Oil and gas resources in Nigeria are solely owned by the federal government by virtue of the Constitution of the Federal Republic of Nigeria 1999 (as amended) and industry-specific statutes such as the Petroleum Act of 1969 (PA) and the recently enacted Petroleum Industry Act of 2021( PIA). Thus, oil and gas resources are not owned by state governments or private individuals in Nigeria. The federal government, in turn, grants licences and leases to players in the oil and gas industry. 

Pursuant to the PIA, the governmental agency responsible for regulating upstream petroleum activities in Nigeria, is the Nigerian Upstream Petroleum Regulatory Commission (the "Commission"), while the agency responsible for regulating midstream and downstream operations is the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the "Authority"). Prior to enactment of the PIA, the Department of Petroleum Resources (DPR) was responsible for regulating petroleum activities across the entire value chain.  

The national oil and gas company in Nigeria is the Nigerian National Petroleum Company Limited (NNPC Limited) which was incorporated in September 2021 pursuant to the PIA. Prior to the PIA, the Nigerian National Petroleum Corporation (NNPC), which was established pursuant to the NNPC Act of 1977, was the national oil company.

The principal legislation regulating activities in the Nigerian petroleum sector are:  

• the PIA – the principal statute in the oil and gas industry which governs activities in the upstream, midstream and downstream sectors. The PIA has extensive provisions relating to its licensing regime, establishment of key regulators, incorporation of NNPC Limited and other matters; 
• the PA – the principal legislation prior to the enactment of the PIA. However, the PA will continue to exist alongside the PIA until the termination and expiration of all permits issued under the PA; 
• the Petroleum Profits Tax Act (PPTA) that provides the framework through which the revenue generated by oil and gas companies are taxed; 
• the Oil Pipelines Act that makes provision for the granting of licences and permits for the laying and use of pipelines for the conveyance of petroleum; 
• the Nigerian Oil and Gas Industry Content Development Act 2010 (Local Content Act) that promotes the participation of Nigerians in the oil and gas industry; and 
• the National Oil Spill Detection and Agency (Establishment) Act 2006 (NOSDRA Act) which is the regulatory body with the responsibility of surveillance and monitoring of oil spills in Nigeria. 

Regulations issued pursuant to the PA and the PIA include: 

• Guidelines and Procedures for obtaining the Minister’s Consent to the Assignment of Interests in Oil & Gas Assets, issued pursuant to the PA. It governs the assignment of interests to third parties by holders of licences; 
• the Nigerian Upstream Host Communities Development Regulations 2022, issued pursuant to the PIA, which regulates the establishment of the relationship between oil and gas companies and their host communities; and
• Guidelines and Procedures for Obtaining DPR Approval for Transfer of Licences, Rights or Interests in the Downstream Sector – which are issued pursuant to the PA and govern the transfer of interests in midstream and downstream assets. 

In Nigeria, the federal government, through the Minister grants private investors the requisite permits to conduct upstream petroleum activities.   

With the enactment of the PIA, the Minister is now empowered to issue Petroleum Exploration Licences (PELs), Petroleum Prospecting Licences (PPLs) and Petroleum Mining Leases (PMLs). Therefore, the PA Oil Exploration Licences (OELs), Oil Prospecting Licences (OPLs) and Oil Mining Leases (OMLs) are no longer issued. 

In carrying out exploration activities, holders of these permits may, subject to the applicable law and with the requisite consent of the Minister, enter into venture arrangements with other players in the industry to jointly exploit the asset. There are instances where the NNPC holds the majority participating interest in the asset with other private investors holding the remaining participating interests. There are other instances where all the joint venture partners are private investors. There are also instances where the private investor holds 100% of the interest on a sole risk basis.  

In some instances where the entire interests in an asset are held by the federal government through the NNPC, the NNPC may enter into arrangements with private investors, such as production sharing contracts (PSCs) and risk service contracts (RSCs), to grant private stakeholders the right to carry out petroleum exploration activities on the specific assets covered by the PSCs or RSCs.   

Upstream interests can be held by private investors through the award of marginal fields. The PIA defines a marginal field as a field covered by an existing OML, which has had no activity for seven years and which was declared a marginal field prior to 1 January 2021. Marginal fields that were producing before 1 January 2021 shall be converted to PMLs, while non-producing marginal fields shall be converted to PPLs. Notably, in 2020, the federal government concluded a marginal field bid process, and the awardees of marginal fields were granted PPLs.  

Marginal fields will, however, no longer be declared under the PIA.  

The PIA regulates the process for the granting of PELs, PPLs and PMLs to qualified applicants for upstream petroleum operations. PELs are granted by the Commission and confer non-exclusive rights to carry out petroleum exploration operations within specified areas.  

PPLs and PMLs are granted through a fair, transparent and competitive bidding process in compliance with PIA and guidelines to be issued thereto. The PPLs and PMLs are granted by the Minister on the recommendation of the Commission. The winning bidder is to be determined either on a single bid parameter based on any of the following: 

• payment of a signature bonus in full prior to the grant of the licence or lease;  
• a royalty interest;  
• profit split or profit oil split;  
• a work programme commitment during the initial exploration period; or any other parameter as may be defined in the specific bid round; or 
• a combination of the bid parameters specified above based on a points system assessable by the bidder such that the bidder with the aggregate highest number of points will be the winner. 

