PETROLEUM ECONOMICS

Prof. S. I Onwukwe
Dept. of Petroleum Engineering,
Federal University of Technology,
Owerri.
Regulatory and Legal Framework
 Regulatory Framework
q Petroleum operations and activities are regulated primarily by
federal agencies in Nigeria.

q The principal government agencies responsible for administering

petroleum matters are
1) The Department of Petroleum Resources (DPR), which is the
regulatory arm of the MOE,
2) The Nigerian National Petroleum Corporation (NNPC),
3) The Federal Ministry of Environment(FMOE),
4) The Federal Inland Revenue Service (FIRS) and
5) Nigerian Investment Promotion Commission (NIPC)
6) Nigerian Content Development & Monitoring Board
(NCDMB)
7) The Niger Delta Development Commission (NDDC).
 Regulatory Framework
1. Department of Petroleum Resources (DPR)
ØMost of the regulatory functions of the Ministry of
Petroleum Resources is exercised by the DPR.

ØThe DPR is responsible for the day to day regulation of the

upstream, midstream and downstream sectors of the
Petroleum Industry.

ØThe DPR ensures the compliance with the terms governing

the award of oil licences to companies engaged in petroleum
operations.
 Regulatory Framework
Ø Some functions of DPR:
§ Overseeing the activities of companies engaged in petroleum
operations.

§ Monitoring and control of oil industry operations to ensure

compliance with national goals and policies.

§ Enforcement of conservation measures and laws.

§ Issuing of permits, licences, leases and giving authorisations

and approvals as required under various petroleum laws
governing the whole range of oil and gas administration.

§Ensuring timely and adequate payments of all rents and

royalties as at when due.
 Regulatory Framework
q license and permits that may be granted by the DPR:
Ø License to Operate Drilling Rig

Ø Permit to Import Petroleum Products

Ø Permit to Import LPG

Ø License to Operate Petrol Station / Products Storage Deport

Ø Industrial Consumer License

Ø License for Surface Tank Storage / Sale- Kerosene/LPG

Ø Bunkering Operations and Coastal Vessels Licenses

Ø License to Operate Lube Oil Blending Plant

Ø License to Operate LPG Plant

Ø Licence to Establish and Operate Private Refinery

 Regulatory Framework
2. NNPC

qIt is a statutory corporation engaged in commercial activities.

qActivities of NNPC span through the whole spectrum of the oil

and gas value chain, from exploration, to production, refining,
transportation, distribution and supply of petroleum.

qThe NNPC sometimes operates directly in petroleum

operations and sometimes indirectly through subsidiaries.
 Regulatory Framework
ØNNPC Prominent subsidiaries are:
§ Nigerian Petroleum Development Company (NPDC)
ü Engaged in petroleum exploration and production.

§ Petroleum Products Marketing Company Limited (PPMC)

ü Responsible for the transportation of crude oil to the
refineries and the transportation of petroleum products to
depots located in various parts of Nigeria.

§ National Petroleum Investment Management Services (NAPIMS)

ü Responsible for overseeing the investments of the Federal
Government of Nigeria in oil industry operations conducted
under joint ventures, production sharing contracts and other
petroleum arrangements with the international oil companies
(IOCs).
 Regulatory Framework
3. FMOE
Ø The Federal Ministry of Environment is responsible for the
initiation and development of policies for the environment in
general.

Ø In conjunction with the DPR, it is also responsible for the

regulation of and administration of environmental standards
and regulation for the Oil and Gas Industry.

Ø The Federal Ministry of Environment is also responsible in

conjunction with the DPR for conducting any necessary
environmental impact assessment (“EIA”) and issuing the
necessary approvals for projects that are subject to EIA.
 Regulatory Framework
4. FIRS
qThe Federal Inland Revenue Service (FIRS) is responsible for
the assessment, collection and administration of all federal
taxes.

ØThe taxes include

§petroleum profits tax,
§companies income tax,
§capital gains tax,
§education tax and
§value added tax.
 Regulatory Framework
5. Nigerian Investment Promotion Commission (NIPC)
q The NIPC is responsible for registering foreign investments
in Nigeria.

q It also acts as a liaison between investors and government

ministries, departments, institutional lenders and other
institutions concerned with investments.
 Regulatory Framework

6. Nigerian Content Development & Monitoring Board (NCDMB)

q The major functions of the NCDMB are to implement the

provisions of the Nigerian Oil and Gas Industry Content
Development Act, 2010, with respect to supervising,
coordinating, administering, monitoring and managing the
development of Nigerian Content in the industry.

q The NCDMB also assist local contractors and Nigerian

companies to develop their capabilities and capacities.
 Regulatory Framework
Nigerian Content Development & Monitoring Board (NCDMB)
q The key areas of focus of the NCDMB are as follows:
ØTraining and employment of Nigerians;
ØFacilitate establishment of critical facilities such as pipe
mills, docking and marine facilities, pipe coating facilities;
ØPromoting indigenous ownership of marine vessels,
offshore drilling rigs, etc;
ØIntegration of indigenes and businesses residing in oil
producing areas into mainstream of industry economic
activity;
ØPromoting services which support industry activities such as
banking, insurance, legal, etc.
 Regulatory Framework

7. NDDC
The Niger Delta Development Commission (NDDC) is the
corporation established to formulate Policies & Guidelines,
and to develop and implement projects & programmes
for the development of the Niger-Delta area where most of
Nigeria’s crude oil is produced.

