OIL AND GAS INDUSTRIAL MAJOR POLICY IN NIGERIA

Under the Petroleum Act of 1969 as amended, the entire ownership and control of oil and gas in Nigeria (including under its territorial waters and continental shelf) is vested in the state of Nigeria. The ownership of oil and all minerals in Nigeria is further reinforced under section 40(3) of the 1979 constitution of the Federal Republic of Nigeria.
Since the discovery of oil in Nigeria in 1956, the government, through its appropriate agencies like Nigerian National Petroleum Corporation (NNPC), Ministry of Petroleum Resources and Federal Environmental Protection Agency (FEPA), has put in place a number of policies,
agreements and regulations for the control and supervision of the oil industry for the overall economic development of the country. Notable policies and agreements in place include: Joint Ventures, Production Sharing Control (PSC), Service Contract, and Memorandum of Under-standing (MOU).

THE OIL AND GAS INDUSTRY IN NIGERIA
BACKGROUND TO THE NIGERIAN PETROLEUM INDUSTRY.
Following the discovery of crude oil in 1956 by Shell D’Arcy Petroleum, pioneer production began in 1958 from the company’s oil field in Oloibiri in the Eastern Niger Delta. Nigeria has since made its mark as Africa’s leading producer of oil and ranks in the top ten oil producers in the world. In 2004, Nigeria’s OPEC’s quota increased to 8.2%.
By the late sixties and early seventies, Nigeria had attained a production level of over 2 million barrels of crude oil a day. Although production figures dropped in the eighties due to economic slump, 2004 saw a total rejuvenation of oil production to a record level of 2.5 million barrels per day. Current development strategies are aimed at increasing production to 4million barrels per day by the year 2010.
CURRENT STATUS OF THE PETROLEUM INDUSTRY IN NIGERIA.
Sedimentary Basins
Table 1, lists Nigeria’s 7 main sedimentary basins with some information on size and productivity, main reservoirs, exploration status etc. The core producing areas cover some 60% of the total acreage of about 31,105 sq. km. The outlying areas remain a significant asset yet to be exploited.
Oil and Gas Reserves
A 2003 estimate showed recoverable crude oil reserves at 34 billion barrels. The reserve base is expected to increase due to additional exploration and appraisal drilling. Already, over 900 million barrels of crude oil of recoverable reserves have been identified. The government has also set a target to achieve a reserve of 40 billion barrels by 2010.
Nigeria has an estimated 159 trillion cubic feet (Tcf) of proven natural gas reserves, giving the country one of the top ten natural gas endowments in the world. Due to a lack of utilization infrastructure, Nigeria still flares about 40% of the natural gas it produces and re-injects 12% to enhance oil recovery. Official Nigerian policy is to end gas flaring completely by 2008. The World Bank estimates that Nigeria accounts for 12.5% of the world's total gas flaring. Shell estimates that about half of the 2 Bcf/d of associated gas -- gaseous by-products of oil extraction -- is flared in Nigeria annually. The new industry strategy is to collect the associated gas and process it into liquefied natural gas (LNG), greatly enhancing Nigerian natural gas revenues while simultaneously reducing carbon dioxide emissions
Oil Fields
Of the 606 oil fields in the Niger Delta area, 355 are on-shore while the remaining 251 are offshore. Of these, 193 are currently operational while 23 have been shut in or abandoned as a result of poor prospectivity or total drying up of the wells. Outside the Niger Delta, a total of 28 exploratory oil wells have been drilled all showing various levels of prospectivity as seen in Table 2. These wells include two (2) discovery wells in Anambra State, one (1) discovery well each in Edo State and Benue State each and Twenty-four (24) wells in the Chad Basin. However, production is yet to commence from any of the wells.

Nigerian liquefied Natural Gas:

The Nigerian LNG project is being implemented in phases with an initial production from two trains. The plant is situated at Bonny Island. NLNG has successfully secured market for its moderate production volume from its base project and train three.
Sources of Gas:

The bulk of the gas for base project is mainly NAG supplied from the following gas supplier fields:

