Authorized Compliance In The Oil & Gasoline Business In Nigeria

There are certain sectors in the Nigerian economy that are highly regulated. One of them is the oil and gas industry. While some regulatory requirements are one-off, others occur again and again, meaning they must be renewed after a set period of time in order to continue doing business in the sector. The Minister of Petroleum Resources under the existing Petroleum Act of 1969 has extensive powers to regulate this sector, and to issue and revoke oil licenses and leases.

This article briefly discusses various laws affecting the oil and gas industry in Nigeria, as well as important conformities in the petroleum sector.

1. 1999 Constitution of the Federal Republic of Nigeria (as amended)

Section 44 (3) of the Constitution transfers all property relating to minerals, mineral oils and natural gas in the territory of Nigeria and its Exclusive Economic Zone in the Government of the Federation in a manner prescribed by the National Assembly. Much like the Land Use Act of 1968, which transfers all areas of the state, the 1999 Constitution transferred all oil resources found in Nigeria to the federal government.

2. The Petroleum Act of 1969

Although a law repealing and replacing this law is pending before the National Assembly, the legislation continues to regulate the petroleum sector. It provides for the exploration of petroleum in all countries of Nigeria, including those covered by water, and transfers ownership of all onshore and offshore revenues from petroleum resources to the federal government. Section 1 of the Act also reiterates the provision of the 1999 Constitution on the transfer of all oil resources to the federal government in all areas of Nigeria under its territorial waters that are part of the continental shelf and part of the Nigerian Exclusive Economic Zone.

Section 2 of the Act also provides for an oil exploration license, an oil prospecting license and an oil mining license that can only be granted to a company registered under the Companies and Allied Matters Act (CAMA). The law also provides for the powers of the minister, whose extensive powers have been restricted by the Petroleum Act, violations of non-compliance with the law, settlement of disputes, etc. The first appendix to the law explains licenses and leases as follows:

  • Oil Exploration License: This is a non-exclusive license that allows a licensee to explore for petroleum in a licensed area. Granting a license for such an area does not preclude the granting of a further oil exploration license to another, an oil prospecting license and an oil mine lease. It can be renewed annually if certain conditions are met.
  • Oil exploration license: This grants the holder the exclusive right to search for and explore oil in his license area and also allows him to carry away and dispose of oil extracted during the prospecting work, in compliance with the obligations under the law through the oil profits tax act or other law to levy taxes on petroleum. The duration is determined by the minister and is usually issued for onshore areas and shallow water areas for a period not exceeding 5 years.
  • Oil Mining License: This license is granted to the holder of an Oil Prospecting License (OPL) if all conditions of the license or the law are met. It is granted when the holder of an OPL discovers oil in commercial quantities, which the minister grants based on evidence presented by the licensee that he can produce at least 10,000 (ten thousand) barrels per day from the licensed area. It is granted for 20 years and may be renewed.

3. Taxation

The Federal Inland Revenue Service (FIRS) Establishment Act 2007 gives FIRS the legal powers to collect all taxes, fees, levies, royalties, rentals, signature bonuses, gas flaring penalties, custody fees, including fees for exploration licenses, oil, mining licenses etc. The Petroleum Profits Tax is one of the taxes imposed on the industry by the Petroleum Profits Tax Act (PPTA), which collects 85% of the taxable profits of such a business operating in the oil and gas sector. The law was amended by the Finance Act 2020.

4. The Nigerian National Petroleum Corporation Act of 1990

Section 1 of this Act establishes the Nigerian National Petroleum Corporation (NNPC). Through this facility, the government participates in the oil and gas industry in Nigeria. It is empowered to carry out commercial activities related to the petroleum industry and to enforce all regulatory measures in this sector. The federal government’s involvement in this industry through NNPC is through the adoption of various contractual models for the development of oil and gas resources such as concession agreements, traditional joint venture agreements, service agreements, production participation agreements and individual risk agreements.

5. Petroleum Resources Department (DVR)

This is a division of the Ministry of Petroleum Resources charged with providing guidelines for the entire value chain of oil and gas in Nigeria. Application for all licenses in the oil and gas sector is requested and obtained by or through this department before a person or entity can carry out activities in the industry.

6. The Law on Environmental Impact Assessment (EIA)

Since oil resources are sourced inland, this law applies to ensure that a prior assessment of the environmental impact of an oil and gas project is carried out before any such activity is started.

7. The Deep Offshore and Inland Basin Production Division Act of 2019

This law was originally enacted in 1993 to incentivize oil and gas companies operating under Production Sharing Contracts (PSCs) in the Deep Offshore and Inland Basin areas. This includes reduced license fees or lower tax rates to encourage the influx of investors in this area. The latest change has increased the royalties owed by these companies. The law also provides for a review of product release agreements every 8 years.

8. The Education Tax Act

This tax is levied on all companies that require an annual remittance of 2% of a company’s assessable profit to develop the Nigerian education sector.

9. The 2017 Law of the Niger Delta Development Commission (Establishment)

The law establishes the Niger Delta Development Commission (NDDC). The law also requires companies in the oil and gas sector to pay certain amounts to a fund set up for the region in order to solve environmental problems arising from the exploration of oil minerals in the Niger Delta. Therefore, in accordance with Section 14 (2) letter B, 3% of the total annual budget of an oil production company operating on land or abroad and a gas processing company in the Niger Delta must be paid to the fund.

10. The 2010 Nigerian Oil and Gas Industry Content Development Act

The law aims and provides provisions to encourage the participation of Nigerian companies in the oil and gas industry. It requires that the Nigerian content / involvement be an important element of any transaction in this industry and that independent Nigerian contractors be considered first when awarding oil blocks and licenses. In addition, minimum thresholds for the use of local services and materials are set to encourage the transfer of technology and skills to Nigerians in the industry. The provisions of this law are implemented by the Nigerian Content Development and Monitoring Board (NCDMB).

11. The 2007 Nigerian Extractive Industries Transparency Initiative Act

The law introduces the Nigerian Raw Materials Industries Transparency Initiative (NEITI), which ensures transparency and accountability in the industry by imposing reporting and disclosure requirements on all crude oil and gas companies for income paid or payable to the federal government. In performing this task, NEITI appoints independent auditors each financial year, who check the correctness of the total income that the federal government receives from the industry.

12.National Oil Spill Detection and Response Agency Act (facility)

It sets up the National Oil Spill Detection and Response Agency (NOSDRA), which coordinates and implements the National Oil Spill Contingency Plan (NOSCP) for Nigeria. NOSDRA monitors to ensure compliance with existing environmental laws regarding oil spills, receives reports on oil spills, and coordinates the implementation of the Hazardous Substances Elimination Plan.

In summary, the National Assembly is currently considering the amendment to the Petroleum Act of 1969. The bill proposed some changes to the minister’s powers and aims to harmonize all legislation and significantly restructure the industry, particularly the functions of the various regulators, to eliminate overlap.

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