Nigerian

Oil and Gas Update

Quarterly Newsletter

Second Edition | October 2019

Introduction Sanction for non-submission of daily output report by

oil companies
The Nigerian Oil and Gas Update provides information on
current developments on regulatory, accounting and tax
The Department of Petroleum Resources (DPR) recently
matters affecting the industry. We hope that you find the
insights in the publication useful in making your business launched the National Production Monitoring System
decisions. (NPMS)3. The NPMS, which is developed and managed by
the DPR, will facilitate the tracking of oil production from
Update on cash call arrears the various oil terminals in the country and movement of
oil export and import vessels. The objectives of the NPMS
The Federal Government of Nigeria (FGN), through the are to ensure timely and accurate reporting of oil production
Nigerian National Petroleum Corporation (NNPC) owns and export data, improve consistency and quality of the
majority stakes in all of the Joint Venture (JVs) arrangements database and facilitate seamless transfers of oil and gas
with the international oil companies (IOCs) operating in data to the National Data Repository (NDR). The NPMS,
the country, owed the IOCs about USD$6.8billion in which replaces the current paper-based reports, will simplify
unpaid counterpart funding (cash calls) as at 20161. This production reporting to the relevant government agencies
had impacted the ability of the IOCs to continue to invest such as Federal Inland Revenue Service (FIRS) and Nigeria
in oil field development in the country. In December 2016, Extractive Industries Transparency Initiative (EITI). The DPR
the FGN commenced negotiations with the IOCs and was also announced that it would commence imposition of strict
subsequently able to obtain a discount of USD$1.7billion sanctions on companies that fail to submit the required daily
from the outstanding amount. production and export reports via NPMS platform.

The NNPC had, through its former Group Managing Director Oil and gas producing companies are required to upload the
(GMD) in his valedictory speech on 8 July 2019, stated that following information to NPMS:
USD$2.3billion (an estimated 47%{sic})2 of the re-negotiated
debt had been settled as at the end of June 2019 using cash • Daily crude oil production report.
obtained from incremental oil production. • Monthly report on producing wells.
• Maximum efficient rate results.
The NNPC also reiterated plans to introduce the • Well test reports.
Incorporated Joint Venture (IJV) model in conjunction with • Crude oil lifting reports.
the IOCs. The IJVs will operate as independent entities with • Daily associated gas and non-associated gas production
the ability to raise capital through equity or debt to finance reports.
cash call obligations. However, the 2020 budget does not • Terminal reports.
seem to contain any details about the restructuring of the
existing JVs. DPR has set up a task force to drive, monitor and ensure
full compliance with the data submission via NPMS, with
The settlement of outstanding cash calls, which have compliance linked to some regulatory processes such as
been a perennial issue in the industry, as well as the issuance of export permits, approval of technical costs and
setup of a new funding mechanism to address this issue other statutory approvals and permits.
going forward, should restore the confidence of the IOCs,
increase investments in oil field developments and improve A robust and reliable oil and gas production database will
reserves growth. However, this will be highly dependent strengthen stakeholders’ and investors’ confidence and
on development and implementation of the right fiscal allow investors access to more reliable information on the
framework to improve and sustain investments in the sector sector.
through the passage of the components of the overdue
Petroleum Industry Bill (PIB).
1
https://assets.kpmg/content/dam/kpmg/ng/pdf/tax/Nigerian-Oil-and-Gas-Update.pdf
2
https://punchng.com/nnpc-repays-2-3bn-jv-cash-call-arrears/
3
NPMS is a web-based oil and gas production accounting and monitoring platform designed and managed by the DPR

© 2019 KPMG Advisory Services, a Nigerian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. 1
Impact of African Continental Free Trade Area Agreement Lease renewal update
(AfCFTA) on the Nigerian Oil and Gas Sector
The FGN, through the DPR, launched the accelerated lease
The AfCFTA, which was introduced in March 20184 and renewal program (ALRP) in January 2019. As at 31 January
became effective 30 May 2019, is the largest free trade 2019, the DPR noted that 22 out of the 25 licence renewal
agreement in the world after the World Trade Organization. applications made under the ALRP had been approved
The objectives of the agreement are to create a tariff- by the President. This is in addition to the 16 new field
free continent that can grow local businesses, boost intra development plans7 approved by the FGN in 2018 and
African trade, improve industrialization and create jobs which are expected to increase the nation’s oil and gas
among partner States. Currently, intra-African trade stands production capacity by about 560,463 barrels per day when
at 15%, which is paltry when compared to Asia’s 58% and fully commissioned. However, the Group Managing Director
Europe’s 67%. High tariffs and colonial-era infrastructure (GMD) of the NNPC, Mr. Mele Kyari, in a recent meeting
make it easier for African countries to export to Europe or with the IOCs, noted that the FGN had no immediate plan
the United States than to one another. Furthermore, the to renew the licences of some of the IOCs, which have
overlapping membership in Africa’s eight Regional Economic been operating with expired licences8. The GMD attributed
Communities (RECs) hinders trade standardization and the reason to FGN’s interest in having the exploration and
enforcement. AfCFTA, which seeks to establish a single production arm of the NNPC operate those licences.
continental market for goods and services, is expected
to increase intra-African trade by 52.3% by 2022, through The non-renewal of the expired IOCs licences will have
the application of at least a 90% cut in tariffs and by immense impact on both the FG and the companies with
harmonizing trading rules at regional and continental level5. the attendant revenue and investment losses.

