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Contents of the Nigerian Oil and Gas Sector

  • Brief on the Nigerian Oil and Gas Sector
  • Division of the Industry in Nigeria
  • Licenses Granted Under Upstream Operation
  • Fiscal Arrangements in Nigerian Upstream Sector
  • Some Challenges Facing the Industry
  • Petroleum Industry Act (PIA)
  • New Fiscal Regimes Under PIA

Brief on the Nigerian Oil and Gas Sector

  • Nigeria’s crude oil generally has a gravity between 21 degrees API and 45 degrees API.
  • The main export crudes are:
    • Bonny Light (37 degrees API)
    • Forcados (31 degrees API)
  • About 65% of Nigeria’s oil is above 35 degrees API and has a very low sulphur content.
  • Nigeria’s crude is characterized as paraffinic and low in sulphur.

Examples of Nigeria’s Light Crude Oil

  • Bonny Light
  • Forcados Blend
  • Qua Iboe Terminal (QIT) Blend
  • Escravos Blend
  • Antan Blend
  • Brass Blend
  • Agbami Blend

Proven Oil and Gas Reserves

  • As of the end of 2024, proven oil and gas reserves are as follows:
    • Total Proven Oil Reserves: 37.50 billion barrels
      • Crude Oil: 31.56 billion barrels (composed of hydrocarbons)
      • Condensates: 5.94 billion barrels
    • Natural Gas Reserves: 209.26 trillion cubic feet (TCF)
      • Associated Gas: 102.59 TCF
      • Non-Associated Gas: 106.67 TCF
  • Estimates of Nigeria’s undiscovered gas reserves range from 300 - 600 TCF.
  • Nigeria is described predominantly as a gas province with some oil due to high-quality gas rich in liquids and low in sulphur.
  • Due to a lack of gas infrastructure, 75% of associated gas is flared.

Division of the Industry in Nigeria

  • Broadly divided into four sectors:
    1. Upstream Sector
    2. Midstream Sector
    3. Downstream Sector
    4. Services Sector

Upstream Sector

  • Characterized by exploration and production of crude oil and gas.
  • It is the most important sector in the Nigerian economy, accounting for over 90% of the country’s exports and 80% of the Federal Government's revenue.
  • Major activities include:
    • Exploration (mineral right acquisition, seismic studies)
    • Development (well drilling, casing, installation of pipelines, terminals)
    • Production (using oil rigs, Floating Production, Storage and Offloading - FPSO)

Participants in Upstream Sector

  • Companies engaged in E&P (Exploration and Production) activities are crucial for the state of the economy.

Licenses Granted Under Upstream Operation

  • Oil Exploration License (OEL):
    • Confers non-exclusive rights to explore for petroleum using surface geological methods for a specified period.
    • Renewed on a 1-year term.
  • Oil Prospecting License (OPL):
    • Confers right to surface and subsurface exploration in a maximum area of 2,590 sq. km.
    • Duration is 5 years for Joint Venture, onshore and shallow water operators and 10 years for Deep Offshore and Inland Basin Production Sharing Contracts (PSCs).
  • Oil Mining Lease (OML):
    • Grants exclusive right to explore, produce, transport and carry away petroleum from a leased area.
    • The term is usually a maximum of 20 years but renewable.
    • Conditions include discovery in commercial quantity and production capacity.

Awards of Oil and Gas Exploration Licenses (Pre-PIA)

  • Licenses were granted through direct negotiation or discretionary allocation by the Federal Government prior to 1999.
  • To enhance transparency, the Federal Government now favors competitive tenders for license awards.

Fiscal Arrangements in Nigerian Upstream Sector

  • Major fiscal arrangements in Nigeria’s upstream sector involve:
    1. Joint Venture (JV)
    2. Production Sharing Contracts (PSCs)
    3. Service Contracts (SC)
    4. Marginal Field Concessions (MFC)

Joint Venture (JV)

  • Standard agreement between Nigeria National Petroleum Corporation (NNPC) and multinational oil companies (MOCs).
  • Both parties share funding and production in proportion to their equity holdings.

Taxation under Joint Ventures

  • Taxed under the Petroleum Profits Tax Act (PPTA) at 65.75% for the first five years and 85% afterwards, adjusted by MOU provisions for profit margins under specific conditions.
  • Notable operators include Shell, ExxonMobil, ChevronTexaco, Total Elf, and Agip.

