is 50% flat
rate of chargeable profits for the period of the PSC (S.3)
(iii) PSC contractors are entitled to investment tax credit of 50% of the
Qualifying Capital Expenditure (QCE), where the PSC was signed
prior to 1993, and the investment tax allowance ate same rate for
PSCs signed after that date.
(viii) The balance of crude oil after deducting royalty oil and cost oil,
known as profit oil, will be allocated to each party to the PSC in line
with the provisions of the PSC (S.10)
(ix) NNPC or the holder has responsibility to pay all royalty, concession
rentals and PPT on behalf of itself and the Contractor out of the
allocated royalty oil and tax oil. However, the FIRS will issue
separate tax receipts for the respective amounts of PPT paid on
behalf of the parties.
(x) NNPC and the Holder will split the chargeable PPT in the ratio as the
split of profit oil as defined in the PSC (S.12)

(iv) the applicable royalty rate are graduated as follows:

40

6 REVIEW OF PROPOSED AMENDMENT TO PPT ACT
6.1 Computing assessable profit
The major amendments are as follows:
 Deletion of royalties on natural gas sold and actually delivered to
the NNPC or any other customer as a deductible tax expense;
 Ministerial approval required for loans whose interest rate
exceeds the London Inter Bank Offer Rate (LIBOR);
 Inclusion of any expenditure (whether tangible or intangible),
directly incurred in connection with the drilling of an exploratory
well and the first four appraisal wells in the same field, whether
the wells are productive or not; and
 Inclusion of provision for abandonment and restoration made in
accordance with any rules approved by the Ministers charged
with the responsibility for matters relating to petroleum and
finance.
The deletion of royalties (first item) and the expansion of the number
of appraisal wells to four from two for tax deduction purposes are
welcome developments. Since gas income is now taxable under
CITA, the deletion will ensure consistency and avoid contradiction in
our laws. The oil and gas industry has long awaited the tax
deductibility of the provision for abandonment and restoration cost.
The requirement for the approval of the Minister of the “maximum
spread on LIBOR” is a setback for the freedom to obtain foreign
loans without ministerial approval under the Foreign Exchange Act,
1995. It is hoped that the responsible ministry will put in place an
efficient process for granting the required approval in order to ensure
that applications are not unduly delayed. Since most foreign loans
are above LIBOR, it would be better if the law provides for a band
above LIBOR beyond, which the ministry’s approval would be
required. Better still, the requirement of ministerial approval should
be dispensed with, as the oil companies can do without another
bottleneck on their way.
6.2 Removal of incentives for gas utilisation
The proposed amendments suggest the deletion of Sections 11 and 12
which provide for incentives for utilisation of associated gas and
non-associated gas. Interestingly, the proposed Gas Fiscal Reform
Bill still contains reference to those sections proposed for deletion.
The reality is that after the provisions are deleted, there would be no
legal basis for the continued enjoyment of the incentives by the
existing beneficiaries. In view of the fact that we have not reached
the stage of optimal gas utilisation yet in Nigeria, it would be better
for the Government to allow a few more years before withdrawing
the incentives, if at all.
6.3 Separation of petroleum business from other lines of
business – amendment to Section 14
The proposed amendment seeks to match expenses with related
income. Consequently, expenses not related to petroleum operation
cannot qualify for tax deduction under the PPT.
6.4 Chargeable profits of any company for any
accounting period – Amendment to section 20
The proposed amendment removes the existing restriction on the
amount of capital allowances claimable. Based on the proposed
amendment, exploration and production (E&P) companies will not
41
 be in a tax payable position where the available capital allowances
exceed the assessable profits.
6.5 Computation of assessable profit for petroleum
operations – Amendment to Section 21
The proposed amendments introduce three new subsections as
follows:
i. Subsection 21(3) – confirms the assessable tax rate of E & P
companies (under PSC terms) at 50% of chargeable profits
from the contract area. The rate may, however, be varied by
the Minister of Finance on the advice of the FIRS;
ii. Subsection 21(4) – which assesses to tax at zero percent,
transfer/sale/disposal of gas to a gas utilization project where
the transfer is done at cost of production. However, where the
transfer is done at a price higher than cost, the profits shall be
subject to tax at the CIT rate; and
iii. Subsection 21(5) – export of gas to be taxed at the CITA rate.
6.6 Investment tax credit for production sharing contract
(PSC) – Amendment to Section 22
The amendments to subsections (1) and (2) of section 22 seek to
clarify:
i the confusion that trailed the provisions of earlier Acts
with respect to whether PSCs signed between 1993 and 1
July 1998 are entitled to claim Investment Tax Credit
(ITC); and
ii The basis for calculating ITC.
Based on the proposed amendment, ITC will be applicable to all
PSCs signed on or before 1 July 1998 and shall be calculated as 50%
of the qualifying capital expenditure.
6.7 Information to be provided on Joint Venture
arrangement – Amendment to Section 24
The proposed subsection 24(7) on reporting requirements provides
that notwithstanding any other contrary provision, every E&P
company in a Joint Venture or partnership shall be responsible for
reporting its petroleum operations, profits, outgoings, expenses,
qualifying expenditure and the tax chargeable on its petroleum
operations.
6.8 Reporting requirements – Amendment to Section 30
The proposed insertion of section 30A, in general terms, seeks to
encourage and promote more transparency and accountability
through the provision of relevant information by the national oil
company and regulator (NNPC and DPR). The entire gamut of
reporting requirements is in the spirit of the Federal Government’s
desire to support the Extractive Industry Transparency Initiative
(EITI)’s drive for promoting transparency in the industry.
6.9 Power to distrain for tax – Amendment to Section 35A
The insertion of a new section 35A contains eight subsections
essentially identical to equivalent proposals for distraining under the
CITA Amendment Bill. The PPTA did not give the FIRS any
distraining powers. These new provisions are intended to strengthen
FIRS’ revenue collection efforts.
42
6.10 Appeal against the decision of a High Court Judge – (ii) any income tax or arrears of tax payable by the company for
Amendment to Section 42 any of the six (6) preceding years of assessment.

The amendment substitutes the amount of N1,000 with N100 million

as the threshold for appealing the decision of the judge of a High
Court (either by an E&P company or the FIRS), to a Court of
Appeal. This proposal may be challenged as unconstitutionally
limiting the right to appeal by citizens.

6.11 Interest/Penalty for underpayment or late payment

of tax – Amendment to Section 45 & 46

The proposed amendments to sections 45 and 47 seek to introduce

interest charges on any delayed payment of PPT installment or
underpayment of PPT by an E & P company and the increase in
penalty rate from 5% to 10%.

6.12 Failure to deduct or remit tax – Amendment to

Section 54

The proposed amendment seeks to reduce the penalty for failure to

withhold tax or remit deducted tax within 30 days from 200% of the
amount of tax (on conviction), plus interest at commercial rate, to
10% and interest at the prevailing CBN minimum rediscount rate.

