You are on page 1of 12

Nigeria: Legal Framework Of The Nigerian

Petroleum Industry
Introduction
Oil was first discovered in commercial quantities in Nigeria in 1956 near Oloibiri
Village in Rivers State. The discovery was made by Shell D’Arcy, a company of
Anglo/Dutch origins. The company began production in 1958 with an average
production of 6000 barrels of oil per day (bopd). Nigeria currently produces about
2 million bopd.
Nigerian oil is light and low in sulphur and consequently commands premium
prices. Nigeria is the 9th largest world oil producer and the 5th largest OPEC
producer. Nigeria also has huge natural gas reserves.
New deep water activity has yielded major discoveries such as

Bonga (operated by Shell)

Erha (operated by ExxonMobil)

Agbami (operated by Texaco)

National aspirations include
1. the increase of reserves from the current level of 25 million barrels to 30
million barrels and increase in productivity from 2.2 million bopd to 3
million bopd in year 2003;
2. further increase in reserves and productivity to 40 billion barrels and 4
million bopd respectively by year 2010; and
3. attaining zero flaring associated gas through gainful gas utilization
projects by year 2008
Government Participation
In the 1960s, government interest in the oil industry was limited to the collection
of taxes, royalties and lease rentals. Many developing countries had begun to
agitate for greater control over their natural resources in reaction to the
continued control of their economies by the old colonial masters. In 1962
theResolution on Permanent Sovereignty over Natural Resources was adopted by
a majority of the General Assembly of the United Nations. The Resolution
asserted that the right of people to freely use and exploit their natural wealth
and resources is inherent in their sovereignty. In this spirit, in 1969 the Petroleum
Act was enacted which vested the entire ownership and control of all petroleum
in, under or upon all land or Nigerian territorial waters in the Nigerian
government.

Refining and Petro-Chemicals 5. However a de-merger took place in 1984 and presently. Nigeria’s military government in 1971 established the Nigerian National Oil Corporation (NNOC) by Decree. Finance and Accounts 4. OPEC was formed to improve the lot of oil producing countries by adopting a "group" stance (all resolutions adopted are binding on every member). Corporate Services 3. headed by Group Executive Directors i. NNPC’s subsidiaries are: 1. and to participate in all phases of the petroleum industry. PH Refineries I and II 2. In that same year. There are six divisions of NNPC. the NNPC undertakes commercial activities.e. In accordance with OPEC’s 1968 and 1971 Resolutions urging member countries to participate in oil operations by acquiring ownership in the concessions held by foreign companies. 1. Exploration and Production 6. The Stakeholders Federal Government/NNPC The Federal Government participates in the oil industry through the NNPC. Further acquisitions occurred in 1973 and 1974 in the operations of all the other foreign oil companies. Government participation in the commercial oil sector continues to this day through the NNPC and government’s participatory interest is 60% in all the JVs except the Shell operated JV where it is 55%. NNPC is the group holding company headed by a Group Managing Director/Chief Executive. It inherited the commercial activities of the NNOC and the supervisory/regulatory role of the Federal Ministry of Petroleum Resources. Engineering and Technical 2. The NNOC was empowered to acquire any asset and liability in existing oil companies on behalf of the Nigerian government. Warri Refinery and Petro-Chemicals . Kaduna Refinery and Petro-Chemicals 3.In 1971 Nigeria joined the Organisation of Petroleum Exporting Countries (OPEC). whilst the Federal Ministry of Petroleum Resources acting through the Department of Petroleum Resources (DPR) is the regulatory authority. Commercial and Investments. the government acquired 33% and 35% of the operating interests of Agip and Elf respectively. The NNPC was formed in 1977.

