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The Nigerian oil and gas industry: from joint ventures to production sharing contracts

By:
Madaki O. Ameh


Madaki O. Ameh a lawyer, works for Shell Nigeria and is currently a Chevening Scholar in Energy Law and Policy at the Centre for Energy, Petroleum and Mineral law and Policy, University of Dundee, Scotland, UK



In addition to the specific contracts signed with the individual companies, the main law which regulates the operation of PSCs in Nigeria is the Deep Offshore and Inland Basin Production Sharing Contracts Act No. 9, Laws of the Federation of Nigeria, 1999.  This law sets out the general framework for the operation of PSCs, including the applicable royalties, tax regimes, and the manner in which costs and profits are allocated between the parties.  It provides for payment of a flat rate of 50% tax on petroleum profits by PSC operators, and sets different royalty regimes, depending on the water depth in which the operation is carried out, ranging from 12% for water depths of 200-500m, to 0% for water depths in excess of 1,000m.  PSCs in inland basins attract a flat royalty of 10%. 

 
In addition to royalties, taxes and its share of profit oil, the government also earns revenue from signature bonuses paid by the oil companies upon successful bids. Most forms of payments under PSCs operating in Nigeria are made in oil, as the law provides for cost oil, tax oil, royalty oil and profit oil.  Investment Tax Credits and Allowances are also available to the investors at the rate of 50% of the value of such investments.
 
Some of the advantages associated with PSCs include the relative flexibility in the management of the operations, and the fact that there is no financial burden on the host government, and even after a commercial find, the payment to the contractor is in oil, which does not attract any direct financial cost.  Leveraging on the technical know-how and experience of the companies in such operations, the government can focus its energies in other areas of the economy while trusting that the oil and gas industry will develop at an acceptable pace without the usual trappings of cash call constraints.  However, PSCs have some drawbacks such as the risky nature of the operation. For instance, in the event of an unsuccessful operation, millions of dollars could be completely lost - unless the local laws allow for costs from one acreage to be transferred to another, which is not always the case, and would depend on the provisions of the PSC entered into by the parties. Also, the fact that the contractor is usually allowed a relatively unfettered hand to draw up and execute its programme could lead to allegations of gold plaiting of costs. 
 
In recent times, there has been a conscious shift in the contractual structure in the oil and gas industry in Nigeria from JOAs to PSCs.   The dynamics of this shift and what it portends for the future of the industry in Nigeria and the investment climate in the country is the subject of the full version of this paper to be published in the African Renaissance Journal of November/December 2005.

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View Comments
Morpheus
Date:Mar 06, 2013
I'm just gonna ask a question..What is/are the impact(s) of oil and gas in the economic development of Nigeria???

ODUOLA SAHEED OLASUNKANMI
Date:Feb 14, 2013
I AM NEW HERE

Anthony Mohamed Aris Mahmoud
Date:Feb 05, 2013
wow so much of oil and the idea of oil rigs and oil tanks and people gotta look out from oil spills that can release CO2 to the air negatively affecting humanity

Razta
Date:Jan 14, 2013
I am also trying to fix on the pramrogme a Civil Society Platform to discuss a lot of emergent issues around local content e.g. the newly launched ICT4D Plan (10 Sectors) which contains a lot of opportunities for local content development. In addition we are bringing some young innovators with local content projects for possible NITDA support. The pramrogme is being finalized this week. We can meet in the venue on Thursday evening to take advantage of synergy but if not we can organize around you on Friday. A few leading CSO ICT leaders will be on the pramrogme too.

OMO
Date:Nov 20, 2012
enjoyed reading yor article it very enlightening it also shows things still function in Nigeria.

JOE ACHONYE
Date:May 07, 2012
PLEASE THERE ARE SOME FOREIGN PEOPLETHAT WOULD LIKE TO GO INTO JOINT VENTURE WITH NNPC AND WOULD LIKE TO KNOW HOW THEY CAN GO ABOUT IT.

Bobbo
Date:May 07, 2012
Good points all aorund. Truly appreciated.

Suevonne
Date:May 07, 2012
Articles like this really grease the sthfas of knowledge.

Woods
Date:May 07, 2012
Home run! Great sluiggng with that answer!

muydam
Date:May 07, 2012
i love this keep it up

dorah
Date:Sep 10, 2011
may i please know the meaning of the abbreviation JOA

Aina O.
Date:Sep 15, 2010
This is a very enlightening piece.

Somieari Beals (somiearib@yahoo.com)
Date:Aug 02, 2010
1. How does the JOA and PSC operate. i.e. what are their advantages and disadvantages 2. What does acreage mean in the oil and gas industry?

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