The ownership and control of all minerals, mineral oil and natural gas in, under or upon any land in Nigeria, its territorial waters and exclusive economic zone is vested in the Government of the Federation based on the provision of section 44(3) of the 1999 Constitution of the Federal Republic of Nigeria. The Federal Government is mandated to manage such minerals in a manner as may be prescribed by the National Assembly.
Before August 2021, the Petroleum Act of 1969 was the primary legislation governing petroleum activities in Nigeria. It provided comprehensive provisions for exploration, production, and transportation activities in the sector. The Act was operated along with a myriad of other laws and subsidiary pieces of inter-related legislations that dealt with specific operations of the industry. This legal framework has been the subject of reform for at least 20years. Criticisms of the old system have been well documented. They include a lack separation of powers between institutions carrying out policy, regulatory and commercial functions, a national oil company that operated with undue political influence and so was not commercially oriented, underdevelopment of the mid stream sector and so on.
The policy uncertainty created by this prolonged effort led to a dearth in investments. This was in addition to challenges created by inadequate infrastructure, inadequate funding of joint venture operations, high tax burden and insecurity. A new law: the Petroleum Industry Act (PIA) 2021 was finally signed into law on the 16th of August 2021.
The Petroleum Industry Act (PIA) 2021
The law is divided into five (5) chapters, three hundred and nineteen (319) sections and eight (8) schedules. The chapters cover: Governance and Institutions, Administration, Host Community Development, Petroleum Industry Fiscal Framework and Miscellaneous Provisions. Miscellaneous provisions include issues relating to legal proceedings, repeals and the transfer of assets and liabilities to the newly created institutions.
It has the following overarching objectives:
- Promote economic growth through increased oil and gas production
- Promote economic growth through strong investments in midstream gas infrastructure to increase gas-based power generation and industries
- Promote frontier exploration
- Establish an effective acreage management system
- Create transparency and non-confidentiality
- Transform NNPC in a viable commercially based and self-sustaining national oil company
- Create a strong regulatory framework with increased emphasis on midstream development
- Create an effective midstream and downstream licensing system
- Promote improved environmental measures
- Assist host communities in petroleum operation areas to achieve their aspirations
The PIA repealed several laws and regulations:
- Associated Gas Reinjection Act, 1979, Cap. A25, Laws of the Federation of Nigeria, 2004, and its Amendments
- Hydrocarbon Oil Refineries Act No. 17 of 1965, Cap. H5, Laws of the Federation of Nigeria, 2004
- Motor Spirits (Returns) Act, Cap. M20, Laws of the Federation of Nigeria, 2004
- Nigerian National Petroleum Corporation (Projects) Act No. 94 of 1993, Cap. N124, Laws of the Federation of Nigeria, 2004
- Nigerian National Petroleum Corporation Act (NNPC) 1977 No. 33, Cap. N123, Laws of the Federation of Nigeria as amended, when NNPC ceases to exist under section 54 (3) of this Act
- Petroleum Products Pricing Regulatory Agency (Establishment) Act No. 8, 2003
- Upon the completion of the conversion process under section 92, the Petroleum Profit Tax Act, Cap. P13, LFN, 2004, provided the repeal shall apply from the effective date to any new acreage granted under this Act
- Upon the completion of the conversion process under section 92, the Deep Offshore and Inland Basin Production Sharing Contract Act, 2019, as amended, provided the repeal shall apply from the effective date to any new acreage granted under this Act.
- It provides savings provisions for any Act, subsidiary legislation or regulation, guideline, directive, and order made under any principal legislation repealed or amended by this Act, shall, continue in force as though they were issued pursuant to this Act in so far as it is not inconsistent with this Act, until revoked or replaced by an amendment to this Act or by a subsidiary legislation made under this Act.
The fiscal framework in the industry includes those set of laws, regulations and agreements that determine the economic benefits derived by the Government from exploration and production activities. The fiscal tools include taxes, royalties, production shares, profit shares, signature bonuses, production bonuses, renewal bonuses, rents, fees, fines, and other levies due in relation to the grant, assignment, termination, and breach of licenses, leases and permits. Chapter 4 of the PIA 2021 provides the basic fiscal framework for the industry currently. However, it should be noted that other laws also provide terms that contribute to Government take from the sector. They include:
Niger-Delta Development Commission (Establishment etc) Act 2000 ActNiger Delta Development Commission (Establishment, Etc.) (Amendment) Act 2017 Nigerian Oil & Gas Industry Content Development Act 2010 (the NCDA) Tertiary Education Trust Fund (Establishment) Act, 2011 Finance Act, 2021
Other key legislations relating to the sector are listed below;
- Regulation 42 of the Petroleum (Drilling and Production) Regulations, 1969
- Petroleum (Drilling and Production) Regulations, 1969
- Petroleum Refining Regulation, 1974
- Company Income Tax Act CAP. 60 LFN of 1990
- The Nigerian LNG Fiscal Incentives Guarantees and Assurances CAP N87, 1990
- Associated Gas Framework Agreement (AGFA) 1991 & 1992
- The Petroleum (Drilling and Production) regulations Act No. 69 LFN of 1996
- Deep Offshore and Inland Basin Production Sharing Contracts Act (No. 9) of 1999
- GAS Finance (Miscellaneous Taxation Provisions) Acts 18 & 19 of 1998 and Act 30 of 1999
- Deep Water Block Allocations to Companies (Back in Rights) Regulations (2003)
- Oil Prospecting License (conversion to Oil Mining Leases) Regulations
- Petroleum Profits Tax Act (2004) Cap (P13), LFN
- Oil Pipelines Act (2004) Cap. (07), LFN
- Marginal Field Operations (Fiscal Regime) Regulations 2005
- Companies Income Tax Act Amendment (Section 39) 2007
- National Domestic Gas Supply and Pricing Regulations 2008
- Companies and Allied Matters Act 2020
- Companies Regulations 2021
These legislations and regulations govern various aspects of operations in the industry including how businesses should be formed and organized. Others describe the operating standards for all operators, their scope of operation and their responsibility to the government, environment, host communities and the international community. Some of the laws also create agencies that implement government policy and ensure compliance with the respective enabling laws.