Furthermore, the PIA provides that, notwithstanding the bid parameters, the federal government may for strategic purposes and in return for substantial benefits to the country, direct the Commission to negotiate and award a PPL or a PML to a qualified investor from a country that has a bilateral or multilateral agreement or treaty with Nigeria.  

The PIA introduced new fiscal provisions which are only applicable to the PPLs and PMLs awarded under it. However, until the termination of the OPLs and OMLs, or the conversion or renewal of the OPLs and the OMLs to PPLs and PMLs respectively, the old fiscal regime will continue to apply to them. Thus, there is a dual fiscal regime applicable in the Nigerian upstream oil and gas industry today.

Old Fiscal Regime

Bonus

Prior to the granting or renewal of an OPL or OML, a potential awardee must pay a signature bonus or a renewal bonus respectively.

Royalties

Royalties are the sums payable by the licencees or leasees to the federal government on oil and gas produced onshore or offshore. The laws applicable to royalty payments by holders of OPLs and OMLs for oil produced are:

• the Petroleum (Drilling and Production) (Amendment Regulations) 2020 which provide the royalty rates applicable to onshore and offshore areas, and to onshore and shallow offshore production-sharing contracts; and
• the Deep Offshore and Inland Basin Production-Sharing Contracts (Amendment) Act 2019 which provides the royalty rates applicable to offshore PSCs in water depth over 200 m.

The law applicable to royalty payment for gas produced is the Petroleum (Drilling and Production) Regulations 1969 (Drilling Regulations) which imposes royalties on the gas produced in an area at the following rates:

• onshore areas – 7%; and
• offshore areas – 5%.

With respect to farm-out agreements entered into between marginal field holders and the head lessors, there is an obligation on the holder of the marginal field to pay overriding royalties to the head lessor.

Rents

The holders are charged with rent in accordance with Regulation 60 of the Drilling Regulations.

Levies

Pursuant to the Niger Delta Development Commission (Establishment) (Amendment) Act, the Niger Delta Development Commission (NDDC) imposes a levy on oil and gas companies operating in the Niger Delta area. The levy imposed is 3% of the total annual budgets for upstream operations.

New Fiscal Regime Under the PIA

The payment of 2% of the company’s assessable profit pursuant to the Tertiary Education Tax Act 2011 as Tertiary Education Tax (TET) continues to be applicable.

Bonus

Prior to the grant or renewal of a PPL or a PML, a potential awardee must pay a signature bonus or a renewal bonus respectively.

Royalties

Under the PIA, royalties are payable by holders of PPL and PML, and this is also applicable to licences and leases awarded to indigenous Nigerian companies on a sole risk basis under the PA, on which the government has successfully exercised its back-in rights prior to the effective date of the PIA at the following rates:

•       onshore areas – 15%;

•       shallow water (up to 200 m water depth) – 12.5%;

•       deep offshore (greater than 200 m water depth) – 7.5%; and

•       frontier basins – 7.5%.

For deep offshore fields with a production of more than 50,000 bopd during a month, the applicable rate is 5%.

For onshore fields and shallow water fields, including marginal fields, with crude oil and condensate production not more than 10,000 bopd, the applicable rate is 5%.

In addition to the foregoing, royalty by price is also payable for onshore, shallow water and deep offshore operations determined in accordance with the price of crude oil and condensates per barrel.

Rent

Every PPL and PML is subject to rent in an amount per hectare per year, to be prescribed by the Commission in a regulation. As at the date of this publication, no such regulation appears to have been issued by the Commission.

For OPLs and OMLs which have not been converted to PPLs and PMLs under the PIA, the applicable income tax is the Petroleum Profit Tax chargeable under the PPTA as follows: 

• for companies that have commenced crude production, 85% of the chargeable profits;  
• for companies that have not fully amortised their pre-production capitalised expenditure, the applicable tax rate is 65.75% of chargeable profits; and 
• for petroleum operations under PSCs with the NNPC, the applicable tax rate is 50% of the chargeable profits. 

For holders of PPLs and PMLs engaged in onshore and shallow water upstream petroleum operations , the applicable income tax is the Companies Income Tax at the rate of 30% and Hydrocarbon Tax at the following rates:  

• onshore and shallow Water (PMLs) – 30% 
• onshore and shallow onshore (PPLs) – 15% 

The company shall also pay TET. 

Back-in-Rights 

The Oil Block Allocation to Companies (Back-in-Right) Regulations issued pursuant to the PA confers the right of the federal government to acquire five-sixths of the interest of the holder of a licence or lease at the time of commencement of a licence, conversion of a licence to a lease and the renewal of a licence or lease. 

Right of First Refusal  

By Section 9(2) and (3) of the PIA, where the Commission considers that data acquired and interpreted under a petroleum exploration licence requires testing and drilling of identifiable prospects and leads, and no commercial entity has publicly expressed interest in such prospects, the Commission will request the services of NNPC Limited to drill or test such prospects and leads. Where a commercial discovery is made, NNPC Limited will have the first right of refusal in the award of the acreage for subsequent development and other petroleum operations in such frontier acreages under the PIA. 

Right to be Carried  

The PIA provides in Section 85(4) that where the model licence or model lease includes a concession agreement, which may include an incorporated or unincorporated joint venture with NNPC Limited, the agreement must include a carried interest provision whereby the government through NNPC Limited would have the right to participate in up to 60% in the contract. 

Right of Pre-emption  

Section 3(3) of the PIA provides that the Minister shall have rights of pre-emption of petroleum and petroleum products marketed under any licence or lease in the event of a national emergency. 