6.13 Deduction of tax at source – Section 56

The proposed amendment suggests that in determining the rate of tax

that will apply to any payments made to a company, the FIRS may
take into account:

(i) any assessable profits of that company arising from any other
source on which income tax is chargeable; and

43

7. LOCAL CONTENT
7.1 Local Content Policy
7.1.1 Brief Overview
In October 2001, the Nigerian National Petroleum Corporation
(NNPC) inaugurated the National Committee on Local Content
Development (the Committee) to develop a policy document on
increased utilization of local (Nigerian) manpower, goods and
services in the Nigerian oil and gas industry.
The Committee’s report titled “the Report of the National Committee
on Local Content Development in the Upstream Sector of the
Nigerian Petroleum Industry” (the Report), was submitted in April
2002. An updated version of the report was submitted in 2003 titled
“Synchronised Report on Enhancement of Local Content in the
Upstream Sector of the Oil and Gas Industry in Nigeria” 39
The Report defines “local content” or “Nigerian content” as:
“the quantum of composite value added to, or created in, the
Nigerian economy through the deliberate utilization of Nigerian
human and material resources and services in the exploration,
development, exploitation, transportation and sale of Nigerian crude
oil and gas resources, without compromising quality, health, safety
and environment”.
The policy requires the local/Nigerian content of a contract to be
stated as a percentage of the total contract sum. The above
developments demonstrate the Federal Government’s (FG) keen
interest in increasing the use of Nigerian manpower, goods and
services in the upstream sector of the Nigerian petroleum industry.
The President reiterated, in November 2003, that his administration
39
This report is stated to be a collation of the “Report of the Committee on Local Content, 19 January, 2002” and “
Enhancement of Local Content in the Upstream Oil and Gas Industry in Nigeria – a Comprehensive and Viable Policy
40
Approach, SNF Report No. 25/03, August, 2003”
of the overall project.
aims to increase local content to 45% by 2007 and 70% by 2010. 40
Consequently, the NNPC and its investment arm, the National
Petroleum Investment and Management Services (NAPIMS), usually
insist that certain portions of contracts awarded by multinational oil
exploration and production (E&P) companies operating in Nigeria
must be exclusively reserved for indigenous companies.
This is especially the case in respect of services for which Nigerian
expertise is available. NAPIMS also usually insists on requiring
contractors and operators to demonstrate the percentage of their
projects or contracts that provide opportunities for local content
development.
7.1.2 Guidelines for the 2005 Licensing Bid Round released by
the DPR
The 2005 Licensing Bid Round took place in August 2005, and the
related guidelines which governed the bidding round substantially
reflected the local content policy thrust of the Federal Government.
While the guidelines relate to only exploration and production (E&P)
companies; in practice, oil services companies are required to also
comply with the general local content regulations.
Among the key provisions contained in the guidelines, are:
(i) the broad objectives of the local content policy include
promotion of indigenous participation in the oil and gas
industry to foster technology transfer, local goods and
services utilisation and skills and competencies acquisition
by indigenous employees;
(ii) the FG reserves the right to recommend Local Content
Vehicles (LCVs) to partner with foreign companies which
win concessions;
(iii) local content was made a biddable criterion in the guidelines,
and the bids submitted by foreign companies shall include the
activities which the operator would be willing to mandate to
In this context, ‘local content’ means Nigerian value added/input - Nigerian manpower, goods and services as a component
44
 its local content partner expressed in US Dollars (US$). (ix) Effective technology acquisition and adaptation, and capacity
building through joint ventures, equipment upgrades, formal
7.2 Measurement of local content under the training and other business development programmes;
Report (x) New jobs/ employment opportunities created for Nigerians; and
The Report listed the following eleven (11) parameters for (xi) Amount of taxes, fees, duties and payments to the Government.
evaluating/ measuring local content, as follows:
Although the Report provides parameters for measuring local
(i) Percentage of Nigerian management and established managerial content, it is silent on the weight to be attached to each parameter in
control of company. This is determined by reference to the respect of any contract and the stipulated minimum percentage of
composition of the Board of Directors of companies and the
Nigerian labour (on professional cadres) for listed projects in such
number of (top) management positions occupied by Nigerians in
contracts. In practice, the operators/regulatory authorities use their
the companies involved in the relevant contract;
judgment to determine the weighting on a case-by-case basis. They
(ii) Percentage element of Nigerian ownership of company. This is also consider the relevance or otherwise of the parameters, since all
determined by reference to the shareholding of the companies the parameters will not be relevant in some cases.
involved in the execution of the contract. This will be evidenced
by the certified true copy (CTC) of Form CAC 2.41 Thus, a 7.3 Categorization of Service companies
company wholly owned by Nigerians or in which Nigerians hold
majority of the shares would be deemed to have satisfied this The Report classifies service companies into five (5) categories (A to
requirement; E), depending on their ownership and institutional structure, as
shown in the table below:
(iii) Percentage element of direct Nigerian employment (skilled and
unskilled);
Category Title Description
(iv) Percentage cost of services provided by Nigerians;
An indigenous company or
(v) Percentage cost of Nigerian raw materials utilized; contractor is one, which is wholly
owned by Nigerians; has a
(vi) Percentage cost of Nigerian finished goods utilized; recognizable establishment and
its own resources in Nigeria are
(vii) Percentage cost of Nigerian participation in the procurement of
appropriate to the type and level
imported goods; Wholly
of work, which it claims to be
A indigenous
able to perform. Other features of
(viii) Quality and quantity of committed infrastructure investment in company
a wholly indigenous company
Nigeria; include:

Equipment must be 100%

owned by the company;
41
‘Return of Allotment of Shares’ filed by companies at the CAC to reflect the shareholding structure of the company or
At least 80% of the Directors
changes thereon arising from new allotments, etc.

45
 Category Title Description The Report assumes that “alliance and joint venture” would only be
recognised for the purposes of local content if formed between a
must be Nigerians; Category A and Category E companies only. In practice, this is too
A minimum of 80% of the restrictive as joint venture and alliances other than the one recognised
top management must be (as Category C) may be necessitated by circumstances of particular
Nigerians; and projects or contracts.
A minimum of 90% of senior
field personnel must be With respect to evaluation of company types for bidding and contract
Nigerians. awards, it is safe to state that, all other things being equal, a Category
A company registered in Nigeria A Company would have preference over all other categories,
with majority Nigerian Category B being next in line, with Category E coming last. Given
Majority shareholding that has the the provisions of the OGEFZA exempting foreign companies from
Nigerian establishment, enterprise, assets local incorporation (provided they are registered in the Zone with the
B
Shareholding and financial capability Zone Authority), a Category C Company does not need to set up
company appropriate to the type and level either a Category B or D company, if its services to be performed in
of work it claims to be able to Nigeria, are carried out in the Zone.
perform.
Alliance or An alliance between a Nigerian 7.4 Value Matrix
C Joint company (Category A) and a
Venture foreign company (Category E). 42 The Report provides guidance for measuring local content in respect
of procurement of goods and services, utilization of direct and
A company registered in Nigeria indirect labour and payment of taxes/fees on the basis of the value
with minority Nigerian matrix below:
Majority shareholding that has the
foreign establishment, enterprise, assets Goods/Materials/Equipment procured
D
shareholding and financial capability
company appropriate to the type and level Where the product or its components are not of Nigerian origin, but
of work it claims to be able to imported, then the Nigerian content is simply the added value to the
perform. product by Nigerians (working in a registered company in Nigeria) in
A foreign company, whether the course of product delivery.
registered in Nigeria or not, with
Foreign
E no Nigerian shareholding and Where the product is manufactured in Nigeria using Nigerian raw
company
whose assets belong to the materials, then the Nigerian content is 100%.
offshore company.
With respect to the proposed business of fabrication and welding, the
Source: ADCG Industry Survey 2004: The Nigerian Oil Industry 43 Report notes that fabrication is one of the activity areas with high