· SPDC – SOKU;
· NAOC – OBIAFU OBIKROM;
· EPNL - OBITE;
The bulk of gas for train three will contain more of associated gas from which both LNG and LPG will be produced.
* Gas Supply Contract: The NLNG had signed Gas Supply Agreements (GSAs) with three upstream gas producers in 1992. This is aimed at securing adequate and regular supply of gas for the project. These gas producers are:
* The Shell Petroleum Development Company of Nigeria Limited (SPDC) – NNPC/SPDC/NAOC/EPNL JV: operator & sellers’ representative - SPDC (Shell affiliate);
* Nigerian Agip Oil Company limited (NAOC) – NNPC/NAOC/POCNL JV: operator & sellers’ representative – NAOC (Agip affiliate);
* ELF Petroleum Nigerian limited (ELF), (then Elf Nigerian Limited) – NNPC/EPNL JV: operator & sellers’ representative – EPNL (Elf affiliate).
These three joint ventures are expected to supply the gas requirement for the project for the next 221/2 years.
* Gas Supply Contract Quantities: The joint venture will supply a total of 302.17 billion standard cubic metres (BSCM) of feed-gas required for the NLNG’s three trains. The feed-gas for the three trains will be a combination of associated and non-associated gas. When NLNG’s train three becomes fully operational, a total of about 41.83 million standard cubic metres will be required by the plant daily.

Joint Ventures In a Nigerian petroleum joint venture, two or more oil companies enter into an agreement for joint development of jointly held oil prospecting licenses or oil mining leases (OMLs) and facilities. Each partner in the joint venture contributes to the costs and shares the benefits or losses of the operations in accordance with its proportionate equity interest in the venture. Each joint venture (JV) operates under Operating Agreement (JOA) with the NNPC and a Memorandum of Understanding (MOU) with the Federal Government. The JOA defines relation-ships regarding: (a) operatorship and obligations; (b) work programme, plans and expenditure; (c) authority of operating (management) committee and its sub-committees (exploration, technical, finance, services, engineering, production, and public affairs); (d) right of assignment by either party; (e) offtake, scheduling and lifting procedures; (f) accounting procedures; (g) project, contract procedures; and  (h) communication procedures. NNPC operates seven joint venture partnerships with companies, equities and details as listed below:   Partners Equity Interest  Operator No.of OMLs  1 Shell  Agip  Elf  NNPC  30%  5%  10%  55%  Shell 58 2 Mobil  NNPC  40%  60%  Mobil 4  3 Chevron  NNPC  40%  60%  Chevron  16 4 Agip  Philips  NNPC  20%  20%  60%  Agip N/A 5 Elf  NNPC  40%  60%  Elf 14 6 Texaco  Chevron  NNPC  20%  20%  60%  Texaco 6  7 Pan Ocean  NNPC  40%  60%  Pan Ocean 1 *Pan Ocean has reverted to PSC. Six operators of the seven joint venture partners with NNPC (Shell, Mobil, Chevron, Agip, Elf and Texaco) produce about 97% of Nigeria’s crude oil.

Memorandum Of Understanding

This is a package of incentives offered by government to joint venture partners to encourage them to step up exploration efforts to increase the country’s oil reserves and production. The MOU provides an overall structure for allocating oil income among the JV partners, including payment of taxes and royalties as well as the industry profit margin. MOU is a unique oil policy in the international arena.

The 1991 Revised Memorandum of Under-standing was predicated on the objectives of achieving a national hydrocarbon reserve base of 25 billion barrels (from 20 billion barrels) while keeping production at 2.5 million barrels per day by 1997.

The Federal Government is working on a new MOU proposal; representatives of NNPC, Ministry of Petroleum Resources and Ministry of Finance are to fashion out government negotiation position prior to renegotiating a new JOA. This may result in changes along the lines of increased guaranteed profit margins and introduction of new set of incentives to operators.

Fiscal Regime 

Oil and gas taxes are periodically reviewed to ensure that the industry does not earn less than the profit margin that prevailed in the past. The fiscal incentives to enhance crude oil production and exports are contained in the Memorandum of Understanding (MOU) while that of gas are embodied in the National Gas Policy (see 4.7).

The profit of petroleum operating companies are taxed under the provisions of Petroleum Profit Tax Act (PPTA) of 1959 as amended. The applicable tax rate is 85% by way of section 16(1) of the PPTA. The PPTA is administered by the Federal Inland Revenue Services.

The calculation of Petroleum Profit Tax (PPT) is based on a formula of government take made up of royalty and tax based on realisable price (RP) and technical cost (TC) according to a 1985  Royalty and PPT regulation.

