Nigerian Petroleum Industry

Nigerian Petroleum Industry




Nigerian Petroleum Industry seems to grow with its importance in the Nations’ economy however still have some limitations and Constraints which will be addressed in this paper. This paper will examine the objectives of Petroleum taxation, the role and importance of tax allowances in the Industry. In analysing the Nigerian fiscal regime for Petroleum, it will examine the Profit tax Act, the Production Sharing Contract Decree, it will show how tax allowances and incentives have failed to promote the sector and suggests how tax allowances can be made to promote investments and attract direct foreign investments in the Nigerian Petroleum Industry.


OPC Oil Producing Companies

MNOC Multinational Oil Companies

OGLTR Oil and Gas Law and Taxation Review

PSC Production Sharing Contracts

PPTA Petroleum Profit Tax Act

ETF Educational Trust Fund

PTDF Petroleum Technology Development Fund

VAT Valued Added Tax

MOU Memorandum of Understanding

PITA Petroleum Investment Tax Allowance

PPT Petroleum Profit Tax

OPEC Organisation of Petroleum Exporting Countries

CITA Companies Income Tax Act

ITC Investment Tax Credit

JV Joint Ventures

NNPC Nigerian National Petroleum Corporation

CEMPLP Centre for Energy Petroleum and Mineral Law and Policy



Many countries with one basic fiscal regime especially the ones that believe that they can extract as much revenue from a non- renewable inheritance has neglected the role tax allowances and other incentives can perform in attracting investments and increasing their revenue base by attracting to the industry. The allowances and incentives due to improper planning, have failed to attract foreign investments, high tax burden often associated with the fiscal instruments and therefore cannot promote investments.

These have become more problematic for countries whose economies are dependent on oil, as they cannot finance social and economic growth in the absence of a large oil revenue base. Nigeria is not an exception to this. Oil accounts for about 90-95% of its revenues, over 90% of foreign exchange earnings and about 80% of government revenue. The oil industry is thus the main source of the Nigerian economy, and needs to be sustained for the country to achieve real economic growth and attract foreign investors.

The Oil boom of the 80’s that greatly impacted on global oil prices and the very low OPEC quota, impose on the country various fiscal regime for petroleum, especially the petroleum profit tax of 85 % and 20% Royalty regime, all in a bid to get more revenue to oil from the nation’s economy. Since then, Nigeria has had lofty aims for its oil industry, however; the constraint of the industry has been failure of the allowances and incentives to attract more investment thereby making more wealth to sustain the future growth of the economy even when the oil wells must have dried up. There is the need to have in place, a fiscal regime that will, through tax allowances and other incentives become investors’ friendly by harmonizing government needs with those of investors through its stability, efficiency and flexibility.

The failure of tax allowances and incentives to achieve government’s desire in this respect therefore needs close examination and the question that comes to mind is, how can tax allowances and the entire fiscal regime for petroleum be made to promote and sustain direct foreign investment in the Nigerian oil industry?

Providing answers to the above question becomes obligatory not only for the government and its citizens, but also for investors and other stakeholders, who will rely on it for investment decisions. This paper in answering these questions, takes a look at the special nature of the petroleum industry and government’s objective in taxing the industry. It assesses the need for the introduction of allowances and incentives to ameliorate the often huge tax burden placed on investors. In doing so, it makes a detailed and analytical study of the Nigerian fiscal regime for petroleum, examining the incentives and allowances therein, and their capacity to promote and sustain investment.

Nigerian government as part of the efforts to provide favorable environment for the growth and development of industries as well as inflow of foreign direct investment, stimulate the expansion of domestic production capacity, the Federal Government of Nigeria has developed a package of incentives for various sectors of the economy. These incentives, it is hoped, will help the economy, accelerate growth and development.

Nigerian government accepts the private sector as the engine of growth while the government's major responsibility is to provide the enabling environment for the private investors to operate. In this regard, laws which had hindered private sector investments have been amended and a national council on privatization has been established to oversee orderly investment by private operators in vital areas of the economy such as transportation, electricity, telecommunications, mining, petroleum and gas. Nigerian government's policy of economic deregulation has opened up new windows of opportunity to all foreign investors wishing to invest in the country's economy. However, the Nigerian Investment Promotion Council has been strengthened to enable it serve as a one-stop office for clearing all the requirements for investment in the country. The tariff structure is being reformed. Within the past few years following the end of military dictatorship in Nigeria, government has progressively introduced a number of incentives designed to promote foreign investments.