42
Category C would apparently be a 50:50 JV between Category A and Category B companies. The proposed JV with
Nigerdock (if Nigerdock is 100% Nigerian owned), may fall under this classification.
43
.
The ADCG Industry Survey cited NNPC as the source for the Table

46
 potential for local content growth and is probably the most developed
manufacturing area in the Nigerian petroleum industry. 44
Where equipment is leased, then the Nigerian content will depend on
the category of the owner/lessor companies weighted as follows: A-
100%, B-75%, C-25% and E-50%.
A wholly owned foreign company would ordinarily have lesser
weighting than a JV in which there is Nigerian participation (the
greater the quantum of local participation, the better). Furthermore,
please note that the various criteria are not mutually exclusive.
Services procured (including Sub contacting)
All services rendered in Nigeria by Nigerians working in any
categorized company shall be deemed 100% Nigerian Content. For
competitiveness, it is envisaged that JVCo would employ a higher
number of Nigerian vis-à-vis expatriate employees.
Direct and Indirect Labour (total payroll)
All gross payments (inclusive of salary, social security tax etc.) to all
Nigerian citizens employed for direct performance and indirect
support of the contract/project shall be deemed 100% Nigerian
Content.
Taxes/Fees/Duties
Should include the total value of all taxes and fees paid on all
materials and equipment to the Federal/local government or
regulatory agencies by Contactor in connection with performance of
work during the reporting period.
Labour Hours
Where cost breakdown is extremely difficult, then the ratio of
estimated total Nigerian-man hours compared to estimate total man-
hours shall be Nigeria content.
44
According to the report, there is a total capacity of 23,000 tons spread across yards located in Dubi, Dorman Long and Niger
Dock in Lagos, Warri and Port-Harcourt that are not fully utilised.
7.5 Core Competencies and Job Categorisation
The Report listed eleven (11) core competencies in the petroleum
industry, and identified their various aspects that have high, medium
and low technology impact, respectively. The expectation is for jobs/
services to be categorised on the basis of their technology and cost
impact.
Although DPR and NAPIMS are expected to periodically publish a
list of jobs and services, which can be awarded to only wholly
indigenous companies, they are yet to publish a formal list. It is
expected that DPR/NAPIMS would give first consideration to
Category A (wholly indigenous companies) for relevant jobs or
services with low or medium technology impact, where such
companies have capacity which has not been fully utilised. In such
instances, a price premium of up to 10% may be accepted for
Category A company vis a vis other companies.
7.6 Policy Thrust
It is recommended that the policy thrust be put in place in achieving
the targets on local content. These include, amongst others, that:
NAPIMS to ensure that work scopes for mega-projects are broken
down into smaller packages to facilitate participation of indigenous
companies.
Industry stakeholders led by NAPIMS/DPR should establish a
system for joint qualification of contractors through establishment of
national databank of available capabilities.
DPR/NAPIMS should use preferential patronage as an instrument to
mandate multinational service companies to invest in the local
fabrication, infrastructure, and other facilities in Nigeria.
Any Category A company that wins a contract and fraudulently uses
a foreign company to execute the contract shall be deemed to have
committed an offence and risks having its DPR Permit withdrawn.
47
 The policy objective of the Federal Government should be to strive
towards achieving an increase in the market share of the wholly
indigenous companies (Category A) in the petroleum industry.
7.7 Regulatory initiatives
The recommendations in the Report are yet to be enshrined in any
approved policy statement by the Government but there are several
draft bills before the National Assembly in this regard. The most
prominent of these bills is the draft Local Content, Nigerian
Content Development Bill, 2004 also contained a draft of the
proposed law (Nigerian Local Content Implementation Bill), which
the Committee recommended for passage into law by the
Government to provide the legal backing for its recommendations.
The key recommendations of this Bill include:
(i) establishment of regulations by the DPR governing minimum
price levels of Nigerian Content and the price premium that
may be applied for Nigerian Content particularly for major
contracts in the Nigerian Petroleum Industry;
(ii) contracts awarded in excess of a threshold value set by DPR in
the procedure guide for the industry shall contain a “Labour
Clause” mandating the use of a minimum percentage of
Nigerian Labour (on professional cadres) for listed projects in
such contracts. 45
(iii) The DPR in consultation with NNPC shall establish for
companies involved in the oil and gas industry targets for
Nigerian employees and for representation on the Board of
Directors;
(iv) The DPR shall establish along with the companies, a Nigerian
Content performance monitoring procedure;
45
In practice, this has already commenced.
(v) Companies shall be required to produce annual local content
plans for utilisation of contractors and labour from the host
communities as well as plans for community development;
(vi) From when the A t is passed, no expatriate quota would be
granted to any company involved in the oil and gas industry
without first obtaining the approval of the DPR.
The Oil and Gas Services Bill is another legislation that would be
relevant on local content issues. The Bill makes it mandatory for
companies doing business in the oil and gas sector to establish a
physical presence in the State where they operate, and ensure that,
as much as practicable, any contract they win is executed in Nigeria
as well as fulfil other corporate social responsibilities. 46 The
affected companies are also required to comply with regulations and
enactments relating to the welfare, safety, health and environment
of its community of operation, and employment of a reasonable
qualified number of peoples in the community, local government
area, and state of operation.
Section 2(1) of the Bill includes a foreign company with an
established Nigerian subsidiary, which:
(i) has its operational base in Nigeria;
(ii) employs citizens of Nigeria in its managerial, professional
and supervisory (MPS) grades, such that at least 30% of the
subsidiary’s MPS positions are occupied by Nigerian
citizens; and
(iii) after five (5) years of its operations in Nigeria, the number of
Nigerians employed in the subsidiary’s MPS grades shall not
be less than 75% of total number of persons employed in such
positions as eligible for the award of contracts in Nigeria’s oil
and gas sector. 47.
46
There are restrictions on executing parts of contracts outside of Nigeria: contractor must apply for permit to execute (not
more than) 10% outside Nigeria from the NAPIMS, and permit would only be issued upon satisfaction of stated criteria.
47
Incidentally, such foreign company was not listed in section 4 amongst candidates for preferential consideration in award of
contracts. Companies registered outside Nigeria can also get contracts in the oil and gas industry if Nigerians own 50% of their
shares and if the shares are also listed and quoted on the Nigerian Stock Exchange
48
 Notwithstanding the absence of enabling legislation on the matter, least 60% Nigerian presence on their Boards of Directors. Thus,
NNPC/NAPIMS have commenced the implementation of the local there is the potential risk of Nigerianisation of the Boards of
content policy enshrined in the Report in contract award process in subsidiaries/ affiliates of multinational companies in Nigeria
the oil industry. unless this element of the policy is reversed in the light of
Federal Government’s foreign investment promotion policy.
7.8 Potential impact on foreign oil service
companies
The implementation of the recommendations contained in the Report
is likely to have the following impact on oil service companies with
foreign majority shareholding operating in Nigeria:

(i) Increase in the compliance requirements for foreign companies

operating in the Nigerian oil and gas industry. For instance, it is
envisaged that such companies would render quarterly and
annual returns to the Department of Petroleum Resources (DPR)
and NAPIMS on their local content achievement during contract
execution. These returns will be in addition to their existing
compliance requirements.

(ii) Foreign companies may be obliged to either increase their

Nigeria local content through Nigerian
shareholding/directorship, management staff recruitment, local
raw material utilisation joint venture and alliances with
Nigerians, etc.