The local content requirements in the oil and gas industry are governed by the Nigerian Oil and Gas Industry Content Development Act (the Local Content Act).  

The Local Content Act provides that Nigerian independent operators shall be given first consideration with respect to the award of oil blocks, oil field licences, oil lifting licences and all projects for which a contract is to be awarded in the Nigerian oil and gas industry.   

In relation to contracts and services, the Local Content Act imposes an obligation to consider, exclusively, Nigerian indigenous service companies that demonstrate ownership of equipment, Nigerian personnel and capacity to execute such work, to bid on land and swamp operating areas.  

Under the PIA, where a licensee under a PPL or the holder of a retention area declares a commercial discovery, the licensee must within two years of such a declaration submit a field development plan with regard to the commercial discovery, together with a commitment (supported by a bank guarantee, letter of credit or performance bond) to carry out the work described in the field development plan. Thereafter, the development plan is approved or deemed approved. 

The PIA provides copious provisions on the terms of the licences and leases. Generally, a licensee or a lessee is obliged to set up a decommissioning and abandonment fund which will be used exclusively to pay for decommissioning and abandonment costs.

Petroleum Exploration Licence

The PEL gives the holder the non-exclusive right to carry out petroleum exploration operations within the area provided for in the licence, for a period of three years renewable for an additional period of three years. The Commission has sole right and title over any acquired raw and interpreted data obtained by the licensee, who is also entitled to grant a data use licence to a third party, subject to the authorisation of the Commission. 

Petroleum Prospecting Licence

The PPL gives the holder the exclusive right to drill exploration and appraisal wells, and the non-exclusive right to carry out petroleum exploration operations within the area provided for in the licence. The PPL for deep offshore and frontier acreages is granted for a duration of five years and an optional extension period of five years, while onshore and shallow water acreages are granted for an initial exploration period of three years and an optional extension period of three years. 

Petroleum Mining Lease 

The PML entitles the holder: to win, work, carry away and dispose of crude oil, condensates and natural gas on an exclusive basis; to a petroleum prospecting licence on an exclusive basis; and to petroleum exploration operations on a non-exclusive basis for a maximum period of 20 years. The PIA further provides that after ten years of the commencement of the PML, the applicable lessee will relinquish all parcels which do not fall within the boundary of a producing field under the PIA as well as any formation deeper than the deepest producing formation.

To transfer interests in upstream licences and assets must meet the following requirements. 

• The holder of the licence (Assignor) is required to notify the Commission of its intention to transfer its interest. No announcement or press release shall be made without the approval of the Commission. 
• The Assignor is then to required to submit to the Commission for evaluation, the list of prospective assignees. Within ten working days from the date of receipt, the Commission shall provide a response on whether the proposed companies are acceptable to the federal government. 
• Upon successful completion of the notification stage, the Assignor applies for the consent of the Minister, through the Commission. The PIA provides a 60-day timeframe within which the Commission is to act on the application and make a recommendation to the Minister. The Minister is required to consider the application within 60 working days of receipt of the Commission’s recommendation. Where none is received within 60 working days, the consent of the Minister to the assignment of the interest will be deemed to have been granted. 
• The conditions for the grant of the Minister’s consent are that the proposed transferee is a company incorporated in Nigeria, of good reputation and standing, and has sufficient technical knowledge, experience and financial resources to develop and operate the asset.  
• There are requisite fees payable for the assignment as set out in the Petroleum (Drilling and Production) Amendment Regulations 2019. With the enactment of the PIA, the Commission is empowered to make regulations to prescribe for fees, which are required to be based on a percentage of the value of the transaction. 

Government Preferential Rights to Purchase 

With respect to assets in which the NNPC holds a participating interest in a joint venture with another entity, the joint operating agreement typically, a pre-emptive right in favour of the NNPC to acquire the participating interest of the joint venture counterparty in the event of a proposed disposal or assignment by the counterparty of its participating interest on the asset. 

Federal Competition and Consumer Protection Commission (FCCPC) Consent 

Depending on the nature of the transaction, the FCCPC consent may be required for the transfer of the interest. The FCCPC will review the transaction from a competition law perspective. 

The FCCPC is required to review an application for consent and make its decision within 60 business days, which is extendable by another 60 business days, otherwise its approval would be deemed granted. 

In addition to a NGN50,000 filing fee payable by each merging entity, a processing fee is payable in the following amount: 0.3% of the first NGN500 million, 0.225% of the next NGN500 million and 0.15% of any sum thereafter of the valuable consideration. 

Tax 

The transfer of interest may be subject to capital gains tax (CGT) or value added tax (VAT). For instance, where the transaction involves the disposal of shares in the holder of the licence, CGT will be payable on the share disposal. 

In Nigeria, there are no legal or regulatory restrictions on production rates by the licensees or lessees.

However, Nigeria is subject to the Organization of Petroleum Exporting Countries (OPEC) quotas, which the country has in recent times, struggled to meet, mainly due to insufficient investment in the oil and gas sector.

Private investors (including foreigners) are permitted to invest in operations in the midstream and downstream sector. This could be via a number of ways, including setting up a company in Nigeria (alone or with others), or acquiring interest in an existing entity. Midstream projects are often undertaken as integrated projects alongside upstream operations. However, with the passage of the PIA, entities intending to engage in activities across the upstream, midstream and downstream sectors are now required to set up distinct entities with respect to such activities.