The defunct Department of Petroleum Resources (DPR) published a compendium of oil and gas laws in Nigeria, including 34 laws, 22 regulations and 20 establishment orders. The publication can be viewed here. You can also find the text of more recent Regulations on the upstream regulator’s website here.
The Compendium of Oil & Gas Law and Regulations - DPRFiscal Terms
Find below a summary description of fiscal terms governing the industry.
Royalty on crude oil and gas
Royalty refers to payments, either in cash or in-kind, made by a holder of a concession to the Federation based on the value of the quantity of crude oil produced (saved after the oil has been separated from its components) from the field within the concession area in line with the fiscal terms approved statutorily by the Government. It is a statutory obligation of every corporate body involved in the production of oil and gas. It is currently guided by the PIA 2021.
Royalty shall be paid on all production of petroleum, including production tests, on a non-discriminatory basis with respect to all licensee and lessees and shall be paid into the Federation Account and verified by the Commission. For the purposes of royalty, condensates shall be treated as crude oil and natural gas liquids shall be treated as natural gas. Royalty will be based on production and price.
For royalties based on production, the applicable rates on chargeable volume for production of crude oil and condensates will be as follows:
| Onshore | Shallow water (up to 200m water depth) | Deep Offshore (>200m water depth) | Frontier basins |
| 12.5% | 14,690,021.45 | 7.5% | 7.5% |
Royalty based on production for natural gas and natural gas liquids will be at a rate of 5% of the chargeable volume and royalty rate for natural gas produced and utilized in-country will be 2.5% of the chargeable volume.
For royalties based on price for crude oil and condensate will be as follows:
| Below US$50.00 per barrel | At US$100.00 per barrel | Above US$150.00 per barrel | |
| 0% | 5% | 10% |
Between US$50.00 and US$ 100.00 per barrel, the royalty per price will be determined based on linear interpolation. For example, if the price is US$75.00 per barrel the royalty rate is 2.5%. The price benchmarks are adjusted yearly for inflation by adding 2% per year to the benchmark price. The royalty on price will not apply to frontier acreages. Royalty derived from “royalty by price” will be for the credit of Nigerian Sovereign Investment Authority (NSIA).
Tax
Under the new law, the Petroleum Profit Tax (PPT) will be replaced with the Companies Income Tax (CIT) and the Hydrocarbon Tax (HT). Both taxes will be chargeable to companies engaged in upstream petroleum operations. CIT rate will be in line with the provisions of the Companies Income Tax Act (CITA), while the HT rate will be graduated and dependent on the area of operation and the period the mining lease was granted as defined in the PIA.
The new tax regime shall only apply to companies upon the conversion of existing Oil Prospecting Licenses (OPLs) and Oil Mining Leases (OMLs) to Petroleum Prospecting Licenses (PPLs) and Petroleum Mining Licenses (PMLs), termination or expiration of unconverted licenses, and renewal of OMLs. Consequently, holders of OPLs and OMLs that do not convert to PMLs will continue to be taxed under the PPTA regime, until the expiration of their licenses.
HT will be charged and assessed on profits from crude oil on such operations in each accounting period at the following rates for new acreages and converted acreages respectively.
| Converted/renewed Onshore and Shallow Offshore | Onshore and Shallow Onshore (including marginal fields) and PPLs | ||
| 30% | 5% |
CIT of 30% will also apply, bringing the aggregate tax rate to 60% compared to 85% under the PPTA. Companies operating in more than one stream must register and use a separate company for each stream. HT is nondeductible for determining CIT. Companies in Production Sharing Contracts will be charged and assessed separately on the profits from each petroleum mining lease of which the hydrocarbon tax is payable every accounting period.
Withholding tax on dividends is at 10% and Education Tax (EDT) at 2% of assessable profits will still be applicable but unlike under the PPTA, EDT will not be tax deductible.