The Frontier Exploration in the Chad Basin.4. Products and Marketing Co Ltd. development and operations. Nine (9) Production Sharing Contracts and one (1) Service Contract (Agip Energy). Nigus Petroleum and Niger Delta Oil Co. The Multinationals The major players in the Nigerian upstream are Shell. and in one instance under a service contract with NNPC. working directly under the E & P Directorate of NNPC. National Engineering and Technical Co Ltd. NAPIMS. However. 5. [IDSL] 8. TotalElfFina Elf and Agip. 6. 2. Later. the . The first set of indigenous grants was in the 1970s/1980s to Henry Stevens Company. some multinational companies have farmed into indigenous oil company concessions where they provide the technical expertise and funding required for E & P operations. as operators/contractors in the Nigerian deep water under production sharing contracts with NNPC. Currently NAPIMS. Nigerian Petroleum Development Co Ltd. ExxonMobil. Nigerian Gas Company Ltd. It is headed by a Group General Manager. manages 1. Pipelines. Chevron/Texaco. and 3. Integrated Data Services Ltd. [NETCO]. These multinationals account for about 97% of Nigeria’s oil reserves and production. They participate in the petroleum industry in Joint Ventures with NNPC. in 1987. NNPC also holds shareholding interests in Nigeria LNG Limited and many oil service companies. In addition. a Business unit of the NNPC is responsible for the management of government investments in the petroleum sector. National Petroleum Investment Management Service. 7. The seven (7) NNPC/Multinational Oil Co Joint Ventures. Dubri Oil acquired a concession by assignment from Philips Oil Company Ltd. it was not until 1991 that Professor Jubril Aminu. Indigenous Oil Companies The Indigenous Concession Programme’s aim was to retain ownership and control of indigenous concessions in Nigerian hands and thereby encourage the growth of local expertise production in exploration.

" Ministry of Environment/FEPA . is finally being recognised and addressed by the Federal Government . awarded eleven (11) concession blocks to Nigeria entrepreneurs on a discretionary basis.is responsible for formulating and implementing Government policy. both onshore and offshore. Host Communities Though not direct stakeholders. DPR’s Mission Statement is "To serve as the watchdog over the development of our nation’s oil and gas resources. In 1999. by employing modern tools and techniques to direct. host communities are nevertheless one of the most important stakeholders in the petroleum industry.Minister of Petroleum at the time. OPLs for nine (9) blocks were awarded and subsequently cancelled. This was followed by another round of allocations in 1993. The critical role and interests of the host communities. The Federation Inland Revenue Board is responsible for collection of Royalties and PPT on behalf of Government. There is an overlap of jurisdiction between Ministry of Environment and DPR in the area of environmental protection matters as it pertains to the petroleum industry. Federal Ministry of Petroleum . and eventually resulted in more than 40 Indigenous E & P companies holding OPLs under the programme. by the passing of the Niger Delta Development Commission Act. It is important that there is only one lead agency dealing with industry operators and a memorandum of understanding between the various regulatory agencies on inter-agency co-operation. through a process of competitive bidding. The National Assembly as the Legislative arm of government is empowered to pass legislation on Petroleum matters – which is on the Exclusive Legislative List. conversion and utilisation of petroleum and its derivatives for the maximum benefit of Nigerians while ensuring minimal damage to the environment. influence and achieve the optimum exploitation. Department of Petroleum Resources is the Regulatory arm of the oil and gas industry. during the current Year 2000 Licensing Round 22 blocks were offered to the entire industry. Finally. acting under advice from the Presidential Adviser on Petroleum and Energy.The Federal Environmental Protection Agency was established in 1988 (Decree no 50) to protect. . restore and preserve the ecosystem of the Nigerian environment. Law & Policy Makers And Regulators The President is currently the de facto Petroleum Minister. inter alia. long neglected.

production and marketing activities in and under the specified acreage for a period of 20 years. It is renewable annually.000bpd)." The Petroleum Act 1969 provides for the grant by the Minister of Petroleum Resources of three types of interests – exploration. It is an exclusive licence given for a period not exceeding 5 years. is under the territorial waters of Nigeria. It includes the right to take away and dispose of oil discovered while prospecting. Section 1 of which provides that 1. Prospecting An Oil Prospecting Licence (OPL) allows for more extensive exploration surveys. Production The grant of an Oil Mining Lease (OML) allows for full scale commercial production once oil is discovered in commercial quantities (currently defined as a flow rate of 10. or d. The foreign company will then enter into a PSC or a Risk Service Contract with the NNPC. or b. is in Nigeria . The entire ownership and control of all petroleum in. or c.Interests & Rights The most important petroleum legislation in Nigeria is the Petroleum Act. The Minister exercises general supervision over all operations carried on under licences and leases (Section 8) and may make regulations prescribing anything required to be done under the Act (Section 9). An OPL granted to a foreign company is now issued with a covenant by the foreign company to assign the OPL to the NNPC upon making a commercial discovery. 1969. Exploration An Oil Exploration Licence (OEL) is necessary to conduct preliminary exploration surveys. prospecting and production rights. 2. This section applies to all land (including land covered by water) which a. forms part of the Exclusive Economic Zone of Nigeria. exploration. The licence is non-exclusive and is granted for a period of one year. Operating Contracts . under or upon any lands to which this section applies shall be vested in the State. forms part of the continental shelf. The Lease confers the exclusive right to carry out prospecting.