A licence must be obtained from the Authority or the Minister (in the case of a crude oil refinery) prior to commencing midstream or downstream operations. Transfer or divestment of interest in the midstream or downstream assets or operations also requires regulatory approvals. 

Although there is no monopoly in the Nigerian midstream or downstream sector, four out of the five existing crude oil refineries in Nigeria are owned by the Nigerian government through the NNPC. Nevertheless, there are several private companies with licences to establish, construct and operate crude oil refineries though these are not yet operational, including the Dangote Refinery. There are also a few modular refineries in various stages of development, while others such as the Waltersmith Modular Refinery are already operational. 

With respect to gas transportation pipelines, while there are pipeline systems owned or operated by the private sector, the majority of the pipeline systems are operated by Nigerian Gas Company Limited (a subsidiary of the NNPC). However, private entities also partner with the NGC in the development of downstream pipelines via ownership models such as the BOT model and more recently, the unincorporated joint venture model.

There are no regulatory differences between interstate and intra-state pipelines. The construction, operation and maintenance of all pipelines are regulated by federal law.

Not applicable.

The Authority is empowered to grant all licences and permits, except for refinery licences, which are issued by the Minister. With the passage of the PIA, licensees engaged in midstream and downstream operations prior to the enactment of the PIA are required to obtain the new licences prescribed under the PIA from the Authority, by 16 February 2023. 

Licensing of midstream and downstream operations is based on product class, ie, petroleum liquids and gas. Petroleum liquids operations that require licences include bulk storage, transportation network operation and wholesale petroleum liquids supply. Petroleum gas operations that require licences include gas processing, bulk gas storage, gas distribution and retail gas supply.

Applications for midstream or downstream licences are accompanied by payment of the prescribed fees as required by regulation. The applicant must also meet certain requirements, including: 

• the required technical standards for petroleum operations, based on international petroleum industry practices; 
• compliance with local content requirements under the Local Content Act; 
• submission of a decommissioning and abandonment plan and an environmental management plan, amongst others.

The Authority is required to inform the applicant of its decision within 90 days.

There is no bid process involved in the granting of midstream or downstream licences.

Operations in the midstream/downstream sector are subject to various offtake arrangements as between the owner of the petroleum or infrastructure or marketer and the customers. In some instances - for example the midstream sector and bulk sales of downstream products, it is typical to find short to medium term offtake arrangements (typically 3 to 10 years). The downstream refined products market is slightly more flexible and products may be sold on the spot market.

Wholesale and Retail Gas Supply

A gas sale and purchase agreement (GSPA) is typically entered into between the licensee and its customers for the wholesale or retail supply of gas. For wholesale gas arrangements, the Authority may vest certain powers on the licensee such as power to terminate wholesale gas supply to a customer for non-payment. For retail gas supply, the licensee is required to publish the prices to be charged to its customers. 

Gas Transportation

For gas transportation, a gas transportation arrangement is typically entered into between the shipper and the buyer for the transportation of gas. Gas transportation using pipeline systems owned by Nigerian Gas Company Limited is also governed by the Nigerian Gas Transportation Network Code (NGT Code).

Gas Processing

Gas processing typically involves a gas processing agreement where the Gas processing company may operate a tolling model - it would process wet gas for a fee based on throughput, or alternatively, purchase gas, process and supply the processed gas to purchasers. In some cases, the upstream joint venture partners or licensees, set up midstream special purpose vehicles to process and monetise the gas developed from the upstream asset. The plant processing fee may be based on a fixed processing fee model; or a ‘keepwhole’ contract model (the project company may extract liquids from the gas and pay the gas supply company based upon the BTU value of the fuel and shrinkage gas).

Regulatory Powers of the Authority

Generally, fiscal terms and terms of service for midstream and downstream operations are on a willing buyer and customer basis and as negotiated by the parties. In instances where an upstream producer is supplying gas as part of its domestic gas supply obligation, this would be subject to domestic supply obligations and the Authority empowered to determine the base gas prices for strategic sectors (i.e. power, commercial and gas-based industries).

As part of its commercial regulatory functions, the Authority is also empowered to design a pricing framework for transportation, distribution and processing of petroleum tariffs. This may apply to new gas transportation pipelines, gas distribution networks and facilities requiring a gas processing licence.

Under the PIA, a licence or permit may also stipulate that the holder would undertake its activities subject to the prescribed tariffs or tariff methodology.

The Authority is also required to regulate prices charged by licensees where it determines that a licensed activity is a monopoly service or competition has not yet developed in the market or a particular licensee is a dominant supplier.

Not applicable.

There are no special rights conferred on NNPC Limited in the Nigerian midstream and downstream sector.

Local content requirements in the Nigerian oil and gas sector are contained in the Local Content Act which applies to all companies operating in the oil and gas industry. 

The Local Content Act prescribes mandatory levels of Nigerian content across a wide range of services, including: 

• engineering services;
• research and development services;
• shipping; 
• surveying and positioning services; 
• modification and maintenance; 
• project management; and 
• consulting and information services. 

Operators are required to:

• employ only Nigerians in their junior and intermediate cadre or other corresponding grades; 
• demonstrate that a minimum of 50% of the equipment deployed is owned by the Nigerian subsidiaries (international and multinational companies); 
• insure all insurable risks related to their operations, through an insurance broker registered in Nigeria;
• retain only the services of Nigerian financial institutions, except where impracticable; 
• retain only the services of Nigerian legal practitioners; and
• carry out all fabrication and welding activities in Nigeria.

