Nigeria Introduction

Transcription

1 12.9 Nigeria Introduction The main elements of Nigerian law relating to the exploration and production of oil and gas are to be found in Twentieth century legislation. Such legislation is exemplified by the following major statutes, the principal effects of which are summarized below: The Petroleum Act (Laws of the Federation of Nigeria 1990, Cap. 350) came into force on 27 November 1969 and has since undergone several amendments. Its main purpose is to vest in the state the property in petroleum existing in its natural condition in strata in Nigeria. In addition, it seeks to provide a legal framework to enable persons to search for and obtain such petroleum. The following regulations are subsidiary to the Petroleum Act: Mineral Oils (Safety) Regulations, Statutory Instrument 1963 No. 45; Petroleum (Drilling and Production) Regulations, Statutory Instrument 1969 No. 69; Crude Oil (Transportation and Shipment) Regulations, Statutory Instrument 1984 No These regulations deal with various matters which concern the search for, obtaining and disposal of petroleum in connection with licences. In particular, the regulations set out model clauses, which are incorporated in such licences unless modified or excluded in specific cases. The Oil Pipelines Act 1956 No. 31 (Laws of the Federation of Nigeria 1990, Cap. 338) came into force on 4 October It provides for the issuance of permits to survey routes for oil pipelines as well as the awarding of licences for the establishment and maintenance of such pipelines incidental and supplementary to oilfields. The Oil and Gas Pipelines Regulations, Statutory Instrument 1995 No. 14, which is subsidiary legislation, are ostensibly geared at augmenting the Oil Pipelines Act and bringing it in line with current industry practices. The Oil Terminal Dues Act 1969 No. 9 (Laws of the Federation of Nigeria 1990, Cap. 339) came into force on 1 January Its purpose is to provide for the levying and payment of terminal dues on any ship evacuating oil at any terminal in any port in Nigeria. Most importantly, it incorporates the Convention on the continental shelf signed in Geneva on 29 April 1958, thereby making it part of Nigerian municipal legislation. The subsidiary legislation passed pursuant to the Oil Terminal Dues Act relates to the establishment of the oil terminals now in operation in Nigeria. The Deep Offshore and Inland Basin Production Sharing Contracts Act 1999 No. 9 (as amended) was passed on 23 March 1999 with retroactive effect from 1 January 1993 and is the first piece of Nigerian legislation recognizing the dichotomy between the onshore and offshore exploration regimes. It provides legislative recognition and support for the Production Sharing Contract (PSC) arrangement, which had hitherto existed and been conducted purely under contractual terms, since its inception in 1973 and its substantial revision in It also modifies existing provisions (particularly royalties and duration of grants) of the Petroleum Act as well as the Petroleum Profits Tax (PPT) Act for the purpose of deep water and inland basin exploration, conducted ostensibly under the PSC. The PPT Act 1959 No. 15 (Laws of the Federation of Nigeria 1990, Cap. 354) came into force on 1 January 1958 and has since VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 757

2 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY undergone several amendments. Its purpose is to provide for the assessment and imposition of a tax upon the profits of enterprises engaged in the development of petroleum in Nigeria. In relation to the development of and disposal of natural gas, statutory intervention has been less regular. The Associated Gas Re-injection Act 1979 No. 99 (Laws of the Federation of Nigeria 1990, Cap. 26) came into force on 28 September 1979 and along with its subsidiary legislation, the Associated Gas Re-injection (Continued Flaring of Gas) Regulations 1979 (as amended) represents the only direct piece of composite Nigerian legislation to date concerning the exploration and development of natural gas. Other provisions appear as sections within the Petroleum Act and PPT Act. In order to understand the content of this legislation, we need to understand the influences and factors which gave rise to it, as well as those which have since shaped the legislator s work. The first factor is the pre-independence legislation which was based on British colonial influence and extensive experience in seeking oil abroad in such places as the United States and the Middle East. In this way, a licensing regime was developed, drawing on leasing practices in the USA and the experience of state concessions in the Middle East. The second factor is based on the common heritage of the law of the sea and international law. The third factor has been prompted by Nigeria s alignment and subsequent membership of the Organization of the Petroleum Exporting Countries (OPEC) in the 1960s and 1970s. This brought to the fore Nigeria s desire to assure state participation interests in petroleum as a basis for the effective regulation of oil and gas exploration and production, as well as an appropriate return from such activity. The fourth factor has been the laws and policies of deregulation and indigenization, born out of the inherent limitations of state participation policies coupled with the realization of the vast potential of offshore petroleum exploration and production. Such deregulation and indigenization policies are now having a profound impact on the sector. The fifth factor instigated by the environmental consciousness prevalent over the past 30 years has given rise to legislative reforms in respect of the environmental aspects of oilfield practice leading, amongst other things, to the encouragement of gas development and utilization. An outline of the history of Nigerian oil and gas law since the beginning of the 20th century shall now be provided, demonstrating the effect these various influences have had on the current regime Development of Nigerian oil and gas law : creation of the licensing regime Although it is believed that grants for the exploration and exploitation of oil and gas date from the late Nineteenth century, municipal legislation governing such grants did not come into existence until the turn of the Twentieth century. This is exemplified by the promulgation of the Mining Regulation (Oil) Ordinance 1907 No. 12 and thereafter Ordinance 1909 No. 19 (Laws of Southern Nigeria 1909, Cap. 130). The Mineral Oils Ordinance 1914 No. 17 (Laws of the Federation of Nigeria 1958, Cap. 120) was passed, repealing Ordinance 1909 No. 19, with the aim of regulating the right to search for, obtain and work mineral oils. The first record of active exploration was the pioneering work in 1908 of the Nigerian Bitumen Company, a German entity whose activities abruptly ceased upon the commencement of the First World War in In 1921, oil exploration rights were granted to two British companies, namely D Arcy Exploration Company and Whitehall Petroleum Co. Ltd in the Niger Delta, but little or no commercial activity was recorded. In 1937, the Shell D Arcy Company, a consortium of the Royal Dutch Shell Petroleum Company and the D Arcy Exploration Company, commenced exploration work and were granted exclusive exploration and production rights in the whole of Nigeria. The advent of the Second World War equally interrupted exploration activity and in 1946, upon resumption of its activities, the Shell D Arcy Company re-emerged in partnership with British Petroleum as Shell-BP, assuming the position of the pioneer oil and gas exploration company in Nigeria. Exploration activity after both the First and Second World Wars was conducted under the authority of the Mineral Oils Ordinance 1914 which provided under section 6(1)(a) that, no lease or licence shall be granted except to a British subject or to a British company registered in Great Britain or in a British colony, and having its principal place of business within her Majesty s dominions, the chairman and the managing director (if any) and the majority of the directors of which are British subjects. 758 ENCYCLOPAEDIA OF HYDROCARBONS