(iii) The practice of engaging expatriates for services for which there
are qualified Nigerians will be minimized. The foreign
companies may not be able to obtain expatriate quota approvals
or renewals for such positions. One of the policy thrusts in the
Report is the collaboration of DPR/NAPIMS with FMIA to
achieve controlled reduction of expatriate workforce and
progressive build up of indigenous manpower.

(iv) Foreign companies will be obliged (or encouraged) to invest in

local fabrication, infrastructure and other facilities in Nigeria.

(v) Foreign companies with over ten (10) years presence in Nigeria
may be obliged to achieve 95% of Nigerian presence in its
management, professional and supervisory cadres as well as at

49
 8.1.2. Revised Government Take
8. THE MEMORANDUM OF UNDERSTANDING
(MOU) The Formula for computing the (RGT) is given as:

The MOU is an understanding reached between the FG and oil RGT = ROYTRP + PPTTRP + TIP
producing companies in JV operations with the NNPC. The main where:
objective of the MOU is to guarantee the E&P companies a profit
margin, irrespective of market conditions. This was necessary to inject ROYTRP = Revised Royalty
life into the oil industry, which was experiencing a slump in the mid PPTTRP = Revised PPT
1980’s. TIP = Tax Inversion Penalty

The margin was determined by a combination of formulae used to 8.1.2.1 Computation of Revised Royalty (ROYTRP)
arrive at the incentive, defined as the “MOU tax credit”. The MOU,
first signed in 1986, was revised in 1991 and again in 2000. This is computed using the formula

ROYTRP = RR x TRP x V
8.1 Computation of MOU Tax Credit under the 2000 where:
MOU.
RR = Applicable royalty rate
The MOU Tax Credit is used as a tax offset against PPT TRP = Tax Reference Price
liability. Its effect is to reduce the tax payable by an E&P V = Company’s crude oil production volume
company in JV
with NNPC. 8.1.2.2 Computation of Revised PPT(PPTTRP)

MOU Tax Credit under the fiscal incentives of the 2000 MOU is This is computed using the following formula
computed as the difference between:
PPTTRP = [(TRP x Vs) - ROYTRP – TC] x TR
1. Initial Government Take (IGT) computed as Royalty plus where:
PPT using posted price, and
TRP = Tax Reference Price
2. Revised Government Take (RGT) computed as Royalty plus Vs = Company’s crude oil sales volume
PPT, using the Tax Reference Price (TRP) ROYTRP = Revised Royalty, computed under
4.1.2.1 above
8.1.1. Computation of IGT TC = Technical Cost, defined as allowable deductions
and capital allowances under PPTA
IGT is the sum of PPT and Royalty computed using excluding Royalty)
“posted price.
TR = Applicable Tax Rate

50
8.1.2.3 Computation of Tax Inversion Penalty (TIP) same calendar year or $3.00/bbl
for companies producing below
TIP is aimed at reducing operating cost inefficiencies an average of 175,000bbl/day in
of E&P companies in JV with NNPC. Where in any the same calendar year. To the
year the technical cost (TC) of operation is greater extent that V, as defined below,
than $1.70/bbl or greater than $2.30/bbl for is adversely impacted by
companies producing above an average of 175,000 circumstances outside the control
bbls/day, or $3.00/bbl for companies producing of the company, UTIT shall be
below an average of 175,000 bbls/day, a penalty is adjusted to negate such adverse
imposed. If however the reverse is the case, a credit impact the procedure of which is
is given. It should however be noted that at the limits set out in Appendix C of the
(i.e. $1.70/bbl, $2.30/bbl or $3.00/bbl as the case may MOU.
be), no penalty or credit is charged / accrued.
TR = Applicable Tax Rate
The formula for computing TIP is twofold;
TIR = Tax inversion rate (35%)
1. Where TC is greater than $1.70/bbl

2. Where TC is greater than $2.30/bbl in any

year for companies producing above an 8.2 Computation of Tax Reference Price (TRP)
average of 175,000 bbls/day or $3.00/bbl for
companies producing below 175,000 TRP = RP – (M + 0.15 x FC)
bbls/day 0.88
where:
For (1) above
RP = Realisable Price
TIP = (TR – TIR) x (T1 – LTIT) x V
M = Applicable Guaranteed Notional Margin which varies
For 2 above with RP

TIP = (TR – TIR) x (T1 – UTIT) x V FC = Notional Fiscal Technical Cost of $4/bbl
where:
8.3 Computation of Applicable Guaranteed
LTIT = Lower Tax Inversion Threshold Notional Margin (GNM)
= $1.70/bbl
(a) For Realisable Price less than $13.48/bbl
UTIT = Upper Trigger Point for Tax
Inversion for T1 = $2.30/bbl for M = (1 – FC) x (RP1a1 + RP2a2 + RP3a3)
companies producing above an RP
average of 175,000 bbl/day in the where:

51
 RP = Realisable Price Realisable Company Share
Price in the Applicable to Price
FC = Notional Fiscal Technical Cost of $4.00/bbl Range Range
T2 < 2.00 T2 >
A = Company’s Percentage share of field profit 2.00
$13.48 < a= 0.1160 0.131
For: RP< 5
$15/bbl
Realisable Company Share
(c) For Realisable Prices greater than $19/bbl and less
Price in the Applicable to Price Range
than or equal to $30/bbl:
Range
T2 < 2.00 T2 > 2.00 M = M19 + (RP – 19) x a
Where:
0 < RP1 < a1 = 0.300 0.365
$5/bbl M19 = $2.50/bbl when actual capital
$5/bbl < RP2 a2 = 0.285 0.28833 Investment costs (T2)is $2/bbl or less
= $2.70/bbl when actual capital Investment
< $10/bbl
costs (T2) is greater than $2/bbl
$10/bbl < a3 = 0.10744 0.08286
RP3 < RP = Realisable Price
$13.48/bbl
a = Company’s Percentage share of field profit
(b) For Realisable Prices between $13.48 and $15/bbl:
For:
M = M15 + (RP – 15) x a
Where: Realisable Company Share
Price Applicable to Price Range
M15 = $2.50/bbl when actual capital investment costs in the Range
(T2) is $2/bbl or less T2 < 2.00 T2 > 2.00
$19 < RP< a 0.1160 0.1315
= $2.70/bbl when actual capital Investment costs $30/bbl
(T2) is greater than
$2/bbl (d) For Realisable Prices greater than $30/bbl:
a = Company’s Percentage share of field profit
The Minister of Petroleum Resources shall advise any
For: change in applicable margin when oil prices (RP)
exceed $30/bbl, for at least 45 days continuously. If the

52
 RP returns below $30/bbl, the margin will return IV. Education Tax (net of other Applicable
automatically to the levels above as appropriate. taxes, levies, etc payable to the
Federal, State and Local
Format for computing PPT Under MOU Incentives Governments)

$ $ B Calculation of Revised
Government Take (RGT)
Sales Proceeds + Incidental Income x
Less: Royalty x Substitute Official Selling price Tax Reference
Operating Cost x with Price
Intangible Drilling Cost x
Tangible Drilling Cost x Tax Inversion Penalty Applicable
Education Tax x (x)
Adjusted Profits x Currency of Calculation US Dollars
Less Unrelieved Losses (x)
Assessable Profits x
Less : Capital Allowances as restricted x
Petroleum Investment Allowance x (x)
Chargeable Profits x
Assessable Tax @ 85% x
Less MOU Tax Credits (x)
Chargeable Tax x