Looking at other fiscal regime and other economic activities around the world, petroleum industry has wider attraction because of its unique nature, which stems from the fact that till date, it remains the largest and most important industry in the world. It has continuously provided the world’s energy and industrial needs, from transportation to agriculture. It has also been a money-spinner first for the OPCs, providing them with the opportunity of economic and social development, however, the multinational oil companies engaged in its extraction; and by extension repatriate their earnings.


No industry curtails these risks better than the oil industry. The whole of the industry, from exploration to production is filled with risks. From the high possibility that a “hole in the ground” will not yield reserves, the risks that the reserves if discovered will not be in commercial quantity to justify the investment.


The cost of exploration and production amounts to huge capitals and cannot be compared to any other industry. The technology needed for all activities in the industry involves huge amount. The scale and size of investment is mostly very high.


However, it takes some time for investment in oil fields to start yielding returns, considering the huge cost of investment and the long time.

There is always the risk of price fall as oil price is not static and is more or less not

Cannot be determined by the multinational oil companies, but to a large extent by the dictates of demand and supply.

The economic rent generated from oil has always been higher than that generated from any other industry including mining. At times, there are lots of political risks associated with the location of oil fields (which due to their fixed nature must be drilled where they are found) especially in the developing countries which incidentally are home to most of the world’s oil reserves, accounting for about 90%23 of the proven oil and gas reserves in the world. Oil depletes and is also non renewable, a “barrel once produced, cannot be produced again.”

All these including the need on one hand, to ensure that the State as resource owner, receives an appropriate and equitable share of the economic rent accruing from oil extraction, and the need to compensate the investor adequately, for the excessive risks and costs associated with the investment, make very strong case for a special tax regime for the petroleum industry.


Most governments impose taxes, in order to raise revenue for economic and social development of their countries.


Oil being the works of art and treasures of a nature, it belongs to the whole nation including future generations. Taxing in an oil sector is to assert right and control over the asset. High tax allowances and incentive are imposed as to cut down and regulate the number of Participants in the Industry and to reduce depletion for conservation.


The tax allowances and incentives mostly gotten from oil producing countries has been of a benefit and good source of economic advancement in meeting the needs of the government and its social-economics needs.

Oil companies are required to contribute 2% and 3 % of their annual profits respectively for development, training and sponsorship of the citizens. This is an underlying objective of developing expertise and manpower for the Nigerian oil industry.


Taxation in Petroleum is a way of assets re-distribution round the world. The multinational oil companies also use it to repatriate their earnings and often very huge profit to their countries; extracting rent from them in the form of petroleum taxation is a way of achieving the asset re-distribution.


Tax allowances are imposed on environment in order to cut down the excesses of pollution to the environment from the industries, this helps to guide against pollution from industries and keep them in check for a cleaner environment.


Tax incentives can come in several ways in form of corporate social responsibilities to help and compensate the indigenous owner of the petroleum industry. All these are form of developing expertise and manpower for the country’s social-economics and political objectives.



When you talk of tax allowances and incentives, what comes to mind is that they are avenues of benefit and to improve social-economic of a given country. In any fiscal regime, tax allowances and incentives are accepted in order to promote and sustain investment.

However, tax allowances and incentives are used to attract foreign direct investments.

Though incentives has been argued to be poor instruments for ameliorating negative factors inherent in a country’s investment climate, they still help the investors’ decisions on where to invest especially where other risks are involve. Tax allowances though may not be able to take better step in explaining the political risks involved in an investment; but will go a long way in addressing the imbalances especially between the government and the investor arising from a very high tax burden and incentives. It is on this basis that the role and importance of tax allowance is discussed and with particular reference to the petroleum industry. A Fiscal regime and the inherent tax allowances give a picture of how much of the investment risks the government is willing to share with the investor, and therefore affect the investor’s decision based on his analysis of the after tax return. Tax allowances also make a fiscal regime more conducive and attractive for investment by taking into notice the investment costs and losses, thereby encouraging the investor to take more risks especially in less explored regions and for marginal fields. This is because where there is no incentive, “there will be no attraction in exploring small fields”.

Tax allowances and other incentives are therefore, of particular importance to the Petroleum industry especially due to the inherent risks associated with it.


The range of tax allowances and other incentives vary from country to country depending on the government’s fiscal objectives.

Some regimes treat royalty as deductible expense for tax purpose while is not the same in other countries, meanwhile treating it as a deductible expense has the effect of mitigating its full impact on firms.