Production Sharing Contract (PSC)

In view of the burden of funding joint venture operations (cash calls) by the NNPC and the need to increase Nigeria’s oil reserves from the present 20 billion barrels and also to develop other sectors of the economy begging for government attention, the federal government decided to introduce the Production Sharing Contract (PSC). This policy is designed to transfer exploration risks and funding of exploration and development efforts on new acreage to the interested oil companies.

The essence of PSC is that NNPC engages a competent contractor to carry out petroleum operations on NNPC’s wholly held acreage. The contractor undertakes the initial exploration risks and recovers his costs if and when oil is discovered and extracted.

Under the PSC, the contractor has a right to only that fraction of the crude oil allocated to him under the cost oil (oil to recoup production cost) and equity oil (oil to guarantee return on investment). He can also dispose of the tax oil (oil to defray tax and royalty obligations) subject to NNPC’s approval. The balance of the oil, if any (after cost, equity, and tax), is shared between the parties (profit oil).

The current direction in the petroleum operations in the country is the production sharing contract.

Examples below detail the number of blocks held by named operators operating PSC with NNPC.

(i)   Statoil/BP                    (3 Blocks)
(ii)  Ashland                       (2 Blocks)
(iii) Abacan                        (1 Block)
(iv) Esso Expt.                    (1 Block)
(v)  Agip                            (1 Block)
(vi) Shell                            (5 Blocks)
(vii) Elf                              (2 Blocks)
(viii) Mobil                         (1 Block)
(ix)  Chevron                      (7 Blocks)
(x)  Conoco                        (1 Block)
(xi) Allied Energy         (1 Block operated by Statoil)
Examples Of Some Specific Provisions Of A PSC Contract:

(a) The term of the contract is for 30 years (inclusive of 10 years exploration and 20 years OML period). However, the contract may be terminated if at the end of the 6th year (from the effective date of the contract) the agreed Work Programme has not been substantially executed, or either party gives a notice of not less than 90 days for termination of the contract (on grounds permitted by the contract terms). Termination of the contract will also take place if no petroleum is found in the contact area after 10 years from the effective date of the contract.

(b) Work Programme: The minimum work programme during the exploration period shall be as follows:

	Contract Years	Amount to be Expended
(i)	1 - 3	$24 million
(ii)	4 - 6	$30 million
(iii)	7 - 10	$60 million

If during any period of the contract years, the contractor spends less than the required expenditure, an amount equal to such under-expenditure shall be carried forward and added to the amount to be expended in the following period of contract years.

(c) Management Committee must be established within 30 days from the effective date of the contract. The Committee is made up of 10 persons appointed by the parties on a 50/50 basis.

The NNPC appoints the Chairman of the Management Committee while the contractor appoints the Secretary who will be a non-member of the Committee.

(d) Recovery of Operating Costs and Crude Oil Allocation: The available crude oil from the contract area shall be allocated in accordance with the Accounting Procedure, the Allocation Procedure and other applicable provisions of the contract.

(e) Royalty: Royalty rates in offshore is graduated as follows:

Area/Water Depth	Rate
In areas up to 200 meters water depth	16.67%
From 201 to 500 meters water depth	12%
From 501 to 800 meters water depth	8%
From 801 to 1000 meters water depth	4%
In areas in excess of 1,001 meters	0%

Market Regulator

The responsibility for enforcing the legislation and regulations in the Oil Industry is vested in the Department of Petroleum Resources. In collaboration with the government agencies such as the Ministry of Finance, Central Bank of Nigeria, the Customs and the Nigerian Police, the DPR monitors the operations of both upstream and downstream sectors of the industry.
Service Contract

Service contract was designed to eliminate the undesirable aspects of the production sharing contract: the right of the contractors to oil, the cumbersome account procedure and the need to constantly review the allocation of “costs oil” in order to encourage the operators to engage in further oil exploration activities. The main features of services contract are:-
(a) The contractor has no title to crude oil, but has the right to be repaid his investment plus an agreed mark-up in crude oil if and when oil is discovered in commercial quantities.
(b) Each service contract relates to a single block unlike the PSC which may cover more than one block.
(c) The exploration period is of 5 years duration and the contract terminates if no oil is discovered during the period. The termination of the contract at pre-production stage means that the contractor has lost all investments made under the contract.
(d) The continuation of the contract is subject to the contractor meeting an agreed level of work programme each year.
(f) The major incentive for the risk undertaken by the contractor is that the contractor has first option to purchase fixed quantities of crude oil produced from that contract area.
Agip Energy and Natural Resources (AENR) is the only company operating a service contract (signed in 1979) for NNPC.