3 NIGERIA The effect of this provision was to fortify Shell- BP s premier position over lands to which leases and licences for the exploration of oil had been granted. Although the primary motive behind the passage of the legislation as a whole was to further consolidate British influence in new economic activity in Nigeria at the time, it is postulated that an equally important consideration arose from the need to avoid unrestricted competitive drilling in what was at the time a largely unregulated sphere of activity. Again, drawing from its experience in the United Kingdom in the 1920s and 1930s, where it claimed that the search for petroleum had been unduly hampered by uncertainties as to the rights of property and having experienced similar difficulties in Nigeria, the British colonial government secured the passage of the Minerals Ordinance 1946 (Laws of the Federation of Nigeria 1958, Cap. 121). The principal purpose and effect of this was to vest in the Crown the property in all petroleum (mineral oils) in situ. It provided that, the entire property in and control of all minerals and mineral oils in, under or upon any lands in Nigeria, and of all rivers, streams and watercourses throughout Nigeria is and shall be vested in the Crown save in so far as such rights may in any case have been limited by any express grant made before the commencement of this Ordinance. Such vesting of rights were subject to the condition under s. 6(1)(b) of the Mineral Oils Ordinance 1914 that the grantee of the lease or licence pay compensation to any person in lawful occupation of the land for disturbance of surface rights or as determined by the Governor General of Nigeria. However, no provision was made for compensation in the event that exploration showed the presence of substantial deposits under one s land, on the basis that no compensation could be due for the loss of something the landowner never had. To this day, this concept continues to underpin the framework of Nigerian oil and gas law. The nature of the current compensation system has been a contributory cause for much of the conflict between the oil producing communities and the oil corporations : the discovery of oil The first commercial discovery of oil in Nigeria was made at Oloibiri in the Delta State (today Bayelsa State) in 1956 by Shell-BP which since 1937 (as the Shell D Arcy Company) had been sole concessionaire in Nigeria. In January 1958, the first oilfield came on stream, producing about 5,100 barrels per day and in the same year, s. 6(1)(a) of the Mineral Oils Ordinance 1914 was repealed by s. 2 of the Mineral Oils Amendment Ordinance 1958 No. 5, thus extending the grant of exploration rights to other foreign, non-british corporations. Shell-BP was constrained to relinquish its interests in areas of its grant in the first instance to Mobil Oil which was the first non-british entity to enter the field in 1962 and thereafter, when Shell s concession areas were further reduced to the most promising areas and other corporations began exploration activities in Nigeria. The PPT Ordinance 1959 No. 15, the last major piece of oil and gas legislation of the pre-independence era, came into force in 1958, introducing a 50% tax on chargeable profits from petroleum operations, thus giving the government a share, albeit indirectly, of the profits from such petroleum activities. As the new multinationals began to increase their exploration activity in the 1960s, so the Nigerian government sought to increase its level of involvement in oil and gas exploration. The latter had been involved, as an observer, in the deliberations of the OPEC since 1964 (four years after its formation in 1960). Moreover, in keeping with the resolutions of the United Nations, it had sought steadily to increase its control over oil production. This was further hastened by the increase in exploration and production activity in the decade of the 1960s (save for the interruption of the Nigerian Civil War ). It was soon realized that the Mineral Oils Ordinance of 1914 (with amendments) was no longer adequate in regulating oil and gas activity, and this led to the promulgation of the Petroleum Act in 1969, which repealed the Mineral Oils Ordinance 1914, whilst preserving the validity of licences and leases issued under the said Mineral Oils Ordinance. The Petroleum Act also pronounced in s. 1(1) that the entire ownership and control of all petroleum, [ ] in, under and upon any lands to which this section applies shall be vested in the state [ ]. This provision, coupled with s. 2(2), which provided that licences or leases may be granted only to citizens of Nigeria or companies incorporated in Nigeria under the Companies Act 1990 No. 1, fully subordinated exploration and production activity as well as the entities engaged in it under Nigerian legislative authority. The Petroleum Act (Cap. 350) for the first time in the Nigerian oil and gas sector, established a comprehensive statutory regime for the grant of rights to search for and obtain oil in Nigeria and remains the basis for the regulatory system in operation today. VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 759

4 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY : evolution of state participation In 1971, Nigeria became a member of OPEC, and in line with OPEC resolutions passed in the late 1960s immediately set about steadily increasing both its control over and the degree of competition within the Nigerian petroleum sector. The alignment with OPEC and the subsequent direct involvement of the government in exploration activity must be contrasted with the pre-1970 position where oil corporations in Nigeria enjoyed, through pre-1969 grants, virtual ownership and control of petroleum from extraction to disposal. At the time, the Nigerian Government s interests were confined to nominal ownership of the petroleum in situ, taxation, royalties and lease rentals. The government s interests were overseen by the Petroleum Resources Department. At the time this was a department under the Federal Ministry of Mines and Power in 1970 (responsible for the enforcement of regulations governing oil field operations) and the Petroleum Section of the Ministry of Finance, which was responsible for ensuring compliance with the fiscal obligations pertaining to petroleum operations. The rapid rise of oil production revenues in the 1970s (the oil boom era ) hastened the realization of the government policy of implementing OPEC resolutions calling on member states to participate more actively in oil operations. This in turn led to the establishment of the Nigerian National Oil Corporation (NNOC) by Act 1971 No. 18. The NNOC operated alongside the Ministry of Petroleum Resources (MPR) with separate and distinct functions. The MPR continued the functions of the Petroleum Resources Department as regulator of petroleum operations of the oil corporations, while the NNOC in 1971 commenced the process of acquisition of the assets and liabilities of the existing foreign oil corporations on behalf of the Nigerian Government. The Nigerian National Petroleum Corporation (NNPC) came into existence on 1 April 1977 pursuant to Act 1977 No. 33. It embodied a merger between the NNOC and the MPR: the NNPC fully succeeded the NNOC in all aspects, assimilating the MPR s regulatory functions under a Petroleum Inspectorate Department. In 1979, the NNPC completed the process of acquisition of the majority interests in the operations of the oil corporations then engaged in exploration and production of oil in Nigeria, which up until then were 100% wholly owned by those corporations. It should be noted that the NNPC acquired participation interests in the petroleum operations as opposed to the equity holdings within those corporations. Such acquisitions resulted in the creation of what is termed the Traditional Joint Venture (TJV) as presently exists in the oil and gas sector. The acquisition of each interest was to be formalized by the simultaneous signing of heads of agreement with participation agreements and, thereafter, the Joint Operating Agreement (JOA). This process, however, suffered protracted periods of delay and stalemate, principally due, aside from bureaucratic factors, to the deep-seated disagreements between the oil companies and the government over the valuation of interests. Such delays not only resulted in the non-execution of participation agreements until 1984 but also accounted for the non-existence of JOAs long after the federal government had effected its acquisitions. An anomalous situation therefore arose whereby from the period of acquisitions to the signing of the JOAs in July 1991 apart from off/take scheduling and lifting of crude oil operation of joint venture business was conducted on the basis of an informal understanding. As aforementioned, the NNPC had, in succeeding the NNOC during the course of these acquisitions, subsumed the functions of the Ministry of Petroleum Resources under the Petroleum Inspectorate Department within the NNPC. However, in 1986, the Petroleum Inspectorate, responsible for regulation and policy formulation, was detached from the NNPC and recreated as the Department of Petroleum Resources. The NNPC was thus left to engage in the commercial aspects of oil and gas activity through the NAtional Petroleum Investment Management Services (NAPIMS). These activities are conducted mainly on the basis of the TJV arrangements concluded between the NNPC and the foreign multinational oil corporations which currently operate in Nigeria through a variety of locally registered subsidiary companies, usually linked to a specific project or operational function. NAPIMS, on behalf of the government, controls a majority stake in the six TJV operations alongside the Nigerian subsidiaries of the Royal Dutch Shell Group, ExxonMobil, ChevronTexaco, Eni/Agip and TotalFinaElf, which account for the majority of Nigeria s total production. The Shell TJV is currently the largest of the joint venture operations. The oil corporations, which have undergone worldwide mergers over the past decade, continue to discharge their functions as partners to the NNPC and operators to the joint venture, through the 760 ENCYCLOPAEDIA OF HYDROCARBONS