In Nigeria, there are two main types of fiscal regime existing. These are the joint ventures (JVs) and the production sharing contracts (PSC). Joint operating agreements govern the unincorporated joint ventures between the Nigerian national petroleum

Corporation (NNPC) and the MNOCs. Tax assessment for the two fiscal regimes is governed by the Petroleum profit tax Act.


3.3.1 Sharing formula:

Royalty oil is allocated in kind to the NNPC or the Holder, the proceeds of which shall be equal to actual monthly royalty payment and annual rental fees in accordance with the PSC terms. Cost oil is allocated to the Contractor in kind to offset his operating costs.

Tax oil is allocated in kind to the NNPC which normally comes to equal the amount of monthly PPT liability. Profit oil, the balance of oil after the above allocations is split between NNPC and the contractor in accordance with the terms of the PSC.

The NNPC or the Holder is to pay all royalty, rental fees and PPT from the royalty and tax oil.


Under the Joint Ventures, NNPC has 55% working interest in the Shell JV and 60% in the others. All operating costs are financed jointly in the proportion of the equity shareholdings, by a system of monthly cash calls. Each of the partners can lift and separately dispose off its share (proportional to the equity holdings) of crude oil production subject to the payment of royalty and tax.

The other obligations of the companies under the fiscal regimes include the following, contribution to the Education Trust Fund (ETF) and training of expertise. Payment of value added tax (VAT) on goods and services rendered with the exception of exports. Dividends are exempted from withholding tax. The companies are to pay other taxes, duties and levies imposed by the different tiers of government. Exploration obligations differ from one company to the other and are contained in the memorandum of understanding signed by both parties.

3.3.3 Allowable Deductions

These are categories of taxes which can be deducted even though they are being treated as charges which are exclusively and necessarily incurred for petroleum operations. The categories are royalties, operating costs, tangible expenses and all intangible drilling costs. Expenses incidental to petroleum operations are also to be treated as allowable deductions. Losses occurring in any accounting period are required to be carried forward.

3.3.4 Capital Allowances

Apart from the allowable deductions, capital allowances are granted annually for qualifying

Capital expenditure at a depreciation rate of 20 % (first four years), 19 %( 5th year) and

1% of the asset value is retained in the books until it is disposed off. The capital allowances are not allowed to reduce a company’s tax liability below 15%-the remainder is carried forward indefinitely.



Investors in Nigeria are there not because of its fiscal regime but because of the low cost and high quality of its reserves compared to other oil provinces. The allowances and incentives have been unable to promote and sustain investment to the level desired by government because the fiscal regime and the allowances as well as incentives neither encourage marginal investments nor adequately enhance the present value terms of the investor’s post tax returns due to some essential constraints and limitations.


The levies imposed on petroleum investment even before production and profit, has been a kind of limitation for the investment. The 50% rate under PSCs is also on the high side. The 15% minimum tax liability is a big burden to a company that is yet to break even especially after paying bonuses, royalties and other charges. The distinction between petroleum investment tax allowance and investment tax credit is a disincentive to exploration and production, especially for those who are denied the benefits of an investment credit. Production sharing contract is always under review mostly for the interest of the government and does not take care of the contractors. Fall in price will not encourage potential investors especially when there is steady fall in price. This is because bonuses, royalties and tax burden will remain the same. The cost recovery limit and limited ring fence, act as disincentives to the promotion of investment. All these when added up are enough to make the allowances and incentives unworkable especially as these are against global trends in the industry.

Most countries have done away with royalty while others have rates ranging from 1-12%, which is based on the R-factor or sliding scale tied to production.

However, Nigeria can adopt a flat tax rate and discuss on corporate social responsibilities depending on the company. This will promote and sustain investment.



1.1 Judicial Decisions

Shell Petroleum vs. F.B.I.R [1996] 8 N.W.L.R

1.2 National Legislation

Companies Income Tax Act Cap 60 Laws of the Federation of Nigeria (LFN)


Education Tax Fund Decree No 7 of 1993.

Industrial Training Fund Act Cap 182 Laws of the Federation of Nigeria.

Petroleum Act Cap 350 Laws of the Federation of Nigeria (LFN) 1990.

Petroleum Profits Tax Act Cap 354 Laws of the Federation of Nigeria (LFN)


Petroleum Technology Development Fund Act Cap.355 Laws of the Federation of

Nigeria (LFN) 1990.


2.1 Books

Anderson, B., Nigerian Competitiveness in Worst –Case World Energy Scenario,

11(10) NPB 468 (1998).