The Authority is yet to issue model licences for midstream and downstream petroleum operations in Nigeria. However, under the PIA, the licensees are required to: 

• conduct their activities in compliance with prescribed health and safety regulations, standards and operating procedures;  
• comply with the requirements for environmental protection, management and restoration in force; and 
• mark, maintain and secure the boundaries of its facilities and associated infrastructure constructed under the terms of its licence. 

The PIA provides that the duration of licences for midstream and downstream operations will be specified by regulations, which are yet to be issued. However, the PIA provides that the term of a domestic gas aggregation licence shall be two years.  

Concerning domestic supply obligations, licensees in the midstream and downstream sector do not have specific obligations to supply petroleum products in the domestic markets under the PIA.  

With regards to exports, a wholesale petroleum liquids supply licence authorises the supplier to export petroleum liquids outside Nigeria.  

Licensees in midstream petroleum operations have environmental obligations and are required to submit and deploy an environmental management plan to the Authority in respect of projects requiring environmental impact assessment for the rehabilitation and management of negative impacts on the environment.  

Additionally, licensees have decommissioning and abandonment obligations which include deploying a decommissioning and abandonment programme approved by the Authority where facilities are no longer required and setting up and funding a decommissioning and abandonment fund. 

Operators of crude oil and natural gas transportation pipelines, bulk storage tank farms, refineries, and gas processing and petrochemical plants have an obligation to set up and maintain a trust for the development of their host communities. They are also required to make annual contributions to the host communities' development fund.  

On withdrawal, a licensee in midstream or downstream operations may surrender its licence by giving 12 months’ notice to the Authority if the licensed activity is no longer permitted, is not economically justifiable or another qualified person is willing to assume its rights. Surrender of a licence is, however, subject to compliance by the licensee with all decommissioning and abandonment obligations. The Authority is empowered to issue regulations to prescribe the form and procedure for the surrender of a licence. 

A licence may be revoked for various reasons including: 

• insolvency; 
• dissolution, except as part of a merger; 
• failure to commence operations within the timeframe specified in the licence; 
• breach of applicable law; 
• interruption of operations for 180 days without cause; 
• assignment of interest in the licence without the consent of the Authority; 
• failure to comply with environmental obligations; or 
• failure to comply with any expert determination or arbitration award from the dispute resolution mechanism contained in the licence. 

Licensees are entitled to right of way for the laying, operation and maintenance of pipelines, communication lines and other similar lines through or across the areas the holder may require for carrying on midstream or downstream operations. However, licencees are also required to comply with the provisions of the Land Use Act (which regulates land acquisition), where they need to acquire any surface rights from persons entitled to them under the Land Use Act; including payment of compensation to persons whose surface rights might be affected by petroleum operations. 

Licences for the processing, transportation and storage of petroleum may either be granted for the licensee’s own account or on a common carrier basis. Where licenses are granted on a common carrier basis, the licensee is to ensure open access to its infrastructure without discrimination subject to compliance by the third parties with the prescribed terms and conditions for access. Licences granted for the licensee’s own account may also have third-party access obligations included in the licence.  

The PIA provides that where open access applies, it must be on a non-discriminatory basis, in compliance with the network code developed by the Authority for the use of gas and petroleum transportation pipelines and on the condition that the applicant undertakes to comply with the network code. Additionally, licence holders subject to open access and third-party access obligations are required to publish at their offices, the terms on which third parties may have access to their infrastructure. The Authority may also develop special terms for third-party access to a gas distribution network.  

The NGT Code also sets out the terms and conditions for the operation and use of the gas transportation system and provides for uniform terms relating to system capacity, operational balances, system clearing and entry and exit requirements.  

The PIA does not prohibit a licensee from offering multiple services in the same stream of petroleum operations and allows a company to hold more than one licence. However, the Authority may require a licensee to maintain separation in management, accounting or legal entities of its licensed or permitted activities, which may prohibit it from directly holding licences of another type.  

On the other hand, where a company intends to provide services across different streams, it must register and use a separate company for each stream of petroleum operations. Activities between affiliate licensees are also required to be at arm’s length. 

Restrictions in the PIA

Only persons who have obtained a licence from the Authority may provide the following services: (i) retail trading, distribution, marketing or supply of natural gas and petroleum liquids; and (ii) bulk sale or wholesale of petroleum liquids or wholesale gas. 

The Authority may direct licensees in the midstream and downstream sector to separate the management, accounting or legal entities of its licensed concern, which in effect may prevent the licensee from directly holding licences of different types. 

The laws and regulations applicable to exports and related taxes/levies of petroleum and petroleum products include:  

• the PIA; 
• the Customs and Excise Management Act 2004; 
• the Customs and Excise Tariff (Consolidation) Act 1995; 
• the Finance Acts 2019 and 2020; 
• the Oil and Gas Export Free Zone Act 1996;
• the Pre-Shipment of Exports Act 1996;  
• Guidelines for the operation of petroleum refining facilities 2021; and   
• the Foreign Exchange Manual (Forex Manual) 2018. 

Authorisations for Exports 

A wholesale petroleum liquids supply licence must be obtained from the Authority for (i) the export of crude oil or petroleum products; and (ii) operation, construction or establishment of a terminal or other facility for the export of crude oil or petroleum products. The Authority also issues certificates of quality and quantity to exporters of crude oil, liquified natural gas and petroleum products. However, where the petroleum products are derived from integrated upstream and midstream operations, the Commission (being an upstream regulator) would issue the certificate of quality and quantity to the exporter.  