Production Sharing Contracts (PSC)

  • Established in 1993, allowing contractors to recover costs from commercial production.
  • Cost oil and tax oil recovery mechanisms based on a defined formula.
  • The applicable PPT rate is 50% for profit-sharing arrangements.

Service Contracts

  • Contractors conduct exploration and production on behalf of NNPC at their own risk, charging fees based on outputs of oil production.
  • The contractor pays income tax on service fees under the Companies Income Tax Act at 30%.

Marginal Field Contracts

  • Defined as unproduced fields with booked and reported reserves for over 10 years.
  • The Federal Government encourages IOCs to assign marginal fields to indigenous operators to enhance industry inclusiveness.

Marginal Field Objectives

  • Expand indigenous participation in the oil industry
  • Increase oil and gas reserves
  • Provide opportunities for rationalization and employment

Midstream Sector in Nigeria

  • Covers processing, storage, and transportation of crude oil and liquefied natural gas.
  • Involves pipelines, tankers, and construction for transportation.

Downstream Sector of the Industry

  • Encompasses marketing, refining, storage, and distribution of petroleum products.
  • Operators are divided into Majors (64% market share) and Independent Marketers (IPMAN).

Types of Products in the Downstream Sector

  • Black Products:
    • Low Pour Fuel Oil (LPFO), High Pour Fuel Oil (HPFO), Liquefied Petroleum Gas (LPG), bitumen, lubricants.
  • White Products:
    • Premium Motor Spirit (PMS), Automotive Gas Oil (AGO), kerosene, etc.

Tax Regime for Downstream Companies

  • Taxed under Companies Income Tax (CITA).
  • Black products subject to Value Added Tax (VAT), while white products are exempt.

Oil Servicing Companies

  • Act as contractors to upstream and downstream companies, providing various technical services and supports.
  • Contracts are subject to 1% deduction from the contract price, treated as expenses.

Services Provided by Oil Service Companies

  • Exploration support, drilling services, production support, refining, communication, well logging.

Regulatory Agencies Overseeing Oil and Gas Operations in Nigeria

  • Local Agencies:
    • Ministry of Petroleum Resources, NNPC, DPR, NDDC, FIRS.
  • Key Functions:
    • Policy formulation, regulation, registration certification, audit, and revenue collection.

International Regulatory Agencies

  • OPEC, American Petroleum Institute (API), Extractive Industries Transparency Initiative (EITI).

Challenges Facing the Industry in Nigeria

  • Policy Uncertainty:
    • Includes price regulation, penalty regimes, and fiscal provisions.
  • Poor Infrastructure:
    • Infrastructure deficit affecting midstream and downstream sectors.
  • Insecurity:
    • Pipeline vandalism and kidnappings affecting operations, with over 1,000 incidents recorded between 2019 and 2020.

Petroleum Industry Act (PIA)

  • Enacted to provide an overarching legal, governance, regulatory, and fiscal framework for the Nigerian petroleum industry, addressing outdated regulations.

Objectives of the PIA

  • Enhance exploration and production, create a stable business environment, and provide a solid fiscal framework for increasing revenues.

Major Fiscal Provisions in PIA

  • Introduction of the Nigerian Hydrocarbon Tax (NHT) at 30%, changes in royalty calculations, and deductibility of expenses.

New Fiscal Regimes under the PIA

  • Replacement of Petroleum Profit Tax (PPT) with Hydrocarbon Tax (HT) and Companies Income Tax (CIT) for various operations.

Royalties Under PIA

  • Royalty rates determined by production and price. Rates include 15% for onshore, 12.5% for shallow water, and 7.5% for deep offshore operations based on specific thresholds.

Marginal Fields Regulatory Changes

  • Marginal fields profit taxed at 15%, with detailed royalty structures for various production scales.

Midstream Changes Under PIA

  • Introduction of licensing, specific regulations for infrastructure development, and establishment of a decommissioning and abandonment fund.

Downstream Changes Under PIA

  • New powers for the Authority to grant licenses, establish pricing frameworks, and segregation of operations.

Natural Gas Changes Under PIA

  • Governs profits from gas operations, establishes royalty structures, and funds dedicated to regulatory authorities and infrastructure developments.

Host Communities

  • Defined as communities in or adjacent to oil and gas operations, mandated to establish trust funds to support local development and economic empowerment.

Summary of Regulatory Changes

  • Transition from various prior bodies to consolidated authorities under PIA, including the establishment of NUPRC and NMDPRA, removing regulatory powers from NNPC and the Ministry of Petroleum Resources.