8.4 Summary of the 2000 MOU

2000
A Incentives:
I. GNM to the Company $2.50
GNM to NNPC $1.25
Provided that TC < $4.00

II. GNM to the Company $2.70

GNM to NNPC $1.35
where T2 (CIC/bbl) > $2.00
and TC Not Applicable

III. Reserves Additions Bonus Not Applicable

53
9 THE NIGERIAN NATURAL GAS INDUSTRY
As discussed in Module 1 under Section 1.1.9 (Trends in the gas
industry) natural gas in Nigeria is largely produced in association with
crude oil, most of which is currently being flared.
Nigeria’s proven gas reserve is currently estimated at 159 trillion cubic
feet making it the tenth largest in the world. The level of natural gas is
about 22 billion barrels of its crude oil equivalent 48 .
One of the reasons put forward for the underutilization of gas is the
absence of a ready market for gas internally and inappropriate pricing
locally. To enhance the development of the gas industry especially for
export, government has put in place specific export-oriented gas
utilisation initiatives as well as other fiscal incentives that would act as
stimuli for the development and utilization of Nigerian gas.
The following are the incentives granted to companies involved in gas
utilization projects.
(i) an initial tax holiday period of three (3) years, which may;
subject to the satisfactory performance of the business, be
renewed for an additional period of 2 year;
(ii) as an alternative incentive to the initial tax –free period, gas
utilisation companies may claim an additional investment
allowance (IVA) of 35%, which will not reduce the value of
the asset. However, if the company claim the IVA, as
opposed to the tax free holiday, it will not be able to claim the
accelerated capital allowances which are provided in (iii)
below;
(iii) accelerated capital allowances after the tax-free period as
follows:
 an annual allowance of 90% with 10% retention for
investment in plant and machinery; and
48
Source: www.nlng.com
 an additional investment allowance of 15% which shall
not reduce the value of the asset;
(iv) tax-free dividends during the tax-free period, where the
investment was in foreign currency, or the introduction of
imported plant and machinery was not less than 30% of the
company’s equity share capital; and
(v) interest payable on any loan obtained for gas project, with the
prior approval of the Minister of Finance shall be tax
deductible.
Gas income is taxed at the rate of 30%.
Also worthy of note are the special incentives granted to Nigeria LNG
Limited under the Nigeria LNG (fiscal incentives, Guarantees and
Assurances) Act. A few of these incentives include, a 10 year tax
relief period for the company and the exemption of the company and its
contractors and subcontractors from all custom duties, taxes, levies and
imposts of a similar nature in respect of imports pertaining plant,
machinery, goods and materials for use in the construction of, or
incorporation to the project.
9.1 Upstream Gas Operations
Upstream gas operation involves all operations necessary to
separate gas from the reservoir into usable form at utilisation or
designated custody transfer points, either through pipelines or
tankers.
The capital allowances, operating expenses and assessment of
companies engaged in upstream gas operations are subject to the
provisions of the PPT Act and fiscal incentives under the revised
Memorandum of Understanding (MOU).
54
9.2 Downstream Gas Operations
Downstream gas operation” involves the marketing and
distribution of gas and its industrial uses. This would include
power generation, liquefied natural gas (LNG), and household
factory consumption.

Companies engaged in downstream gas operations, are subject to

the provisions of the Companies Income Tax Act (CITA).

55
10. REVIEW OF THE PROPOSED GAS FISCAL 10.2 Downstream
REFORM BILL (GFRB)
(i) restrict the applicability of the incentives for downstream
The gas fiscal reforms, encapsulated in the Gas Fiscal Reform Bill, operations to such operations that commenced before the
2005 (GFRB) 49 , are still under discussion in the National Assembly. GFR bill comes into effect;
Hopefully, after public hearings are conducted (involving various
stakeholders), the final version should be passed into law in no distant
future. (ii) provide varying tax rates of between 20% and 75% for
assessing downstream gas income to tax;
The major changes that the GFR bill seeks to effect are as follows:
(iii) remove the time restriction (4 years) for recouping losses
10.1 Upstream incurred in downstream gas projects;

(i) define “upstream gas operation” as operation which “shall (iv) remove the applicability of investment tax credit (ITC) at
include any activity or operation that is upstream of the 15% to qualifying capital expenditure incurred on
downstream gas sector (as defined in the Downstream replacement of obsolete plant and machinery;
Gas Act)”;
(v) stipulate that only annual allowance is claimable on a
(ii) restrict the incentives granted to upstream gas projects to straight line basis over four years; and
only those projects commenced before the GFRB comes
into force. Ironically, the sections containing these (vi) restrict total capital allowances claimable to 85% of
incentives in CITA and PPTA are proposed for deletion; assessable profit.

(iii) provide a basis for calculating the applicable tax rate to (vii) The changes are supposed to affect any gas project
upstream gas operation; commenced after the GFR bill is passed into law.

(iv) specify the payment of gas income tax on an annual basis

as against monthly basis for petroleum operation; and

(v) specify the capital allowance rate (only annual allowance)

of 25% per annum (for four years) from commencement
of production as certified by the Minister.

49
You should please note that there is a Natural Gas Fiscal Reforms Bill (NAGFRB). The provisions of this bill are being
harmonized with that of GFRB.