The Guidelines for the Operation of Petroleum Refining Facilities

The Authority’s approval must be sought by a refinery to export finished products such as motor spirit, gas oil, and aviation fuel and intermediate products, ie, the hydrocarbon stream that is not crude oil nor a finished product. 

The Forex Manual  

Any person intending to export petroleum and related products from Nigeria must: 

• first, ensure that the petroleum and related products are subject to inspection by pre-shipment inspection agent(s) pursuant to the Pre-Shipment of Exports Act 1996; 
• process the Nigerian Export Proceeds Form and such other forms as may be prescribed through an Authorised Dealer; 
• pay the Nigerian Export Supervision Scheme levy to a designated bank; and
• ensure that all export proceeds are paid into a domiciliary account held in Nigeria pursuant to the Pre-Shipment of Exports Act 1996. 

Specific Limitations 

By Section 110(14) and (15) of the PIA, an upstream oil and gas company that intends to apply to the Commission for approval to supply gas for export projects must have complied with its domestic gas delivery obligation as directed by the Commission. 

Authorisation for Cross-Border Pipelines 

Beyond the licence to operate a gas transportation pipeline licence, there is no special authorisation for cross-border pipelines. 

Export Taxes and Duties

By Section 3 and the first schedule of the Value Added Tax Act 1993 (as amended), all exports from Nigeria are exempt from VAT. Further, oil and gas companies situated in export free zones are exempt from payment of taxes, levies, and duties. 

To transfer or assign interest in midstream or downstream assets or licences, the PIA mandates a licensee or permit holder to obtain the prior written consent of the Authority. The Authority may require the licensee to notify the public of the proposed transfer or assignment. 

The Guidelines and Procedures for Obtaining DPR Approval for Transfer of Licence, Rights, or Interests in the Downstream Sector 2020 establishes the procedure for obtaining approval for transfer of licences, rights or interest in midstream and downstream assets. The Guidelines set out a five-step procedure, as follows:

• licensee’s notification to the Authority and obtainment of a no objection certificate for the proposed transfer;
• an application to the Authority for transfer of the licence;
• payment of relevant application fees, processing fees and approval fees;
• submission of documents specific to the midstream or downstream facility; and
• inspection of the facility by the Authority’s inspectors and issuance of a comprehensive report.

Foreign investment in the Nigerian oil and gas sector is primarily governed by the Nigerian Investment Promotion Commission Act, 1995 (NIPC Act). Section 17 of the NIPC Act recognises that foreigners may invest and participate in the operations of any company registered in Nigeria. A Nigerian oil and gas company in which there is foreign participation must apply to the NIPC for registration before commencing business. 

The PIA restricts the grant of PELs and PPLs to companies incorporated and validly existing in Nigeria under the Companies and Allied Matters Act.

Incentives and Protections under the NIPC Act

The NIPC Act guarantees against the nationalisation or expropriation or compulsory acquisition by the government, unless for public purpose or in the national interest, and subject to (i) payment of fair and adequate compensation; and (ii) the investors having a right of access to the courts to determine the investor’s interest or the amount of compensation payable.

In the event of a dispute between a foreign investor and the government, Section 26 of the NIPC Act recognises arbitration within the framework of any bilateral or multilateral agreement to which the investor’s nation and the Nigerian government is a party, or any other machinery for settlement of investment disputes.

Incentives and Protections under the Industrial Development (Income Tax Relief) Act (IDA)

The IDA establishes the pioneer status incentive which is a tax holiday for a period of three years (which may be extended for up to two years) to companies operating in certain industries or creating certain products to encourage development within the sector.

The following products and/or industries are eligible for pioneer status incentives:

• manufacturers of refined petroleum products;
• manufacturers of tanks, reservoirs and containers for storage of compressed or liquified gas;
• gas production and gas distribution;
• crude oil and gas transportation via pipelines; and
• construction and operation of refineries and petrochemical plants.

Repatriation of Capital for Foreign Investments 

Foreign investors who imported capital into Nigeria (either in the form of cash or via plant and machinery through licensed deposit money banks (Authorised Dealers) are guaranteed unconditional transferability of their imported capital in freely convertible currency of: 

• dividends or profits (net of taxes) attributable to the investment; 
• payments in respect of loan servicing; and 
• remittances of proceeds in the event of a sale or liquidation of the oil and gas company (net of taxes). 

The investors, however, need to have secured a certificate of capital importation through an Authorised Dealer.

Incentives and Protections under the PIA

The PIA mandates the Commission and Authority to facilitate third-party investments in upstream, midstream and downstream operations. In its practical application, this is reflected in the introduction of funds such as the Midstream and Downstream Gas Infrastructure Fund, which is aimed at encouraging investments in gas projects.

Companies located in oil and gas export free zones are: 

• guaranteed repatriation of foreign capital investments in the zone and any capital appreciation; 
• entitled to remit all profits and dividends earned in the zone; 
• entitled to rent free land at construction stage; and 
• exempt from all taxes, levies, duties and foreign exchange regulations subject to certain reporting obligations.

It is crucial to note that, in accordance with Section 305 of the PIA, fiscal stabilisation clauses in any production-sharing contracts entered after August 2021 will not apply to fiscal terms listed in Section 305, unless any proposed changes to the fiscal terms are discriminatory to the petroleum industry or the contractor.

There is no sanctions regime in place.