5 NIGERIA corporate entities which existed before the mergers occurred. All daily decisions are taken through their management, and all operating costs of each joint venture are financed jointly between the joint venture partners, in accordance with their equity interests, and by a system of monthly cash calls. The contractual relationship between the NNPC and the joint venture partners is subject to a Memorandum Of Understanding (MOU), designed to provide attractive fiscal incentives to the participating oil corporations in exchange for increased investment and efficient operations. In principle, the MOU is subject to regular review in order to adjust to ruling cost, production and oil price regimes. The operational basis for the joint venture and the MOU is the joint operating agreement, which: a) designates the operator of the joint venture; b) specifies each partner s share in the cost of petroleum operations; c) indicates PPT and royalty obligations; and d) outlines various commercial principles, among other considerations. The JOA permits the NNPC to reserve the right to become the operator in any joint venture undertaking. However, a lack of sufficient indigenous expertise and, more importantly, financing continues to constitute an impediment to the realization of such a right. With most of the major oil and gas projects focusing on the joint venture operations in which NNPC is the major shareholder, matters of joint venture funding and cash calls continue to be of paramount concern to state participation policy within the sector Current structure of the Nigerian oil and gas sector With the following major sedimentary basins in Nigeria, namely Anambra, Bida, Sokoto, Chad, Benin/Dahomey, Benue basin/trough and the Niger Delta, seismic records have over time overwhelmingly testified to the level of proven reserves; and these principally in the Niger Delta, therefore making it the focal point for exploration and production development. Thus, all oil production to date has occurred in the Niger Delta basin. Although the majority of the oil is to be found in relatively simple sub-surface geological structures, operating conditions in the Niger Delta basin have always been acknowledged as challenging. The onshore terrain of exploration ranges from mangrove jungles, marshes and swamps to the shallow water continental shelf and requires significant commitment in terms of human skill and financial resources, with logistics and ecological dangers largely contributing to discovery and development costs. Major discoveries and the demonstration of huge proven oil and gas reserves compensate for substantial investments. However, difficulties of such onshore exploration are compounded by the perennial incidents of community instability, attacks on installations and sabotage of oil and gas-related facilities. The petroleum industry has nevertheless provided a highly profitable foundation for extensive participation by a wide range of oil service contractors in Nigeria. These extend over a broad field from seismic exploration, rig construction, drilling, well finishing and completion, to the logistics of pipeline installation and complex project management. Although major global operators in the oil service sector operate joint ventures with Nigerian partners and have been closely involved in developing skill, capacity and competence among their partners, local involvement, however, remains low. The emergent local content policy, which is another facet of the indigenization of the upstream oil sector, seeks to balance the need to attract and retain foreign capital and technology, as well as to increase indigenous participation in the oil service sector. 1990s to the present: the movement offshore, modification of state participation and indigenization The developments of 3 dimensional (3D) seismology and deep drilling technology have made the deep seas a very attractive proposition for oil exploration. It was in response to this overwhelming potential that the Nigerian offshore exploration, deepwater development programme commenced through the licensing round The government, which had already begun reevaluating its involvement in its TJVs, offered for bidding a number of new concessions in the deep outer shelf of the Niger Delta area. In 1993, deep offshore blocks in water depths of between 200 m and 3,000 m were awarded to foreign oil corporations such as Royal Dutch Shell, ChevronTexaco, ExxonMobil, TotalFinaElf and Eni/Agip. These corporations were mandated to incorporate new subsidiary entities under the production sharing contract arrangement. Such contractual arrangements have since become the contractual vehicle of choice between the NNPC and oil corporations for offshore exploration and production of oil and gas. In March 2000, the government opened competitive bidding on 22 new oil blocks, including 11 in the VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 761

6 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY Niger Delta deep and ultra-deep offshore, in which 46 oil companies participated, and in 2005, the government made available a further 43 oil blocks. The emergence of the offshore regime also resulted in the entrance of new foreign oil corporations into Nigeria, including Exxon (now ExxonMobil), Conoco (now ConocoPhillips), Canadian Occidental (now Nexen Petroleum), Statoil/British Petroleum Alliance, Jerez Energy, Marathon Oil, Trans Atlantic Petroleum Corporation, Ocean Energy, as well as BP Amoco - which had until the latter part of the 1990s also been involved but subsequently withdrew its interests in the country. However, despite the current dominance of onshore/shallow water exploration and production to date (where major new discoveries continue to be made), since the beginning of the offshore exploration and development campaign in 1995, a number of sizeable discoveries have been made in the offshore area. The major commercial finds are Erha (Oil Prospecting Licence, OPL 209), Bonga (OPL 212), Agbami (OPL 216), and Akpo (OPL 246). Despite the aforementioned, the competitiveness of the Nigerian deep water regime in comparison to other deep water basins such as the Gulf of Mexico is yet to be established and this will doubtless have an impact on the contractual and fiscal arrangements, which will govern it in the near to medium-term future. The 1990s also witnessed the articulation of an indigenous policy, which resulted in the emergence of indigenous oil producers in Nigeria, hitherto largely stultified by the dominance of foreign oil investment interests and the financial and technical requirements necessary for participation in oil and gas exploration. Since the 1990s, the indigenous producers have become a growing presence. Their role in the industry, in the context of increased opportunities, for direct investments and joint venture relationships has been promoted and facilitated by policy directives of the state in 1989 by the Ministry of Petroleum Resources and particularly, under the Petroleum (Amendment) Act 1996 No. 23, which gave a legislative underpinning to the marginal fields regime. The Nigerian government held a special licensing round to offer marginal fields to local firms and in June 2002, pre-qualified 71 companies out of 150 that submitted bids. The licensing round, which was held in November 2002, was to allow for more participation by indigenous oil companies in Nigeria s upstream oil exploration and production activities. 24 marginal fields, which had been relinquished by Shell, ChevronTexaco and TotalFinaElf, were distributed to 31 of the 71 companies pre-qualified prior to the licensing round. The government has identified about 116 fields in the Niger Delta, which it categorizes as marginal. They are located within existing Oil Mining Leases (OML), which according to the government have substantial collective reserves and have not been developed under the TJV arrangements between the multinational oil corporations and the NNPC. These have been proposed for allocation in future marginal field licensing rounds. The indigenous oil companies are essentially sole risk operators and generally enter into partnerships either of the nature of a PSC or joint venture relationship with foreign oil corporations. Production caps imposed on indigenous producers to ensure the OPEC quotas are not exceeded make it clear that indigenous operators are more at risk and more vulnerable than the multinational oil corporations to oil production policies of the state State participation Structure State participation in Nigeria was defined in the pre-independence era through the concession system. In the immediate post-independence era, namely, the early 1960s, where oil and gas production expertise and capability in the domestic sector was virtually non-existent, it seemed logical to continue with the concession system to make the maximum call on the resources of the worldwide private oil industry. State participation continued (through the 1970s and 1980s) within a modified framework of governmental partnership with private enterprise involvement. To date, such participation has been manifested through the present mode of state control and involvement in the exploration and production activities of the multinational oil corporations. The TJV arrangement, the PSC and the RSC (Risk Service Contract) are common contractual devices by which the Nigerian government has implemented its policy of direct participation in oil exploration and production. Nigerian National Petroleum Corporation The prevailing policy of direct state participation has been exemplified by the mandatory intervention of a wholly-owned state enterprise to achieve: a measure of control over the licensee s operations; physical control of vast 762 ENCYCLOPAEDIA OF HYDROCARBONS