(NNPC) Oil Company Shell Elf Agip 5 NNPC/ Shell/ Elf/ Agip 55 30 10 NNPC/ Texaco/ Chevron 60 Texaco Chevron 20 20 Agip Philips 20 20 NNPC/ Agip/ Philips 60 NNPC/ Mobil 60 40 NNPC/ Chevron 60 40 NNPC/ Elf 60 40 NNPC/ Pan 60 40 .Participatory Joint Ventures/JOA/MOU The seven (7) Joint Ventures operated by foreign oil companies in partnership with the Federal Government are – Joint Ventures % of Partner's Participation Govt.

Ocean The JV is an unincorporated vehicle. The first MOU signed in 1986 was revised in 1991 and the current one is the MOU. 3. 2000. all new government contracts with oil companies are PSCs. Ownership. funding and production sharing are all based on each partner’s equity share. . "Tax Oil" and "Profit Oil" in that order of priority. Each JV participant contributes to the payment of all costs when called upon ("Cash Calls") in the proportion of its participating interest. The contract is entered into between the NNPC and the E & P company ("the contractor"). 5. Each JV partner shares the exploration and financial risks. Only in the event of successful development of discoveries will the oil company recover exploration and development costs. due to Nigeria’s inability to adequately meet its cash call obligations to fund JV operations. A Joint Operating Agreement (JOA) governs the parties’ administrative and operational relations. "Cost Oil". 2. 6. Production is divided into "Royalty Oil". 4. The NNPC is the holder of the OPL and OML which constitute the contract area. Since then. The contractor is exclusively responsible for financing all petroleum operations. The commercial terms of the JV’s are governed by a Memorandum of Understanding (MOU) which modifies the fiscal regime by providing fiscal incentives to ensure that the oil company realises a minimum profit margin and a bonus for additions to oil reserves. Hence all exploration and development risks are taken by the oil company. The contractor is appointed and given exclusive rights to carry out the exploration and production operations in the contract area for a period of 30 years. Elements common to PSCs are – 1. Production Sharing Contracts (PSC) The first Nigerian PSC was the Ashland Oil PSC signed in 1973.

provides legislative backing for the contract terms and fiscal regime governing PSCs. A Joint Management Committee is responsible for overseeing petroleum operations and the agreed work programme. Risk Service Contracts The OPL is held by NNPC while the service company funds petroleum operations. of its own accord. 8. "Profit Oil" is the oil remaining after all the above have been allocated. The law provides that the holder of an OML may. As the contractor only gets reimbursed from funds derived from the sale of the concession’s available oil. Companies Income Tax is not applied to petroleum operations. as the Petroleum (Amendment) Decree 1996. The primary term is for a period of 2 or 3 years renewable at NNPC’s option for a further 2 years. There is no government participatory interest (although government reserves the right to exercise an option to participate at any time). the contractor does not recover its cost. Where oil is found. Marginal Fields The long awaited legislation on marginal fields was promulgated in August 1996. Government interest is limited to collection of Royalty and Petroleum Profit Tax. The contractor is remunerated by payment of a fixed amount. . The profit oil is allocated to each party in pre-agreed percentages. in cash or crude allocation. "Royalty Oil" is the quantity of available oil allocated to pay the sum of Royalties payable during a month of production and the amount of concession rentals payable for that period.7. the contractor is paid its cost back in installments. if oil is not discovered in commercial quantities. 1999. As such the contractor is liable to pay Companies Income Tax and not Petroleum Profit Tax. The Deep Offshore and Inland Basin Production Sharing Contracts Act. "Tax Oil" is the oil allocated to cover the Petroleum Profit Tax payable. Indigenous Operations – Sole Risk Contracts The operating company holds the OPL or OML. "Cost Oil" is sold to provide revenues for the recovery of qualifying preproduction costs and operating costs. farm out any marginal field within the leased area with the consent of the Head of State. Each service contract relates to a single concession. It does not have a participation share and does not acquire title to any crude produced. All concessions under the Indigenous Concession Programme are granted on a sole risk basis.