Principal Environmental Laws and Scope

The PIA

The PIA is the principal law that regulates activities in the Nigerian petroleum industry, with extensive provisions for the regulation of environmental management and financial contributions for remediation of environmental damage arising from petroleum industry activities.   

The Environmental Impact Assessment Act, Cap E12 LFN 2004 (EIA Act)

The EIA Act establishes the general principles, procedures and methods to be applied in carrying out environmental impact assessments prior to the implementation of projects which may significantly impact the environment, including upstream and downstream petroleum operations. 

The NOSDRA Act

The NOSDRA Act establishes the framework for the co-ordination and implementation of the National Oil Spill Contingency Plan for Nigeria, and ensures a safe, timely and effective response to significant oil spillages and pollution in line with the International Convention on Oil Pollution Preparedness and Co-operation, to which Nigeria is a signatory.   

Harmful Waste (Special Criminal Provisions etc) Act, Cap H1 LFN, 2004 (HWSCPA)

The HWSCPA prohibits the disposal of harmful waste on land and territorial waters, including depositing, dumping and transportation of harmful waste within the Nigerian environment. 

The Oil in Navigable Waters Act 1968

This law was enacted in line with the International Convention for the Prevention of Pollution of the Sea by Oil 1954 to 1971. The law generally prohibits the discharge of oil from international vessels into Nigerian territorial waters and vice versa.

Petroleum Refining Regulations 1974

These Regulations provide the procedure for the establishment of a refinery, including the procedure for procuring the relevant licence to construct or operate a refinery, and observance of fire and safety regulations. 

Flare Gas (Prevention of Waste & Pollution) Regulations 2018

These Regulations seek to reduce the environmental and social impact of flaring of natural gas, protecting the environment, preventing waste of natural resources as well as creating social and economic benefits from gas flare capture. 

Principal Environmental Regulators

The Federal Ministry of Environment (FME)

The FME is the overall federal authority with the power to formulate and enforce general environmental policies in Nigeria. The Environmental Assessment Department of the FME is primarily responsible for ensuring compliance with environmental laws in the execution of developmental projects including upstream and downstream petroleum operations.

The Commission

The Commission is the primary authority empowered by the PIA to ensure compliance of parties within the upstream petroleum sector with regards to relevant environmental obligations under the PIA. 

The Authority

The Authority is the primary body empowered by the PIA to ensure compliance of parties within the midstream and downstream petroleum sector with relevant environmental obligations under the PIA. 

NOSDRA 

NOSDRA was established to co-ordinate the implementation of the National Oil Spill Contingency Plan for Nigeria in line with the NOSDRA Act.

Environmental Impact Assessment (EIA)

The EIA Act requires operators who intend to execute projects likely to significantly affect the environment to submit, prior to implementing such projects, an application to the FME for an EIA to be conducted. This assessment is to be conducted to ascertain the level of impact the project is likely have on the environment. In examining the EIA, the FME is to receive comments from interested groups on the impact of the project on the environment before reaching a decision with respect to the project. Upon the completion of the EIA, the FME will issue an EIA Certificate.

Environmental Management Plan (EMP)

Section 102 of the PIA mandates players in the upstream and midstream petroleum sector to submit an EMP for approval to the Commission or Authority as the case may be, with respect to projects which require an EIA. This is required to be done within one year of the effective date of the PIA, or six months after the grant of the applicable licence or lease. The Commission or Authority in considering the EMP is enjoined to consider the policy thrust of the federal government regarding environmental protection and management practices. 

Environmental Remediation Fund (ERF)

Section 103 of the PIA makes it a condition to the grant of a licence or lease and prior to the approval of the EMP, for the licensee or lessee to pay a prescribed financial contribution to an ERF established by the Commission or Authority, as the case may be, for the rehabilitation or management of any negative environmental impact with respect to the licence or lease. 

Host Communities Development Trust Fund (the Fund)

A major local obligation for licences and lessees under the PIA, is the establishment of the Fund which is to be financed by 3% of the licensee’s or lessee’s actual operating expenditure of the preceding financial year in respect of all petroleum operations affecting the host community. This Fund is to be utilised for community developmental projects.

The DPR Guidelines for the Construction and Maintenance of Fixed Offshore Platforms 1992 (the "Guidelines")

Under the Guidelines, prior to construction there shall be an EIA study near the shore area as provided for in the Environmental Guidelines and Standards for the Petroleum Industry in Nigeria (EGASPIN). The general construction programme should also comply with all applicable conditions in the EGASPIN. Also, the Guidelines require that constructed platforms be equipped to contain and handle spillages, potential contaminants, drainages and extreme environmental phenomena, etc. 

EGASPIN

The EGASPIN requires a licensee/operator whose operations affect the environment to have an environmental management system aimed at ensuring that unforeseen, identified and unidentified environmental issues are contained and minimised to an acceptable level. A licensee or lessee shall also obtain an environmental permit from the Commission before commencing seismic and drilling operations in Nigeria. 

Offshore Safety Permit (OSP)

Personnel undertaking offshore development activities are required to obtain OSPs as stipulated under the “Guidelines and Procedures for Travel to Offshore/Swamp Locations and Obtainment of Offshore Safety Permit” issued by the defunct DPR. One of the requirements for obtaining an OSP is that the personnel must have a valid offshore medical certificate of fitness from designated medical facilities or hospitals in Nigeria showing fitness to travel to an offshore/swamp environment.