7 NIGERIA quantities of oil; the acquisition of information and know-how about the industry. The emergence and growth of the NNPC is thus intrinsically linked with such policy objectives. The acquisition by the NNPC of majority participation rights under existing concessions was thereon fortified by Federal Government Notice 1972 No. 311, which vested all unallocated acreages and reversions in leased sedimentary blocks, onshore and offshore Nigeria in the NNOC then, and now the NNPC. The NNPC was also given powers and operational interests in refinement, petrochemical processing and product transport as well as marketing, in addition to its exploration and production activities. Between 1978 and 1989, the NNPC constructed refineries in Warri, Kaduna and Port Harcourt and took over the Shell refinery established in Port Harcourt in The NNPC, headquartered in Abuja (Federal Capital Territory), Nigeria, now stands as a monolithic corporate entity headed by a Group Managing Director with six directorates. The first five directorates listed below are each headed by Group Executive Directors, while a General Manager heads the sixth directorate. The directorates are: a) Engineering and Technology; b) Refineries and Petrochemicals; c) Commercial and Investments; d) Exploration and Production; e) Finance and Accounts; f ) Corporate and Legal Services. There is also a Public Affairs Division headed by a General Manager. The NNPC has ten subsidiary companies; two joint ventures and about ten affiliated companies, which are engaged in a variety of upstream and downstream activities. Within the Exploration and Production Directorate, the NAPIMS monitors and supervises all aspects of the government s investments in the TJVs, PSCs, RSCs and other allied contractual arrangements in the upstream sector of the industry. The NNPC s subsidiaries are: Nigerian Petroleum Development Company (NPDC) Limited a sole operator, subsidiary of the NNPC, engaged in exploration and production of crude oil from acreages, wholly owned by NNPC in contrast to the joint venture interests to which NNPC is a non-operator partner. Pipelines and Products Marketing Company (PPMC) an entity responsible for the transportation of NNPC s crude oil to refineries in Nigeria. It also imports, distributes and markets refined products through its pipelines. Kaduna Refinery and Petrochemicals Company (KRPC) Limited. Eleme Petrochemicals Company (EPCL) Limited. Port Harcourt Refinery Company Limited (PHRC). Warri Refinery Petrochemicals Company (WRPC) Limited. Integrated Data Services (IDSL) Limited an entity providing seismic data acquisition, processing and interpretation services to the oil and gas sector generally. National Engineering and Technical COmpany (NETCO) an entity providing engineering services to NNPC s direct exploration operations, with a technical affiliation to Betchel Corporation of the United States. Nigerian Gas Company (NGC) Limited this entity was established in 1988 from the former Gas Division of the oil and gas section of NNPC. NGC is responsible for the development of a gas industry to serve the domestic energy needs and provide industrial feedstock requirements through a national integrated pipeline network. The company is also established to participate in the international natural gas market, particularly the West African sub-region through the export of the gas and its derivatives. Duke Oil Services (UK) Limited a company established in the United Kingdom for purposes of international trading of NNPC crude oil and petroleum products. The NNPC has two downstream joint ventures: Nigerian Liquefied Natural Gas (NLNG) Company is an incorporated joint venture made up of the NNPC (49%), Shell Gas B.V. (25.6%), Cleag (a subsidiary of Elf now TotalFinaElf; 15%), Agip International B.V. (10.4%), with Shell as technical partner. The NLNG Company is responsible for the liquefaction of non-associated and associated natural gas for export. HYdrocarbon Services Of Nigeria (HYSON) is an incorporated joint venture with Calson (Bermuda) for the purpose of supplying petroleum products from Nigeria s refineries to sub-saharan Africa. The Department of Petroleum Resources The Petroleum Inspectorate within the NNPC structure, responsible for regulation, was detached in 1986 and recreated as the Department of Petroleum Resources (DPR). The DPR is headed by a Director General who is responsible for setting standards for the effective control of the petroleum industry. The DPR s general VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 763