56
11. OIL AND GAS FREE ZONES
The Oil and Gas Export Free Zone Act (OGEFZA) established the Oil
and Gas Export Free Zone. The Zone refers to the Onne/Ikpokiri area
of Rivers State. The OGEFZ is managed, controlled and co-
coordinated by the Oil and Gas Export Free Zone Authority.
11.1 Review of the Oil and Gas Export Free Zone
(OGEFZ) Act
The OGEFZ Act establishes an Oil and Gas Export Free Zone
and also the Oil and Gas Export Free Zone Authority (“The
Authority”), to manage and co-ordinate all activities within
the zone. The Authority has power to take over and perform
such functions performed hitherto by the Nigeria Export
Processing Zones Authority, as they relate to the export of oil
and gas from any of the Nigeria Export Processing Zones
(NEPZ) established by the NEPZ Act.
Exemption from Taxes
 Approved enterprises operating within the export free
zone are exempted from all Federal, State and Local
Government taxes, levies and rates
Approval of Enterprise to Undertake Approved Activity
 An enterprise is required to apply to the Authority if it
wishes to undertake an approved activity within the
Export Free Zone. The Authority is not, however,
compelled to grant such application
Power to Grant Licence
 The Authority may grant a licence for any approved
activity in the Export Free Zone to an individual or
business concern whether or not the business is
incorporated in the customs territory.
 The grant of licence by the Authority constitutes
registration for the purposes of company registration
within the Export Free Zone
 A body corporate licensed to operate within the Export
Free Zone and undertaking an approved activity shall
notify the Authority of any purchase, assignment or
transfer of shares in the body corporate, except where
such shares are quoted and are freely transferable on any
international stock exchange.
Payment for Goods and Services
 Where an approved enterprise operating in the Export
Free Zone is entitled to receive payment for goods and
services sold to customers within the customs territory in
foreign currency. The rules and regulations applicable to
importation of goods and services into Nigeria and
repatriation of the proceeds of sales or services will apply
 Where a person within the customs territory supplies
goods and services to an approved enterprise established
within the Export Free Zone, that person shall be entitled
to receive payment for such goods or services in foreign
currency, and the rules and regulations applicable to
export from Nigeria and the repatriation of proceeds from
sales or services shall apply
Import of Goods into the Export Free Zone
 The Authority and any approved enterprise are entitled to
import into the Export Free Zone, free of customs duty,
any capital goods, consumer goods, raw materials,
components or articles intended to be used for the
purposes of and in connection with an approved activity,
including any article for construction, and maintenance of
premises in the Export Free Zone or for equipping such
premises
57
 11.2
 All articles for equipping premises include equipment for
offices and other ancillary facilities necessary for the
proper administration of the premises and for health,
safety, hygiene and welfare of the premises and of
persons employed therein
 All goods brought into the Export Free Zone shall be
consigned to the Authority or to an approved enterprise
and the goods may, with the approval of the authority, be
transferred from one approved enterprises to another or
from the Authority to an approved enterprise or from the
approved enterprise to the Authority.
 The Authority may take such steps as it deems necessary
to preserve goods within the Export Free Zone, whether
by moving the goods from one place to another or by
storing the goods and where any expenses are incurred by
the Authority in so doing, the owner or consignee of the
goods shall reimburse the Authority for the expenses.
 Where any goods which are dutiable on entry into the
customs territory are sent from the Export Free Zone into
the customs territory , the goods will be subject to the
provisions of the Custom, Excise Tariff,
(consolidation) Act and its regulations, and if the goods
are intended to be disposed of in the customs territory,
will not be removed from the export Free Zone unless
(a) the consent of the Authority has been obtained; and
(b) the relevant customs authorities are satisfied that all
relevant import restrictions have been complied with
and all duties have been paid.
 Where goods are brought from the customs territory into
the Export Free Zone for the purposes of an approved
activity, the goods are deemed to be exported
Registration Procedure
Free Port Licence
 Obtain and complete an Application Form
 Submit completed Application Form together with
certificate of incorporation and DPR Permit to the Free
Zone Management
 Free Zone Management checks and sends application to
Ministry of Commerce for final approval
 On acceptance by Ministry, the free zone management
issues a Free Port Licence to the applicant
Free Port with Manufacturing, Processing or assembly
Operations
There are two types of licences applicable here:
a. Special Licence: granted to companies that are not
incorporated in Nigeria
b. General Licence: granted to Nigerian registered
companies
The application procedures here are the same as those under the
Free Port Licence. The supporting documents for registration
include:
a. Original or notarised copy of the certificate of incorporation;
b. A notarised copy of the MEMART;
c. notarised Board resolution approving the establishment of a
branch in the free zone;
58
 d. A statement on the amount of capital set aside for the free  Sales of a maximum of 25 percent of production in the
zone operation; Customs territory (i.e. Nigeria) against a valid permit and
on payment of appropriate duties (S18{1e})
e. A certified copy of the DPR Registration Certificate;
 Rent free land during construction stage, thereafter rent
f. A specimen signature of the Branch Manager designate; and shall be as determined by the Authority (S18{1f})
g. A photocopy of the Branch Manager designate passport
 Foreign managers and qualified personnel may be
employed by companies operating in the OGEFZ – No
11.3 Incentives available to enterprises operating expatriate quota requirements (S18{1h})
within the Zone
The incentives include: 11.4 List of free trade zones
 All approved enterprises shall be entitled to import into
the OGEFZ, free of customs duty, any capital goods, YEAR OF
S/N NAME LOCATION STATUS OWNERSHIP
consumer goods, raw materials, components or articles to APPROVAL
be used in carrying out an approved activity or for the Calabar Free
construction, alteration, reconstruction, extension or 1 Trade Zone CRS 1992 Operational Fed. Govt.
repair of premises in the OGEFZ. (S12 {1}) (CFTZ)
Kano Free Trade
2 Kano State 1996 Operational Fed. Govt.
 Approved enterprises operating within the Export Free Zone (KFTZ)
Zone shall be exempt from all federal, state and local Onne oil & Gas
3 River State 1996 Operational Fed. Govt.
government taxes, levies and rates (S8) Free Zone
4 Lagos Free Zone Lagos State 2002 Under Cons. Private
 Legislative provisions pertaining to taxes, levies, duties Tinapa Free
and foreign exchange regulations do not apply within the 5 Zone & Tourism CRS 2004 Under Cons. Private
OGEFZ (S18{1a) Resort
Olokola Free
 Repatriation of foreign capital investment in the OGEFZ 6 Ondo & Ogun 2004 Under Cons. States/ Private
Zone
at any time with capital appreciation of the investment Snake Island
(S18{1b}) 7 Lagos 2005 Operational Private
Integrated
Maigatari
 Remittance of profits and dividends earned by foreign 8 Border Free Jigawa State 2000 Operational State
investors in the OGEFZ (S18{1c}) Zone
Banki Border
 No import and export licences are required (S18{1d}) 9 Borno State 2000 Declaration State
Free Zone

59
 YEAR OF
S/N NAME LOCATION STATUS OWNERSHIP
APPROVAL
Ladol Logistics
10 Lagos 2006 Operational Private
Free Zone
Ibom Science &
11 Tech. Park Free Akwa Ibom 2006 Under Cons. State
Zone
Living Spring
12 Osun State 2006 Under Cons. State
Free Zone
Airline Services
13 Export Proc. Lagos State 2006 Operational Private
Zone
14 Lekki Free Zone Lagos State 2004 Under Cons. State/ Private
Egbeda Free
15 Oyo State 2001 Declaration State
Zone
OILSS Logistics
16 Lagos 2004 Declaration Private
Free Zone

Source: www.nepza.org

60

12. NIGER DELTA DEVELOPMENT COMMISSION
The Niger Delta Development Commission (NDDC) bill was passed into
law in June 2000 by an Act of the National Assembly. The Act repealed
the Oil Mineral Producing Areas Commission Decree No. 41 of 1998 and
conferred on the NDDC the status of a body corporate distinct from its
governing board. The NDDC is managed and supervised by a governing
board, whose members are appointed by the National Assembly.
12.1 Establishment of the Governing Board
 A Chairman
 A representative from each member state of the commission,
namely Abia, Akwa Ibom, Bayelsa, Cross River, Delta, Edo,
Imo, Ondo and Rivers
 Three persons representing the non-oil producing state, drawn
from geo-political zones outside the Niger Delta
 A representative each of oil producing companies in the Niger
Delta, the Federal Ministry of Finance, and the Federal
Ministry of Environment
 The Managing Director of the Commission
 Two executive directors
12.2 Funding
The NDDC sources funds through:
 Federal Government of Nigeria – 15% of the total monthly
statutory allocation of member states of the Commission from
the Federal Account
 Oil producing companies operating (onshore and offshore) in
Niger Delta – 3 % of their total annual budget
 50% of the monies due to member states of the Commission
from the Ecological Funds
 Grants and loans from the Federal or State Government, any
other body or institution (local or foreign)
 Proceeds from any assets that may accrue to it; and
 Money from other sources – gifts, grants-in-aid, testamentary
disposition, etc
Authorised Expenditure
 Administrative costs
 Payment of salaries, fees, remuneration, allowances, pensions
and gratuities to qualified members of the board and
employees
 Payment for contracts, including mobilisation, fluctuations,
variations, legal fees and cost on contract administration
 Other relevant activities
Monitoring & Supervision
Provision for the establishment of a Monitoring Committee by the
President
Functions of Monitoring Committee
 monitor the management of the funds of the Commission and
implementation of its projects;
 have access to the account books and other records of the
Commission
 submit periodic reports to the President
61