Indigenous companies must relinquish existing OPL/OML to be eligible. inter alia. Current holders of OPL/OML.75%. and  acceptability of the partners to the government. The draft guidelines are yet to be approved. 1979. 1996 provide. The pre-conditions for a compulsory farm out are:  public interest. Marginal fields may only be operated on a "Sole Risk" basis. Gas utilization opportunities include  Independent Power Projects (IPPs) . renewable thereafter every 5 years until the expiry of the lease. Gas Nigeria has been described as a gas province with a little bit of oil! This is testimony to our huge gas reserves which is estimated at 120 trillion cubic feet. Only technically qualified Nigerian citizens who own locally incorporated companies may apply. Various fees. that: 1. while Petroleum Profit Tax is charged at the rate of 65. Our position as the world leader in gas flaring is well known. 2. are excluded from farming into marginal fields. except indigenous oil companies. generous fiscal incentives for gas utilization have been granted. The current gas legislation is the Associated Gas Re-injection Act. A farmee may have a foreign technical partner with not more than 40% interest in the marginal field. In pursuance of government policy. The oil majors view any compulsory acquisition of portions of their OMLs as an act of expropriation and in breach of the terms under which the Leases were granted. Rents and Royalties are prescribed. The agreement shall be for an initial period of 5 years.The Head of State may compulsorily farm-out a marginal field where it has been left unattended for 10 years or more from the date of first discovery of the marginal field. gas development under the Companies Income Tax Act and duty/VAT exemptions for gas developments. Premium. The good news is that the Nigerian Government is committed to a "flares out" date of 2008. Draft "Guidelines for Farm-out and Operations of Marginal Fields" prepared by the DPR in September. Gas incentives include royalties at zero per cent.

Petroleum (Drilling and Production) Regulations [Cap 350] LFN 1990 4. 1990.Liquids (GTL)  West African Gas Pipeline  Domestic gas utilization. Downstream The supply sub-sector of the Downstream sector is completely and exclusively dominated by NNPC through ownership of all the existing refineries and government regulation of pricing. FEPA Act. Response and Cooperation. Environmental Impact Assessment Act. There is a need for the publication of the long awaited National Gas policy. The distribution sub-sector is also entirely controlled by NNPC through ownership of the distribution pipelines. depots and oil import jetties. The plan which was prepared to establish a national system for responding promptly and efficiently to oil pollution incidents was drafted in compliance with Nigeria’s international obligations as a signatory to the International Convention on Oil Pollution Preparedness. Statutes –e. Clear evidence of this is the formation of the new Ministry for Environment.g. 1991 The National Oil Spill Contingency Plan deserved a mention. Only in the marketing sub-sector do we see control shared by the eight major marketers (40% of the fuels retail market) and the Independent Marketers (60% of the fuels retail market). 3. 2. Both Government and the public are now fully sensitised to the issues of environmental management and protection. Liquefied Natural Gas (LNG)  Natural Gas Liquids (NGL)  Gas – to. International law – Treaties. 1992. customary international law. Subsidiary Legislation –Mineral Oils (Safety) Regs 1995. Environmental Standards and Guidelines for the Petroleum Industry in Nigeria. The sources of environment law are myriad and include – 1. Oil in Navigable Water Act [Cap 337] LFN 1990. . The Environment Public awareness and concern over the degradation of our natural environment is growing.

PH Refinery I and II 2. i. Further. Kaduna Refinery and Petro-Chemicals 3. 1999. Nigerian Petroleum Development Co Ltd. laws. NNPC is slated for full commercialisaion and the following NNPC subsidiaries are to be partially privatised.It has already been noted that the supply and distribution assets of NNPC are slated for partial privatisation. Privatisation The Privatisation policy of the Federal Government is premised on the need to manage public funds efficiently.e. An Ideal Legal Framework In order to attract investment to the petroleum sector. and the Bureau of Public Enterprises as the implementation organ. 6. regulations and policy governing the industry should be  Clear. which establishes the National Council on Privatisation as the governing body. 1969 and Regulations made under it. Government retains 40% equity stake : 1.  Accessible. 5. The Downstream sector is governed by the Petroleum Act. attract foreign capital and new technology and raise funds for Government to be used for infrastructure and social development. Products and Marketing Co Ltd. Nigerian Gas Company Ltd. Warri Refinery and Petro-Chemicals 4.  Complete.  Transparent. National Oil and Chemical Co Ltd and African Petroleum Plc – have recently been fully privatised through sale to core investors. The enabling legislation is the Public Enterprises (Privatisation and Commercialisation) Act. Under the Privatisation Act.  Flexible. and  Practical. government’s 40% interests in the marketing sub-sector – Unipetrol Plc. . Pipelines.

the law should further the national energy policy objectives of the Federal Government. Stability of fiscal contract terms is essential.A consultative process should be institutionalised to ensure periodic dialogue with operators to ensure that regulations are technically feasible and cost effective. Legal processes must be quick and remedies efficient and effective. . Finally.