8 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY responsibilities and objectives are to ensure: compliance with petroleum laws and regulations through the monitoring of the operations of the exploration companies; the full development of Nigerian petroleum resources; the protection of all oil and gas investments (foreign, local, public and private). The previous objectives have been expanded by the DPR in enumerating its stated functions in the upstream oil and gas sector to be: a) the supervision of petroleum industry operations carried out under licenses and leases; b) collaborating in this regard with other government agencies such as the Ministry of Finance, Central Bank of Nigeria and the Nigerian Customs Service; c) ensuring conformity of oil and gas operators with technical and safety regulations and ensuring conformity of operations with national industry standards and practices; and, further to this, d) maintaining records of petroleum industry operations, such as petroleum reserves, production, exports, licences and leases. Note that in this regard, part of the functions of the DPR in seeking to enforce technical/operational standards essentially converge with the functions of the NAPIMS in maintaining the efficiency of the government s investments within the upstream sector. Furthermore, the DPR processes all applications for licences from all entities seeking to carry out business in the oil and gas sector. In so doing, it regulates and certifies by way of guidelines, the prerequisites for all registration requirements and/or bid submissions in the sector on behalf of the Ministry of Petroleum Resources. It also advises the MPR on technical and policy matters under the following enabling and subsidiary legislation: a) Petroleum Act; b) Petroleum (Drilling and Production) Regulations; c) Mineral Oils Safety Regulations; d) Oil Pipelines Act; and e) Oil and Gas Pipelines Regulations. Ministry of Petroleum Resources The Ministry of Petroleum Resources is the government ministry charged with the formulation and implementation of government policy and general management of the operations of the petroleum industry. The MPR has as its sub-unit, the DPR, and discharges a number of duties including representing the government at domestic and international level. Such international fora include representation of the government at OPEC meetings (particularly at quota negotiations). In the domestic context, the MPR formulates domestic industry policy as well as oil and gas resource management policy (on the DPR s recommendation), particularly through oil production reserves generation and the issuance of licences to operators engaged in any petroleum activity. Ancillary to the aforementioned is the MPR s duty of collation of economic, commercial and technical data on the oil and gas industry, and generally ensuring the compliance of all entities operating under licences, with legislation and regulations in the sector. From May 1999 to July 2005, the office of the Minister of Petroleum Resources was vacant and the responsibilities of the position particularly with regard to representation of the government at domestic and international level, attendance of OPEC deliberations, and formulation of domestic industry policy and resource management have been jointly discharged by the office of the Special Adviser to the President of Petroleum Affairs and the Group Managing Director of the NNPC. However in July 2005, a Minister of Petroleum Resources was appointed who has resumed the proper discharge of the roles aforementioned The impact of the law of the sea on Nigerian oil and gas law Risks of pollution and environmental degradation The Convention on the Territorial Sea and Contiguous Zone of 1958 and the Convention on the Continental Shelf of 1958, which were superseded by the United Nations Convention on the Law Of the Sea (UNCLOS) 1982, all represent important sources of international law from which Nigerian oil and gas law has thus far developed and continues to develop. The scope of Nigerian oil and gas legislation has been progressively extended to its territorial waters, Continental Shelf and Exclusive Economic zone, by various legislative enactments, which arose principally from developments of international law and in anticipation of the movement of exploration activity from onshore to offshore. However, despite the likelihood of conditions radically different from those obtained on land, after the promulgation of the Petroleum Act in 1969, a separate legal framework for offshore exploration has not been deemed necessary. No attempt has thus far been made to devise an original system of legal regulation for offshore activity. The landward regime has simply been extended to all areas 764 ENCYCLOPAEDIA OF HYDROCARBONS

9 NIGERIA outside Nigerian territorial waters in which international law recognizes the rights of a coastal state with respect to the seabed and subsoil as well as their natural resources. Recent deepwater discoveries have underscored the overwhelming importance of offshore exploration since the first deepwater licensing rounds As international agreements are also forged between Nigeria and other countries for the exploration and exploitation of oil and gas in the Gulf of Guinea, the continued focus on deepwater exploration and the development of international law will doubtless affect the pace and direction of Nigerian oil and gas legislation. Current legislative provisions regarding the scope of ownership of oil and gas are to be found in the following legislative provisions: Section 1 of the Petroleum Act which states: (1) The entire ownership and control of all petroleum in, under or upon any lands to which this section applies shall be vested in the state. (2) This section applies to all land (including land covered by water) which a) is in Nigeria; or b) is under the territorial waters of Nigeria; or c) forms part of the Continental Shelf or d) the Exclusive Economic Zone. (3) In this section, references to territorial waters are references to the expression as defined in the Territorial Waters Act. The Constitution 1999 of the Federal Republic of Nigeria further restates this position under s. 44(3) which provides that, Notwithstanding the foregoing provisions of the section, the entire property in and control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria or in, under or upon the territorial waters and Exclusive Economic Zone of Nigeria shall vest in the Government of the Federation and shall be managed in such manner as may be prescribed by the National Assembly. The law of the sea has also enabled Nigeria to enter into maritime treaties for the exploitation of its continental shelf. A major example of this is the Treaty 21 February 2001 between Nigeria and the Republic of São Tomé and Principe which established the Joint Development Zone (JDZ), in respect of an overlapping area of the states respective maritime boundary claims and created a Joint Development Authority (JDA) as the sole body to promote and supervise petroleum and other activities in the JDZ. The JDA reports to a Joint Ministerial Council (JMC), which has overall political responsibility for the JDZ. The Treaty outlines the principles for joint development as well as the general regime for petroleum-related activities through the creation of a specific regulatory and tax regime in the JDZ. All petroleum development activities in the JDZ shall be embodied in a zone plan, which will be reviewed periodically. The JDA is empowered to supervise all activity related to the exploration and production of petroleum resources in the JDZ. The JDA is divided in four departments: a) Monitoring and Inspections Department; b) Commercial and Investment Department; c) Non-Hydrocarbon Resources Department; d) Finance and Administration Department. The Monitoring and Inspection Department assumes similar functions to that of the Ministry of Petroleum Resources and the Commercial and Investment Department assumes a role similar to that of the NNPC, both representing the states with regards to all issues relating to exploration and production in the JDZ. The JDA is vested with the proprietary rights to all acreages in the JDZ on behalf of the states and no petroleum activity can be undertaken in the JDZ except pursuant to the permission of the JDA and in accordance with the Petroleum Regulations The JDA is governed by a board and headed by a Chairman. It is headquartered in Abuja, Nigeria. The JMC comprises Ministers and related personnel who, as mentioned before, retain overall political responsibility for the JDZ. The JMC receives reports and recommendations from the JDA and is responsible for approving operational aspects of the zone, such as the Guidelines for Investors, Petroleum Regulations, Tax Regulations and the Model PSC. The JMC reports directly to the governments of the states The licensing of oil and gas exploration and production The Petroleum Act which sets out the legal framework for persons to be enabled to search for and obtain such petroleum as well as the scope of such rights, viz., from land to the Continental Shelf and Exclusive Economic Zone, also empowers the Minister to grant to such persons as he thinks fit, licences and leases to explore, prospect, search for, obtain, carry away and dispose of petroleum. Section 2 of the Petroleum Act provides: (1) Subject to this act, the minister may grant: a) a licence, to be known as an oil exploration licence to explore for petroleum; b) a licence, to be known VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 765