Andrew-Speed, P., Why is China’s Onshore Acreage proving to be unattractive to

Foreign Oil Companies?14 (3) OGLTR 126 (1996).

Anthony, S., Changing Times and Legal Structures,11(10) NPB 471 (1998)

Atsegbua, L., Appraisal of the new Production Sharing Contract in Nigeria,14

(10) OGLTR 436 (1996).

Atsegbua, L., Nigeria’s Deep Offshore and Inland Basin Production Sharing

Contracts Decree (No.9) of 1999, 8 OGLTR 307 (1999).

Byrne, J., Coalbed Methane- would you credit it?13(5) OGLTR 169 (1995).

Emole, C., The Interrelationship of Law and Policy in the Petroleum Industry in

Nigeria, 15 (3) OGLTR 94 (1997).

Morisset, J., Tax Incentives, Using Tax Incentives to attract Foreign Direct

Investment, Note Nos. 25x, The World Bank Group, Private Sector and

Infrastructure network, January 2003, p.1.

Nnona, G., New Policy Regime for Gas in Nigeria: A Perspective on Tax and

Related Incentives, 21(3) JENRL 286 (2003).

Garnaut, R., and Ross, A., Taxation of Mineral Rent (Oxford: Clarendon Press,


Gidado, M., Petroleum Development Contracts with Multinational Oil Firms-The

Nigerian Experience (Maidugiri, Nigeria: Ed-Linform Services, 1999).

Johnston, D., International Petroleum Fiscal Systems and Production Sharing

Contracts (Tulsa, Oklahoma USA: Penn Well Publishing Company, 1994)

Khan, K., Petroleum Resources and Development, Economic, Legal and Policy

Issues for Developing Countries (London: Belhaven Press, 1987).

Otto, J., The Taxation of Mineral Enterprises (London: Graham and Trotman,


Smith, E., International Petroleum Transactions (Denver, Colorado

USA: Rocky Mountain Mineral Law Foundation, et al,ed. 2000).

2.2 Articles

Alejimenlen, O., Issues in the acquisition of Petroleum Development Technology

for Third World States, 25(2) OPEC Review 123 (1991).

Nwokonko, C., Enhancing Local Content in the upstream Oil and Gas Industry in

Nigeria: An Appraisal, 1(4) OGEL 15 (2003).

Onuosa, S., U.K. Oil Taxation: A Responsive Fiscal Regime?

Onwekwe, C., and Onyenkpa, V., New legislation for the Deep Offshore and

Inland Basin Operations, 11 OGLTR 307 (1999)

Segun, K., Nigeria: Oil, Profits and Post-Tax Returns, 5 OGLTR 125-131 (1999).

Campbell, G., Foreign Investment and Petroleum Laws of the Republic of

Namibia, 13(5) OGLTR 189-193 (1995).

Weinthal, E., and Luong, P., Energy wealth and tax reform in Russia and

Kazakhstan, 27 Resources Policy 215-223 (2001).

2.3 Others

2.3.1 Seminars/Workshop

Emole, C., Joint Operating Agreements in the Oil and Gas Industry, Unpublished

Paper presented at the Alpha Juris CLE Workshop on Petroleum and Commercial

Law, Lagos, Nigeria March 2008.

2.3.3 Internet

Alexander’s Gas and Oil Connections, Nigeria streamlines lifting of Crude by

granting category Licenses. Available at (last visited 23/040/08)

Baunsgaard, T., A Primer on Mineral Taxation, IMF Working Paper, WP/01/139

Sept. 2007. Available at (last

visited on 21/04/08)

Catriona, B., Angola: Oil-curse or cure all. Available at (last visited on 21/04/08)

Clashes in Oil Rich Nigerian Area,

(Last visited on 21/04/08)

Dry Well only a blip in Angola Crude Exploration, available at

http://www.gulf- (last visited on


Nigeria- Deductibility of Expenses in Computation of profits, available at (last visited on 21/04/08)

OPEC’s Annual Statistical Bulletin, Member Countries, available at, visited on 21/04/08).

Otto, J., Mining Taxation in Developing Countries a Paper prepared for UNCTAD

November 2000, http://www.naturalresources.

org/minerals/development/docs/pdfs/otto.pdf(Last visited on 21/04/2008)

Razavi, H., Financing Oil and Gas Projects in developing Countries. Available at (last visited on


Schjott-Pedersen, K., Proposal for Petroleum Taxation Amendment. Available at

The United States’ energy information administration, Nigeria, Available at (last visited on 21/04/08)


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