Section 232 of the PIA provides that decommissioning and abandonment activities should be conducted in accordance with good international petroleum industry practice and guidelines issued by the Commission or Authority, which should meet the standard of the International Maritime Organisation on offshore petroleum installations and structures. 

Some of the specific procedures and conditions required for decommissioning and abandonment under the PIA include the following.

• Notification and approval of the Commission or Authority prior to commencement. 
• Submission of a programme setting out key information, such as the details and estimate of the cost of the proposed measures. 
• Compliance with relevant environmental, technical and commercial regulations or standards during the process.
• Removal of installations and structures on land and restoration of the environment to its original condition, except for buried transportation pipelines and gathering lines.
• The power of the regulators to recall a licensee/lessee responsible for decommissioning and abandonment to undertake its obligations under the PIA, even where the holder’s interest in the licence or lease has been transferred, has expired or been surrendered. In cases of transfer or divestment to a new entity, the entity may be required to inherit the outstanding decommissioning and abandonment obligations. 
• Each lessee/licensee is required to maintain and manage a decommissioning and abandonment fund with a financial institution that is not an affiliate of the lessee or licensee, in the form of an escrow account to be utilised for decommissioning and abandonment costs. 

In line with its commitment under the Paris Agreement, Nigeria recently enacted the Climate Change Act (the Act) to address key national and global issues on climate change. 

Under the Act, the FME in conjunction with the Federal Ministry of Budget and National Planning has been mandated to set a "Carbon Budget" which is to serve as the greenhouse gas (GHG) emission threshold for Nigeria. Entities with an employment base of 50 persons or more are also required to set annual carbon emission reduction targets in consonance with the National Climate Change Action Plan and appoint officers to submit annual reports to the Climate Change Council (the Council) detailing the entity’s compliance efforts. 

The Act establishes the Climate Change Fund which is to be maintained by the Council for funding its administrative costs, as well as innovative climate change mitigation and adaptation projects and awareness. Some of the sources of the Fund include sums appropriated by the National Assembly for running of the Council, carbon tax and emissions trading, etc. 

The Act also prescribes penalties for entities whose efforts tend to undermine the objectives of the Act.

The federal government exclusively legislates on petroleum operations in Nigeria. Therefore, local governments or host communities cannot unilaterally impose restrictions or limitations on oil and gas development. The PIA contains provisions addressing environmental issues and host communities’ development. Section 105 of the PIA, for instance, prohibits flaring and venting of natural gas, and imposes a penalty for such acts.

However, local governments routinely attempt to impose various levies on companies operating within their areas, including oil and gas companies, which heavily resist these levies. 

There are no special laws or regulations relating to unconventional upstream interests.

The Nigeria LNG (Fiscal Incentives Guarantees) Act (NLNG Act) was enacted to confer pioneer status and to confer tax incentives on Nigeria LNG Limited (NLNG), Nigeria’s only operating LNG company. 

In respect of tax incentives, the NLNG Act provides for tax exemption on:

• interest on loans payable by NLNG;
• interest or amounts payable to a non-Nigerian company in respect of loans or final arrangements with NLNG;
• works or services provided from outside Nigeria to NLNG;
• payment of import duties, taxies, etc, in relation to necessary imports of materials used for construction of, or incorporation into, the plants facilities and works used for NLNG’s business;
• payment of export duties or taxes on the export of LNG; and
• income earned in Nigeria by shipping companies owned by NLNG or its shareholders from the business of transporting LNG produced by NLNG.

Nigeria has targeted 2060 as its cut-off date for attaining net-zero carbon emissions, and energy transition considerations in Nigeria currently contemplate leveraging Nigeria’s abundant natural gas as a ‘transition fuel’, to reduce reliance on oil. Nigeria’s energy transition plan hinges on the development of the local natural gas sector, which Nigeria would be dependent on until 2040. There have also been infrastructure developments to foster the effectiveness of the gas sector. For instance, in 2020, the Ajaokuta-Kaduna-Kano Natural Gas Pipeline was launched by the government and is expected to connect Nigeria’s gas supply to other trans-regional and intercontinental pipelines such as the Trans-Saharan Gas Pipeline. Additionally, there are discussions with International Finance Corporation, on collaborating with the Nigerian government to identify promising sectors and private companies capable of developing new technologies for capturing, using, and storing carbon. 

On the part of the oil and gas companies, Nigeria has witnessed a significant reduction in investments in the upstream sector, as well as major divestments by the IOCs. This and other developments, including increasing vandalisation of pipelines and crude oil theft, has negatively impacted investments in the Nigerian upstream oil and gas operations

The Nigerian petroleum industry is currently plagued by various security challenges, which primarily include crude oil theft and pipeline vandalism. It is estimated that over 100,000 barrels of oil are lost to theft and vandalism daily which roughly equates to over USD300 million Accordingly, investors in the petroleum industry will need to be aware of the risks and take measures to guard against these security threats. 

On the regulatory side, it is interesting to note is that the PIA still preserves to some extent, the legal and regulatory framework which existed prior to the passage of the PIA, hence it could be said that Nigeria currently operates a dual regulatory regime in this sector.

The passage of the PIA in 2021 introduced a comprehensive legal and regulatory framework for the Nigerian oil and gas industry – covering the upstream, midstream and downstream sectors. Some of the changes include the establishment of two new regulators – the Commission and the Authority – to regulate technical, operational and commercial activities in the upstream sector, and in the midstream and downstream sectors, respectively.