10 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY as an oil prospecting licence, to prospect for petroleum; and c) a lease to be known as an oil mining lease, to search for, win, work, carry away and dispose of petroleum. (2) A licence or lease under this section may be granted only to: a) a citizen of Nigeria; or b) a company incorporated in Nigeria under the Companies and Allied Matters Act, or any corresponding law. (3) The provisions of the First Schedule to this act shall, in so far as they are applicable, have effect in relation to licences and leases granted under this section. The Nigerian licensing regime, first formalized in 1914 by the Mineral Oils Ordinance, has evolved into the Petroleum Act 1969, and is based on the principle of the proprietary rights of the state. What this means in terms of the nature of rights conferred by the licence and concomitantly those obtained by the licensee will be examined later in the chapter. Thus the state, having been vested with the entire ownership or control of all petroleum in accordance with s. 1 of the Petroleum Act Cap. 350, was and is at liberty to decide how petroleum is to be exploited or even whether it should be exploited at all. It could therefore undertake exploration and production itself, through a wholly-owned entity of the state or by joint venture (incorporated or unincorporated) or by employing oil companies as contractors either through production sharing contracts or through Service Contracts (SCs) etc. to get the oil on its behalf. Therefore, anyone who seeks to explore for petroleum in a way other than under a licence or contractual grant by the state is interfering with the property rights of the state. The licence serves to establish the rights of the licensee in substances produced from the licensed area and to regulate the manner in which operations under the licence are conducted. It also provides an instrument of governance for direction of exploration efforts into particular areas and for control of the rate of depletion of resources. Licences are issued under the Petroleum (Drilling and Production) Regulations, which the Minister is empowered to make by virtue of s. 9 of the Petroleum Act. These regulations lay down conditions for application for licences. The invitation for applicants in a licensing round is provided for by way of guidelines or guidance notes for the particular bidding or licensing round, which lists the blocks on offer and indicates application procedures. Types of licence under the Petroleum Act The powers conferred under the licence granted pursuant either to a discretionary allocation or bidding/licensing round constitute wide discretion which is constrained by the provisions of the first schedule to the Petroleum Act. These form part of the parent legislation and the provisions of the Petroleum (Drilling and Production) Regulations, which are subsidiary legislation and are, by operation of such legislation incorporated into the licences and leases as model clauses unless waived by the minister. These provisions also subject licensees and lessees to regulatory requirements of various types such as the Mineral Oils (Safety) Regulations, Oil Pipelines Regulations and the Crude Oil (Transportation and Shipment) Regulations as well as other environmental laws, regulations and guidelines. Oil exploration licence The Oil Exploration Licence (OEL) is usually granted by the Minister in respect of an area of undetermined potential on which a premium has not been placed by the Minister. The licence confers upon the licensee non-exclusive rights subject to the surface rights of the owners or occupiers of the area of the licence, to explore for petroleum by geological and geophysical methods. The OEL permits the licensee to erect temporary structures necessary for operations, which may thereafter be dismantled and removed and does not preclude the grant of another oil exploration prospecting licence or oil mining lease over part of or the whole of the same area. The OEL has to all intents and purposes fallen into disuse, although it remains on the federal statute books. The present practice is that the state engages the services of a seismic data gathering service company and such seismic information is available for perusal by oil companies from the Department of Petroleum Resources upon payment of set fees. Oil prospecting licence The Oil Prospecting Licence (OPL) conveys an exclusive right to explore and prospect for petroleum within the area of the licence. Its duration cannot exceed five years including renewals, and the grantee is entitled to carry away and dispose of petroleum obtained during prospecting operations subject to fulfilment of special terms imposed under the Petroleum Act, the PPT Act or any other law imposing taxation in respect of petroleum. Oil mining lease The Oil Mining Lease (OML) is granted to the holder of an OPL who has satisfied conditions imposed either on the licence or on him by the act 766 ENCYCLOPAEDIA OF HYDROCARBONS

11 NIGERIA and who has also discovered oil in commercial quantities. For these purposes, oil shall be deemed to be discovered in commercial quantities by the OPL holder if the Minister is satisfied with the licensee s evidence that the licensee is capable of producing at least 10,000 barrels per day of crude oil from the licensed area. The OML is an exclusive right within the leased area to conduct exploration and prospecting operations and to obtain, get, work, store, carry away petroleum in or under the leased area. The term of the OML shall not exceed 20 years but may be renewed under the Act Impact of environmental protection laws Risks of pollution and environmental degradation The risks of pollution and environmental degradation are almost inevitable corollaries of oil exploration, development and production. Nigeria has not escaped these threats. Indeed, due to the lack of a rigorous regime enforcing international standards of good oil-field practice amongst its joint venture partners, oil exploration and production operations in Nigeria were subject to several oil spills on variable scales, between the mid-1970s and the late 1990s. The effects of flaring natural gas, which the government now seeks to curtail and eliminate, have also added significantly to the environmental threats through the emission of vast quantities of greenhouse gases and deforestation. In particular, careless and unmonitored onshore oil production, combined with peculiarities of terrain where ecological damage can be rapid and devastation of local flora and fauna long-lasting, has resulted in severe strain on both agriculture and fishing as well as jeopardizing the economic stability of a vast number of local communities in the Niger Delta. The installation of pipelines running through numerous farmlands continues to cause the destruction of vast areas of agricultural land, ground-water sources, wildlife habitats and ecosystems. Of all the identified causes of onshore oil spillage, ruptured pipelines arising from obsolete and or inadequate pipeline delivery infrastructure, together with poor monitoring and reporting, account for 70% of the incidents. The remaining 30% are caused by engineering errors, poor maintenance and sabotage. Rural land in Nigeria represents a fundamental safety net for a great number of people who traditionally depend on their narrow range of crops for subsistence agriculture and various indigenous medicines. Oil exploration activities have eroded the livelihoods and incomes of most families who previously relied on hitherto fertile homelands. A further distorting factor has been the large amount of displacement occurring within the rural communities through expropriation of land during the course of oil exploration and production activities. Furthermore, the promulgation of the Land Use Act 1978 No. 6 and its consequences of vesting direct control and management of land in the state Governor resulted in major oil communities losing their farmlands to claims on areas for oil production and transportation without adequate compensation. Allied to this expropriation of farmlands was further displacement resulting from area pollution from oil wells and flow stations. Up until the late 1980s, regulatory measures within the existing petroleum statutes had not resulted in any substantial changes in the conduct of oil exploration, with the operations of Shell (in view of their exploration rights over vast acreages) featuring prominently in the majority of the instances of oil pollution. The model clauses in the legislative enactments and contractual provisions under the joint venture arrangement, requiring that operations be conducted with good oil field practice leave considerable room for interpretation of what is practical or possible in terms of environmental goals. Some commentators have suggested that fundamentally the willingness by the state over the past 30 years to endure the effects of environmental damage in respect of onshore and shallow water operations indicated a financial dimension to the problem of pollution, namely that the government frequently sought to attract foreign investment by neglecting to enforce environmental standards in general. Development of regulatory framework Background The 1972 Stockholm Conference on the Human Environment, which was attended by Nigeria, ignited the consciousness of the Government on the need to evolve a holistic rather than sectoral approach to environmental protection. Thereafter, the issue of controls on environmental degradation was made the subject of Nigerian constitutional and legislative provisions, in consonance with international endeavours under the auspices of the United Nations Environment Programme (UNEP) and the International Maritime Organisation (IMO). During the late 1970s and 1980s, there were sectoral environmental regulations with various VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 767

