July 7, 2021 / 11:00 AM / By Deloitte / Header Image Credit: @TopeBrown
The Petroleum Industry Bill ('PIB' or 'the Bill')
was passed by the National Assembly on Thursday, 1 July 2021. The Bill, which
has been in the works since the early 2000s, will become law once the President
has assented to it.
The enactment of PIB is Nigeria's boldest attempt
at revamping the fortune of the Nigerian Petroleum sector. The PIB either
repeals or amends at least ten different legislations applicable to the
Petroleum Industry. This 'substantially enacted legislation' is expected to
bolster the government's revenue and create significant investment
opportunities for local and international investors.
We have provided the key highlights of the PIB
below, under relevant headings:
Governance and Administration
- Introduction of separate regulatory authorities for
the upstream subsector on the one hand and midstream & downstream
subsectors on the other hand. The current petroleum regulatory authorities
including the Department of Petroleum Resources (DPR) will cease to exist when
the new Regulatory Authorities come on board.
- The Nigerian National Petroleum Corporation (NNPC)
will transform into NNPC Limited, a profit-oriented incorporated company, to be
jointly owned by the Ministry of Finance Incorporated and the Ministry of
- Existing Unincorporated Joint Ventures (UJVs) with
NNPC participation, which are currently managed under the Joint Operating
Agreements (JOAs), may voluntarily convert into Incorporated Joint Ventures
- New licenses and leases that will be issued under
the PIB, which includes the renewal of existing licenses and leases, can only
be issued to incorporated companies. This suggests that existing UJVs would
have to convert to IJVs upon the expiration of their licenses and/or leases.
- Introduction of a new licensing regime, which is
largely similar to the current one.
- Holders of existing Oil Mining Leases may voluntarily
convert to the new licensing regime before expiration. Oil Mining Leases will
upon conversion to the new regime, whether voluntarily or upon expiration of
existing contracts/leases, relinquish up to 60% of their acreage.
- PIB introduces the Host Communities Trust Fund
(HCTF) concept and requires all license/leaseholders to incorporate an HCTF for
the benefit of their host communities.
- The HCTF seeks to enhance peaceful and harmonious
co-existence between companies and host communities where they operate, while
creating a framework to support the development of these host communities.
- Companies are required to contribute 3% of the
preceding year's annual operating expenses to their respective HCTFs. This is
based on the Senate's approval, as reported in the media. The House of
Representatives is reported to have approved a contribution rate of 5%.
- The host community shall forfeit its entitlement to
HCTF benefits to the extent of the cost of repairs of the damage that results
from an act of sabotage, vandalism and civil unrest.
- HCTFs are exempted from income taxes and are
required to issue annual audited accounts.
- Oil and gas companies operating in the Niger-Delta
area will continue to contribute 3% of their annual operating and capital
expenditure budget to the Niger-Delta Development Commission (NDDC), as the PIB
did not repeal the NDDC Act, the legal basis for the imposition of the 3% NDDC
- Tax rate - The
maximum applicable income tax rate for upstream crude oil and condensates is
60%. However, the income tax rate can be as low as 30%, if the companies are
involved in deep offshore, upstream gas, and midstream & downstream
activities. Companies Income Tax (CIT) applies to all categories at 30%, the
excess rate relates to Hydrocarbon Tax (HT). The maximum 60% tax rate is a
significant reduction from the 85% rate applicable under Petroleum Profits Tax
- Incentives and tax holiday - All companies engaged in domestic midstream petroleum operations, downstream
gas operations and large-scale gas utilization industries are entitled to gas
utilization incentives under Section 39 of the CIT Act (CITA). Up to 10 years
tax holiday is available to gas pipeline companies.
- Royalty rates - PIB retains production-based royalty but also introduced price-based royalty.
Production-based royalty ranges from 5% to 15% for crude oil and condensates;
for gas, the royalty rate is 5%, but 2.5% for local gas supplies. The gas
royalty rate under PIB is lower than the rates under the current regime, which
is between 5% and 7%. Additional (price-based) royalty only applies to crude
oil and condensates; it crystallizes when the price exceeds $50 per barrel.
Price based royalty is credited to the Nigerian Sovereign Wealth Fund. Depending
on the price of crude/condensate, the effective royalty rate may be lower under
PIB relative to the existing regime, which is as high as 20%.
- Unbundling - Companies intending to operate in more than one sector (upstream, midstream, or
downstream) of the petroleum industry must incorporate separate companies for
each sector. Where a company is required to unbundle itself into more than one
company, capital gains tax and stamp duties will not apply under certain
- Cost price ratio (CPR) - Deductibility of expenses and capital allowances, for HT purposes, is
restricted to 65% of gross revenue. Rent paid on license and lease, royalty and
all deductible taxes and levies paid to the government are not subject to the
65% CPR restriction.
- Non-deductible expenses - Interest, retirement benefits, custom duties, and head office, affiliate &
shared costs are not deductible for HT purposes, but deductible for CIT,
subject to other deductibility rules. These expenses are fully deductible under
PPTA, subject to other deductibility rules.
- Production allowances - Price and production-based allowances introduced to replace petroleum
investment allowance and investment tax allowance/credit that currently exist
under PPTA and Deep Offshore and Inland Basin Petroleum Sharing Contract Act
- Grandfathering provisions - Current players may elect to remain under the existing Petroleum Act, PPTA and
DOIBSCA until the expiration of their leases/licenses. The decision to remain
or transit is going to be largely driven by economics.
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