12.3 The Major functions of the NDDC include:
 formulating policies and guidelines for the development of the
Niger Delta area;
 attending to and solving ecological and environmental
(ii)
problems that arise from exploration of oil minerals in the
area;
 assessing and reporting on any project being funded or
carried out in the Delta by oil and gas producing companies,
any other company and non-governmental organisations;
 utilising the funds contributed to the Commission in
executing projects, which are required for the sustainable
development of the Niger Delta area.
(iii)
The effective implementation of the Commission will boost
exploratory and development activities in the Niger Delta. This is
because the frequent shutdowns of production facilities caused by
community disturbance will be greatly reduced. Consequently, the
cost of carrying on petroleum operations in the area may actually
reduce, notwithstanding the 3% statutory contribution by the oil
producing companies.
12.4 Evaluation of the provisions of the Act vis-à-vis E&P
Company’s activities
The impact of the Act on the activities of E&P companies will be
evaluated below:
(i) Tax treatment of the contribution from oil and gas
companies
The annual contribution to the NDDC would qualify as an
allowable deduction for tax purposes, since it is an
expenditure that is wholly, exclusively and necessarily
50
Source: Article by Adewale Ajayi – International Energy Law and Taxation Review
incurred for petroleum and gas operations. This is further
supported by the ruling in the case between Gulf Oil Co.
Nig Ltd v FBIR I1997) 7 nigeria Weekly Law Report 700;
where it was held that any statutory obligation on the part of
the tax payer should be deductible in computing the tax
liability of the tax payer.
Contribution to host communities
The contributions of oil companies to host communities
have continued despite the inauguration of the Commission.
E & P companies have argued that since they already meet
certain obligations to the host communities on the same
subject matter for which the NDDC was set up, it amounts
to a duplication of efforts, and consequently, a waste of their
resources. It is unclear whether these companies would
reduce their commitments/annual budget to/on community
development, given the mandatory contribution to NDDC.
Applicability to companies in exploratory stage50
It is not clear whether companies, which have not yet
commenced production, are liable to contribute to the
NDDC fund. This confusion has arisen because of the
apparent distinction made between oil and gas ‘prospecting’
and ‘producing’ companies in section 7(1) of the Act. Since
the provision of the section 14(b) on financial contribution
says oil ‘producing’ companies, it seem that oil companies,
which are yet to commence productions, may be exempted.
62
 13.2 Member States
13. ORGANISATION OF PETROLEUM EXPORTING There are currently 12 OPEC Member Countries:
COUNTRIES (OPEC)
Country Date
Location
13.1 Overview of OPEC Joined
Algeria 1969 Africa
The Organization of the Petroleum Exporting Countries Angola 2006 Africa
(OPEC) is a permanent, intergovernmental Organization, created on Indonesia 1962 Asia
September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela. The five Founding Members were later joined by eight IR Iran 1960* Middle East
other Members: Qatar (1961); Indonesia (1962); Socialist Peoples Iraq 1960* Middle East
Libyan Arab Jamahiriya (1962); United Arab Emirates (1967); Kuwait 1960* Middle East
Algeria (1969); Nigeria (1971); Ecuador (1973–1992)* and Gabon SP Libyan AJ 1962 Africa
(1975–1994).* Angola recently joined the OPEC bringing the
current number of members to 12. Nigeria 1971 Africa
Qatar 1961 Middle East
OPEC had its headquarters in Geneva, Switzerland, in the first five Saudi Arabia 1960* Middle East
years of its existence, but currently has its headquarters in Vienna,
United Arab
Austria. 1967 Middle East
Emirates
OPEC's objective is to co-ordinate and unify petroleum policies South
among Member Countries, in order to secure fair and stable prices Venezuela 1960*
America
for petroleum producers; an efficient, economic and regular supply * Founder Members
of petroleum to consuming nations; and a fair return on capital to
those investing in the industry.
13.3 Operations of OPEC
As stated above, Nigeria joined OPEC in 1971. The organization
enjoined its members to acquire participating interests in the
operations of the oil companies present in their respective countries. The OPEC statute stipulates that: "any country with a substantial net
This led to the establishment of the Nigerian National Petroleum export of crude petroleum, which has fundamentally similar interests
Corporation (NNPC) and the subsequent signing of Joint Venture to those of member countries, may become a Full Member of the
Agreements between the Government of the Federal Republic of Organization, if accepted by a majority of three-fourths of Full
Nigeria and the various oil producing companies. Members, including the concurring votes of all Founder Members".

The Statute further distinguishes between three categories of

membership: Founder Member, Full Member and Associate
Member.

 Founder Members of the Organization are those countries,

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 which were represented at OPEC's first Conference, held in
Baghdad, Iraq, in September 1960, and which signed the
original agreement establishing OPEC.
 Full Members are the Founder Members plus those countries
whose applications for membership have been accepted by the
Conference.
 An Associate Member is a country which does not qualify for
full membership, but which is nevertheless admitted under
such special conditions as may be prescribed by the
Conference.
OPEC members meet four times a year to discuss and agree issues
relating to `s and pricing of oil. Quotas of each member state are
based on production capacities and represent maximum production
output of crude oil imposed by the organisation on each member.
13.4 Implications of Quota Restrictions
Each member country is allocated a quota, which officially should
not be exceeded. The quota allocated is dependent on a number of
factors which include but are not limited to the following:
(1) a country’s current level of reserves and its ability to increase
the reserves;
(2) political stability;
(3) production capability; and
(4) global oil prices.
Although, the quota restrictions may seem to hamper a country’s
ability to produce more crude and earn more revenue, it has served,
over the years, the need to maintain some price stability. However, it
is being argued in some quarters that the restriction in quota does not
serve this purpose any longer given the consistently increasing prices
over the last 12 months.
OPEC has been restricting members quota to stabilise global oil
price and Nigeria’s current production quota is 2.3 million bpd.
Restrictions in OPEC quota may result in cut back in production
especially on the part of the majors. Consequently, most of the
operators have to contend with the restriction vis-à-vis their
ambitious exploration programmes aimed at raising reserves and
production capacities. They are especially faced with additional cost
of maintaining equipment, which had been shut of production as a
result of the restriction
13.5 OPEC Price Band
The OPEC price band strategy is aimed at stabilizing oil prices while
at the same time ensuring that there is minimal disruption of oil
supply. In the late 1980’s OPEC sought to keep prices at around
18$/b. In the 1990’s, it raised its aspirations to a price of 21$/b. In
2000 it replaced the target price with a price band of $22-$28/b for
its basket of crudes. This was abandoned officially in 2005, although
it had become obsolete by 2003 with oil prices standing at about
50$/b for Brent (European standard for oil prices).
Under the price band strategy, if the OPEC price basket exceeds $28
for 20 days, OPEC will initiate a pro-rata increase in output of
500,000 b/d. If the OPEC basket falls below $22 for 20 days, OPEC
will initiate a pro-rata decrease in output of 500,000 b/d.
Given the sustained increase in the price of crude products it would
be safe to assume that a minimum price should be in the range of
40$/b.
The OPEC “basket” of crude oils includes:
 Algeria’s Sahara Blend
 Indonesia’s Minas
 Nigeria’s Bonny Light
 Saudi Arabia’s Arab Light
 Iran’s Heavy
 Iraq’s Basra Light
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 Kuwait’s Export
 UAE’s Murban
 Venezuela’s BCF17
 Libya’s ES Sider
 Qatar’s Marine