12 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY responsibilities relating to environmental protection and improvement. There were also commissions with an advisory capacity in environmental matters and non-governmental organizations dealing with environmental matters. The Department of Petroleum Resources endeavoured with limited success to adopt remedial enforcement tools. These included compliance monitoring within the context of the Petroleum Act and model clauses incorporated into the licence pursuant to the Petroleum (Drilling and Production) Regulations. Equally, environmental issues were not given sufficient prominence until the dumping of toxic wastes of Italian origin in Koko Port, Bendel State (now Delta State), in May 1988 under a purported private arrangement with the local inhabitants of Koko. This represented the catalyst for environmental enforcement and in reaction to widespread public condemnation of the event, the government immediately promulgated the Harmful Waste (Special Criminal Provisions) Act 1988 No. 42 (Laws of the Federation of Nigeria 1990, Cap.165), which came into force on 25 November An institutional framework was nevertheless needed to deal with existing and anticipated problems of the environment and the Federal Environmental Protection Agency (FEPA) was established by Act 1988 No. 58 and came into force on 30th December It was amended by Act 1992 No. 59 pursuant to which FEPA was given responsibility for control over the environment and development of processes and policies to achieve its objectives. In addition to its contributions to the National Policy on the Environment (NPE) in 1989 it published other sectoral regulations including the National Environmental Protection (Pollution Abatement in Industries and Facilities Generating Wastes) Regulations, Statutory Instrument 1999 No. 9. The Environmental Impact Assessment Act (EIA) 1992 No. 86 established FEPA as the overall regulator and made the EIA mandatory for all development purposes (with specific exceptions). State and local government councils were also encouraged under Act 1992 No. 86 to establish their own environmental protection agencies. Under the authority of the same Act, FEPA published the EIA procedural guidelines in Current regulatory framework Apart from the provisions of current petroleum statutes, the current key regulatory framework is outlined below: Harmful Waste (Special Criminal Provisions, etc.) Act (Cap. 165). This Act prohibits and penalizes the carrying, dumping and importing of harmful wastes (without lawful authority) on land, territorial waters, the Contiguous Zone and the Exclusive Economic Zone of Nigeria. Breaches of the Act attract civil liability as well as criminal penalties. The FEPA Act (Cap. 131). This Act creates the FEPA and pursuant to section 4, endows it with the responsibility of prescribing the environmental criteria and standards for protecting Nigeria s environment. Section 23 of the FEPA Act provides that the Agency shall cooperate with the Ministry of Petroleum Resources through the DPR for the removal of oil related pollutants discharged into the Nigerian environment. The Act also states that the agency should provide support to the MPR (DPR) as it may from time to time request. As part of the government s efforts towards integrating environmental concerns into development, the guidelines and standards set in the FEPA Act prior to the United Nations Conference on Environment and Development (UNCED) were reviewed through the enactment of the FEPA (amendment) Act 1992 No. 59. Not only was FEPA s mandate expanded by an amendment to section 4 of the FEPA Act, but it was made an integral part of the presidency even though it is subject to the direction (under the principal Act) of the Minister for the Environment. The amendment also empowered the Director General of the Agency to make regulations for the purposes of the Act prescribing standards for water and air quality, effluent limitations, atmospheric protection, ozone protection, noise control as well as control and removal of hazardous substances. The EIA Act 1992 No. 86. This Act seeks to infuse environmental considerations into development project planning and execution, by providing that it shall be obligatory for an EIA study to be conducted on any project likely to have a significant impact on the environment. Such a study is to be prepared at an early stage, before the project is undertaken and directed to the FEPA for approval. The EIA Act prescribes guidelines for EIA studies, outlines project areas and sizes of projects requiring EIAs in all areas of national development as well as the restrictions on public or private projects which were undertaken without prior consideration of their environmental impact. State legislation. In line with the FEPA Act, some of the states, which make up the Federation, including the three major oil producing states, namely Rivers State, Delta State and Bayelsa State, 768 ENCYCLOPAEDIA OF HYDROCARBONS

13 NIGERIA have enacted the following pieces of environmental legislation: Rivers State Environmental Protection Agency Law 1994 and Rivers State Pollution Compensation Tax Law 1994; Delta State Environmental Protection Agency Law 1997 No. 5 and Delta State Pollution Compensation Law 1995; Bayelsa State Environment and Development Planning Authority Law 1996 and Bayelsa State Pollution Compensation Tax Law Applicable environmental instruments and subsidiary legislation. The following instruments of intervention in pollution control outline specific offences, requirements and penalties for contravention namely: a) the National Guidelines and Standards for Environmental Pollution Control in Nigeria; b) the National Environmental Protection (Effluent Limitation) Regulations in Statutory Instrument 1991 No. 8, which make it mandatory for industrial facilities generating wastes to retrofit or install at commencement of operations anti-pollution equipment for detoxification of effluents and chemical discharges. The regulations also outline industrial categories, crucial parameters and their limits in effluents or emissions and prescribe penalties for their contravention; c) the National Environmental Protection (Pollution Abatement in Industries and Facilities Generating Wastes) Regulations Statutory Instrument 1991 No. 9, which provides for, inter alia, the restriction on the release of hazardous or toxic substances into the ecosystem, pollution monitoring requirements for industries, strategies for waste reduction, requirements for environmental audits and penalties for contravention; d) the Management of Solid and Hazardous Wastes Regulations Statutory Instrument 1991 No. 15, which sets out a comprehensive list of dangerous and toxic wastes, contingency plans and emergency procedures. These regulations also prescribe the guidelines for ground water prevention, a toxic waste tracking programme, and environmentally sound technologies for waste disposal. Environmental guidelines and standards for the petroleum industry in Nigeria. The lack of detail and enforcement mechanisms within petroleum statutes, as well as the growing concern for adverse environmental impact and damage arising from oil-related pollution, prompted the need to control new installations and projects within the oil sector with the capacity to degrade the environment. This compelled the Department of Petroleum Resources pursuant to the Minister s powers under the Petroleum Act to issue Environmental Guidelines And Standards for the Petroleum Industry in Nigeria (EGASPIN) in 1991, which were revised and updated in 2002 in the light of advances in pollution control technology. The EGASPIN represent a comprehensive working document covering environmental control of the six stages of petroleum operations in Nigeria, namely exploration, production, terminal operations, hydrocarbon processing plants, oil and gas transportation and marketing. Specifically, the guidelines deal with monitoring, handling, treatment and disposal of effluent. They prescribe tentative limits of waste discharges into fresh water, and offshore areas of operation, where established, as well as focussing on the characteristics of gaseous, liquid and solid wastes generated. The guidelines are subject to periodic review Development of natural gas The prospects for the commercialization of natural gas, principally through liquefaction for export, and in the more efficient use of gas for domestic industrial energy generation, coupled with the imperative to end flaring gas for compelling environmental reasons, resulted in a significant shift commencing in the 1980s through the 1990s towards natural gas as the basis for Nigeria s future hydrocarbon industry. The execution of the Associated Gas Framework Agreements (AGFA) in 1992 provided a foundation for a series of incentives and inducements that were re-enacted into legislation under the Petroleum Act as well as the PPT Act and in turn resulted in the establishment of a wide range of gas utilization projects, some of which began to come on stream at the end of the 1990s. Such domestic utilization projects, which have been directed at improving the quantity and reliability of energy generation, were undertaken by the NNPC s natural gas subsidiary, the Nigerian Gas Company, in order to improve the efficiency of the state-owned National Electrical Power Authority (NEPA). Other significant investment endeavours by Independent Power Producers (IPPs) have been encouraged, including power-generating projects sponsored by ExxonMobil, Agip, Siemens, Asea Brown Boveri (ABB). Equally, gas gathering, transmission and delivery projects have also been undertaken by dedicated gas-related companies formed by major oil companies such as Shell and Chevron Nigeria Limited in order to realize natural gas utilization programmes. In this regard, the VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 769