More than 75% of Africa’s external exports are extractive,

mainly oil and minerals. Nigeria became a signatory to the Applicability of Cabotage to drilling services
AfCFTA in July 2019. The main consideration for Nigeria’s
oil and gas sector under the AfCFTA is the applicable tariff The Court of Appeal (CoA), on 24 June 2019, issued
on energy resources since participating countries are judgment in the case between Transocean Support
expected to reduce tariffs by 90%. The other challenge will Services Nigeria Limited& 3 Ors3. and NIMASA &
be to address the issue of rules of origin and cross-border Minister of Transport (CA/L/503/2016)9. The Court ruled
infrastructure. The African Development Bank (ADB) has that drilling rigs are not vessels and that drilling activities
created a regional integration strategy for periods up to do not constitute coastal trade. The Court also stated that
20256 to address the infrastructural challenge. The ADB drilling rigs are not used for marine navigation and do not
plans to provide funds for the construction of 9000km cross- engage in the transportation of goods or passengers from
border transmission lines, the construction or rehabilitation one point in Nigeria to another. They therefore cannot be
of about 16,400km of cross-border roads, the support of rail considered as vessels used for coastal trade under Section
lines and transport corridors construction, the increase of 2 of the Cabotage Act. Rigs are also not expressly listed in
transport links wherever possible and use investments in Section 22(5) of the Cabotage Act and cannot be deemed
infrastructure as a way of creating market linkages. to be a vessel eligible for registration under Section 22(1)
of the Cabotage Act. The CoA further emphasized that the
The above investment, though relevant, may not be enough Minister, when issuing a guideline, cannot deviate from the
especially for Nigeria given the current state of our internal provisions of the principal legislation and expand or curtail
infrastructures. Therefore, the FGN will need, as matter of the provisions of the substantive statute. Thus, the inclusion
urgency, to begin to make investments in the development of rigs as “foreign vessels” in the Guidelines is improper.
of internal infrastructure and systems to ensure that the
country is ready to compete when the AfCFTA becomes The judgement of the CoA has resolved, for now, the
fully operational. perennial controversy regarding the applicability of cabotage
levy on drilling rigs. It has also settled the legal tussles
between rig operators and NIMASA on the issue. Based
on the above, rig operators in the Nigerian oil and gas
industry can focus on the performance of their contracted
obligations without any worry of interference from marine
regulators. However, the National Assembly is proposing
an amendment to the Cabotage Act with respect to the
definition of vessels, amongst other things. It is hoped that
the proposed amendments would be consistent with the
spirit and intent of the Cabotage Act.

4
Spotlight On The African Continental Free Trade Agreement: www.mondaq.com/Nigeria/x/813804/international+trade+investment/SpotlightOn+The+African+Conti
nental+Free+Trade+Agreement
5
https://www.cfr.org/blog/african-continental-free-trade-area-new-horizon-trade-africa
6
Africa’s continental free trade area comes into effect: https://africanbusinessmagazine.com/in-the-news/africas-free-trade-agreement-comes-into-effect-what-hap
pens-now/
7
https://allafrica.com/stories/201807270338.html#targetText=Data%20made%20available%20to%20Daily,per%20day%20when%20fully%20commissioned.
8
https://allafrica.com/stories/201807270338.html#targetText=Data%20made%20available%20to%20Daily,per%20day%20when%20fully%20commissioned.
9
Follow link to the full text of our newsletter on the case: https://assets.kpmg/content/dam/kpmg/ng/pdf/tax/Cabotage-levy-drilling-rigs-and-drilling-operations-through-
the-cases.pdf

© 2019 KPMG Advisory Services, a Nigerian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. 2
How we can help
At KPMG, our purpose is to inspire confidence and
empower change. We have an Oil and Gas Team, which
comprises professionals with diverse experience and
knowledge in accounting, tax, mergers and acquisitions,
advisory and regulatory practices. You can, therefore,
count on us as a valuable partner with respect to
meeting your needs in the industry. Please contact the
following for additional information:

Chibuzor Anyanechi
Partner and Head
Energy Line of Business
KPMG in Nigeria
T: +234 803 402 0965
E: [email protected]

Adewale Ajayi
Partner
Tax, Regulatory & People Services
KPMG in Nigeria
T: +234 804 202 1014
E: [email protected]

Segun Sowande
Partner and Head
Management Consulting
KPMG in Nigeria
T: +234 803 402 0994
E: [email protected]

home.kpmg/ng
home.kpmg/socialmedia

© 2019 KPMG Advisory Services, a Nigerian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. 3