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GLOSSARY
i. Abandonment-The process of giving up further exploration
activities in a well or field in which oil or gas has not been found
in commercial quantity. This does not include capped (plugged)
wells. It can also relate to the giving up of production wells or
field at the end of their productive lives.
ii. Acquisition Costs are costs of acquiring concession rights in a
lease area.
iii. Amortization is used generically to mean the depreciation of
tangible costs, depletion of mineral acquisition costs, and
intangible costs.
iv. Appraisal Well is a well drilled to ascertain the commercial
potentials of a reservoir discovered from exploratory activities.
v. Barrel is a standard of measurement in the oil industry. One
barrel equals 42 U.S. gallons (35 Imperial gallons) at standard
conditions.
vi. Blow out refers to when gas, oil or salt water escapes in an
uncontrolled manner from a well.
vii. Bottom Hole Agreement refers to an agreement in which cash
consideration or property is given to another party for his use in
drilling a well or property in which the payer has no mineral rights,
in exchange for technical information from the drilling of the well.
viii. Carried Interest is when one licensee meets part or all of a fellow
licensee’s costs during exploration or development.
ix. Casinghead Petroleum Spirit means any liquid hydrocarbon
obtained in Nigeria from natural gas by separation or by any
chemical or physical process before same has been refined or
otherwise treated.
x. Casing Point is the point at which the drilling has reached its
objective depth, in which case determination can be made as to its
productivity or otherwise.
xi. Ceiling Test is a test to determine whether the recorded capitalised
exploration, appraisal and development costs are recoverable from
proved reserves.
xii. Chargeable Natural Gas in relation to a company engaged in
petroleum operations means natural gas actually delivered by such
company to NNPC under a Gas Sales Contract but does not
include natural gas taken or on behalf of the Government of the
Federation in pursuance of the Petroleum Act
xiii. Chargeable Oil in relation to a company engaged in petroleum
operations means casinghead petroleum spirit and crude oil won or
obtained by the company from such operations
xiv. Christmas tree is an array of pipes and valves fitted to a
production well head to control oil or gas flows and to prevent
blow outs.
xv. Commercial Quantity is the quantity of oil or gas in a reservoir
that can be produced economically at current prices using existing
technology. The Petroleum Act however, defines commercial
quantity as daily production of 10,000 barrels of crude oil or more.
xvi. Completion is the process of bringing an oil or gas well into
production. The process begins only after the well has reached the
depth where oil or gas is thought to exist, and generally involves
installation of casing pipes, perforation of the casing pipes, and
acidizing and fracturing operations.
xvii. Concession is a right granted to a company by the federal
government on behalf of the federation to explore and produce oil
and gas within a given area. In Nigeria this involves the granting
of oil exploration licence, oil prospecting licence or oil mining
lease.
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xviii. Condensate refers to liquid hydrocarbons which are sometimes
produced together with natural gas (SEE LPG).
xix. Conservation refers to the preservation or restoration of a drilling
site to its natural state after drilling. It may also be related to
economy and avoidance of waste during drilling.
xx. Cost Pool is a cost centre comprising a defined geographical area
used under the full cost method of accounting as a basis for
accumulating depreciable capitalised exploration, appraisal and
development expenditure. Cost pools are usually not smaller in
size than a country except where warranted by major differences in
economic, fiscal or other factors in that country.
xxi. Crude Oil means any oil (other than oil extracted by destructive
distillation from coal, bituminous shale or other stratified deposits)
won in Nigeria either in its natural state or after the extraction of
water, sand or other foreign substance therefrom, but before any
such oil has been refined or otherwise treated
xxii. Development Costs are additional capital costs incurred following
a decision to develop a reservoir.
xxiii. Directional drilling is a technique used extensively in offshore
drilling where many development wells have to be drilled from a
single platform, i.e. where the well is not drilled vertically.
xxiv. Discovery well is an exploratory (wildcat) well that finds a new
deposit of oil or gas.
xxv. Discovery Value is the estimated value of oil and\or gas at the date
of discovery.
xxvi. Dry Hole (also referred to as a duster or wet hole) is a well that
either finds no oil or gas, or finds too little to make it commercially
viable.
xxvii. Dry Hole Agreement is similar to bottom hole agreement except
that money or property contributions are made to another party
only in the event that the well reaches an agreed depth and is found
to be non-productive.
xxviii. Exploration and Appraisal Costs are costs incurred in the search
for oil and gas deposits after obtaining a licence but before a
decision is taken to develop a reservoir.
xxix. Exploratory Project Area is an acreage usually larger than a field
where initial finding efforts such as geological and geophysical
surveys are undertaken.
xxx. Exploratory Well is a well drilled to ascertain whether or not oil
or gas exists in a field.
xxvii. Farm In refers to the transfer of all or part of an oil and gas
interest in consideration for an agreement by the transferee
(farmee) to meet certain oil exploration and development costs
which would otherwise have been undertaken by the owner
(farmor). See Farm out.
xxviii. Farm Out is a sharing of oil exploration and development
activities and costs whereby a company with a concession, either
because it has more potential oil acreage than it can handle or
wishes to share risks, invites others to explore all or portions of the
tract in return for a share of whatever oil it found. See Farm In.
xxix. Field is a given area or region, usually comprising a number of
individual reservoirs in which oil and gas reserves exist.
xxx. Injection well is a well used for injecting gas or water into the
reservoir rock to maintain pressure for secondary recovery.
xxxi. Impairment is the possible diminution in the value of unproved
properties of an exploration and production company arising from
events or circumstances outside its control.
xxxii. Net profits interest refers to a share in production measured by a
certain percentage of the net profits.
xxxiii. Plugging is the filling in with concrete of an abandoned well.
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xxxi. Pre-Licence Costs are costs incurred in the period prior to the
acquisition of a legal right to explore for oil and gas in a particular
location. Such costs include the acquisition of speculative seismic
data and expenditure on the subsequent geological and geophysical
analysis of these data.
xxxi. Production Costs (operating or lifting costs) are the recurrent
costs incurred in oil and gas production activities.
xxxvii. Stratigraphic Test Well is a well drilled to obtain information
about the geological conditions of an exploration area.
xxxvii. Wildcat Well is any well drilled in an unproved territory.
xxxviii. Workover is a remedial operation required to restore oil flow from
a well to its maximum production capacity or to enhance its
production capacity following a decline in production.

xxxii. Production payment refers to a right to receive in cash or in kind,

a specified share of production from an oil or gas interest up to an
agreed amount.

xxxiii. Property includes leases, reservations, royalty rights, and similar

rights.

xxxiii. Proved Developed Reserves represent oil and gas reserves that
can be expected to be recovered from existing wells and facilities
using existing technology.

xxxv. Proved Reserves represent estimated quantity of oil and gas that
can be recovered from known reservoirs using existing technology.

xxxvi. Proved Undeveloped Reserves include all proved oil and gas
reserves that do not qualify to be described as proved developed
reserves.

xxxvii. Reservoir is a natural formation of porous and permeable spaces

in the earth’s crust containing accumulation of oil and gas. Each
distinct reservoir is confined by impermeable rocks or barriers,
which help to trap oil and gas.

xxxviii. Seismic survey is the determination of rock structure below an

area by using acoustic shock waves and measuring reflected
signals.

xxxix. Spud in refers to making a hole to commence drilling operations.

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