14 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY Nigeria Liquefied Natural Gas (NLNG) project, conceived in 1989, and the Chevron multi-phase Escravos gas project, conceived in 1992, are the most prominent of such gas utilization projects to date. There is further illustration of this through regional initiatives such as the West African Gas Pipeline (WAGP) project, which is at its final planning stages and seeks to establish a natural gas transmission pipeline to supply Nigeria s neighbouring states with gas, principally for power generation. Also significant is the West African Power Pool (WAPP) which is a long term (15-20 years) plan for the integrated utilization of gas in power generation by the Economic Community Of West African States (ECOWAS) Taxation of oil and gas Government take in the Nigerian oil and gas sector is derived presently from four principal sources: a) direct taxation under the Petroleum Profits Tax Act and the Companies Income Tax (CIT) Act; b) oil and gas field levies such as rents and royalties; c) licence bonuses or premiums and fees; d) miscellaneous levies under petroleum statutes and other enactments; e) indirect taxation. The nature of PPT The PPT Act was passed into law as Ordinance 1959 No. 15 on 23 April 1959 with retroactive effect from 1 January The PPT Act is the main body of legislation on petroleum profits tax and is now contained in Laws of Nigeria 1990 Cap It imposes a tax and provides for the assessment and collection of such tax from the winning of petroleum in Nigeria and in this regard, it takes precedence over other tax laws. It comprises 11 parts and 4 schedules and its provisions are administered by the Federal Board of Inland Revenue (FBIR), established and constituted under s. 1 of the CIT Act. Furthermore, the Board is deemed to have been established and set up with all constituent powers and duties as set out in s. 3 of the PPT Act. Petroleum profits tax applies to the chargeable profits for a given accounting period at the rate of 85% (effective from 1 April 1975). There is, however, a reduced rate of 65.75%, payable within the first five years of operations, allowing for all pre-production capitalized expenses to be fully amortized. The profits of any company engaged in petroleum operations as expressed in the definition section of the PPT Act are wholly subject to the PPT Act and are, by s. 19 (h) of the CIT Act, exempt from tax imposed by the CIT Act. Equally, s. 55 of the PPT Act further restricts the scope of the Income Tax Management Act 1969 No. 81 (Laws of the Federation of Nigeria 1990, Cap.173), now repealed and replaced by the Personal Income Tax Act 1993 No. 104, which regulates the taxation of the income of persons other than companies. It also provides that no tax shall be charged under the provisions of the Income Tax Management Act or under any other Act in respect of any income or dividends paid out of any profits which are taken into account under the provisions of the PPT Act in the calculation of chargeable profits (upon which tax is charged, assessed and paid). Application of the Companies Income Tax Act The specific scope of application of the PPT Act means that its provisions do not extend to the many and varied activities of oil service contractors, which include such services as exploration, drilling, construction, pipeline production, equipment supply, consultancy services, laboratory services, marine transportation, pressure testing, calibration, diving and dredging services etc. This is premised on the fact that such activities do not involve such entities in the winning or obtaining and transportation of petroleum or chargeable oil for their own account. Therefore, such entities will be taxed in accordance with the provisions of the CIT Act. Likewise, should the oil exploration and production companies become additionally engaged in activities which do not come within the ambit of petroleum operations and where such activities cannot be classified as operations incidental to such petroleum operations, they must be taxed under the CIT Act. The assessable tax for any accounting period under the CIT is 30%. However, a full exegesis of the CIT Act is not within the scope of this work and some basic knowledge of the CIT regime is therefore assumed. There are, however, certain aspects of the CIT regime, which are either relevant or applicable to the PPT regime. The most significant are the administration as well as the principle of ascertainment of profits based on expenses incurred wholly, exclusively, necessarily and reasonably so that tax liabilities are based on book profits of the company which are then adjusted to arrive at the taxable profits. In this regard, the most significant adjustments are the reliefs given by way of capital allowances. Accounting period The taxation of a company engaged in petroleum operations is applied for an accounting period. 770 ENCYCLOPAEDIA OF HYDROCARBONS

15 NIGERIA According to the definition section of the PPT Act, this means, a period commencing 1 January and ending 31 December of the same year or (a) shorter periods commencing the day the company first makes a sale or bulk sale of chargeable oil under a programme of continuous production and sales and ending on 31 December of the same year or (b) commencing on the 1 of January and ending when the company ceases to engage in petroleum operations. Such date of cessation is to be determined by the Minister of Petroleum. PPT payable Since the enactment of the PPT Act, percentage rates of PPT have been reviewed in the following manner: 50% with effect from 1 January 1958; 55% with effect from 20 March 1971; 60.78% with the effect from 1 October 1974; 65.75% with the effect from 1 December 1974 and 85% with effect from 1 April The Act provides that the assessable tax for any accounting period shall be an amount equal to 85% of the chargeable profits for the period. However, where the company is yet to commence sale or bulk disposal of chargeable oil under a programme of continuous production and sales and has not fully amortized all its pre-production capitalized expenditure, its assessable tax shall be 65.75% of chargeable profits for the period. Laws applicable to oil and gas The laws applicable to oil and gas transactions are essentially determined by the common law rules of private international law in Nigeria. These rules provide that the proper law of the contract shall be the law of the country in which the contract is created, the lex loci contractus and performed, the lex loci solutionis.this very often, is Nigeria. However the concerns of foreign investors are primarily based on the uncertainy as to the limits of the state s power as well as the uncertainties due to delays and possible unfairness of the Nigerian legal system. These concerns have been partially addressed by provisions within the licence, joint venture agreement and production sharing contracts which provide for arbitration in accordance with the United Nations Commission on International TRAde Law (UNCITRAL) rules. A foreign investor s rights are generally protected from expropriation by provisions in oil and gas laws. These however do not extend to changes in the governing law by the state, which adversely affect the economic interests of the investor. An investor s rights are also protected by Bilateral Investment Treaties (BITs) and Multilateral Investment Treaties (MITs) such as the ECOWAS Energy Protocol (modelled on the Energy Charter Treaty) and the Washington Convention which created the International Centre for Settlement of Investment Disputes (ICSID). Such investment protection instruments are increasingly being employed in the Nigerian oil and gas sector to protect foreign investors rights under licenses and exploration and production contracts. This trend will continue for the forseeable future as offshore financing plays an increasingly vital role in the development of the Nigerian oil and gas sector. Adedolapo Akinrele F.O. Akinrele & Co. Law Firm Lagos, Nigeria VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 771

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