Oil producing companies and gas processing companies are

required by law to contribute 3% of their annual budget to
the NDDC fund.
 Regulatory Framework
NDDC
The roles of the NDDC are to:
ØFormulate policies and guidelines for the development of the
Niger- Delta area.
ØConceive, plan and implement projects and programmes for the
sustainable development of the Niger-Delta area in the field of
transportation.
ØImplement all the measures approved for the development of
the Niger- Delta area by the FGN and the member States of the
Commission.
ØTackle ecological and environmental problems that arise from
the exploration of oil mineral in the Niger-Delta area.
 Legislation Provisions
The key legislation and taxes applicable to companies operating
in the oil and gas industry in Nigeria are as follows:
1) The Petroleum Act
2) Petroleum Profits Tax Act (PPTA)
3) Deep Offshore and Inland Basin Production Sharing
Contracts Act (DOIBPSCA)
4) Companies Income Tax Act (CITA)
5) Tertiary Education Trust Fund Act (TETFA)
6) Value Added Tax Act (VAT Act)
7) Capital Gains Tax (CGT)
8) Royalties
9) Niger Delta Development Commission Levy
 Legislation Provisions
1. The Petroleum Act
The Petroleum Act is the main legislation governing matters
relating to petroleum exploration and production in Nigeria.

2. Petroleum Profits Tax Act (PPTA)

Companies engaged in petroleum operation are subject to
tax under the PPTA.

3. Deep Offshore and Inland Basin Production Sharing

Contracts Act (DOIBPSCA)
The DOIBPSCA is the enactment which gives effect to the
fiscal incentives granted to oil and gas companies operating
in the Deep Offshore and Inland Basin areas under PSCs.
 Legislation Provisions
4. Companies Income Tax Act (CITA)
Companies operating in all other segments of the oil and gas
sector are assessed to CIT at 30% of taxable profits under CITA.
§ Also, non-crude oil related income / profits earned by
petroleum companies are liable to CIT, separately.

5. Tertiary Education Trust Fund Act (TETFA)

The Tertiary Education Trust Fund Act, 2011 requires every
company registered in Nigeria to pay 2% of its assessable profit
as Tertiary Education Tax (TET).
§However, petroleum companies are entitled to a taxNon-
Nigerian companies are not liable to pay the tax.
 Legislation Provisions
6. Value Added Tax Act (VAT Act)
VAT is charged at a flat rate of 5%, and is payable on supplies of
taxable goods and services, except those specifically exempted
from VAT.
§The Value Added Tax Act, 2004 as amended (VAT Act)
regulates the operation of VAT in Nigeria.
7. Capital Gains Tax (CGT)
The rate of CGT tax is currently 10% and is levied on capital gains
accruing on disposal of chargeable assets, irrespective of
whether the asset is situated in Nigeria or not.
§Capital gains accruing outside Nigeria to a non-resident
company or individual are subject to CGT only on the amount
received or brought into Nigeria.
§The Capital Gains Tax Act, 2004 as amended (CGTA)
regulates payment of CGT in Nigeria.
 Legislation Provisions
8. Royalties
ØThe Petroleum Act (1969) requires the holder of an OPL or
an OML, to pay royalties to the FGN as soon as production
starts.

ØThis is usually in the form of monthly cash payments at an

agreed percentage of the quantity of crude oil/gas produced,
after making adjustments for treatment, handling and related
expenses.
 Legislation Provisions
Royalties
The royalty rates currently applicable are as follows:
 Legislation Provisions
9. Niger Delta Development Commission Levy
The Niger Delta Development Commission Act requires
oil producing companies operating in Nigeria to pay an
annual contribution of 3% of their total annual budget to
the Commission.
The contribution will qualify as allowable deduction for
PPT purpose.
 Organization of the Petroleum Exporting Countries

OPEC is an intergovernmental organization currently made up of

twelve oil exporting countries that work together to coordinate
their petroleum policies.

v Formed in response to the activities of seven large IOCs

‒in 1959, the IOCs reduced the price of oil without consent
v In response, OPEC was form in September, 1960 in Baghdad
‒Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela
‒ First headquarters were located in Geneva, Switzerland
‒ In 1965, headquarters was move the to Vienna, the capital of Austria
v There are three categories of membership:
‒Founder Members,
‒Full Members and
‒Associate Members.
Organization of the Petroleum Exporting Countries
OPEC Membership:
Founder Members of the Organization are those countries
which attended the Baghdad Conference in 1960, and which
signed the original agreement establishing OPEC.

Full Members are all Founder Members, plus those countries

whose applications for membership have been accepted by
the Ministerial Conference.

Associate Members are countries which do not qualify for

full membership, but which are nevertheless admitted under
special conditions.
Organization of the Petroleum Exporting Countries
OPEC Membership:
Ø The oil producing capacity of each
Member Country is different. But
when it comes to making decisions
as an Organization, every country is
equal.
 Organization of the Petroleum Exporting Countries
Basic Mission of OPEC
q The 3 basic mission of OPEC are:
Ø Help stabilize oil markets
§ If demand suddenly grows and supplies fall short, OPEC
can increase its oil production in order to keep the market
well supplied.
§ If demand suddenly falls and supplies grow, OPEC can
slow down production in order to help maintain a balance
in the market.
Ø Ensure regular supply of oil available to consumers
§ OPEC tries to do this by working to avoid price extremes
§ When oil prices are too high or too low, problems can be
generated for the global economy.
Ø Ensure a steady income is generated for producers.
Petroleum Fiscal System and Contract Term
 Petroleum Fiscal Systems (PFS)

Ø Describe the legislative, tax, contractual and fiscal

elements under which petroleum operations are conducted
in a petroleum province, region or nation.

Ø Define the relationship between mineral owners (host

government) and the oil and gas companies (IOC, NOC).

Ø Determine equitably how cost are recovered and profits

are shared between firms, the host governments, and mineral
owners.
 Petroleum Operation Licences
q The Petroleum Act provides for 3 types of licences for
upstream operations:

§Oil Exploration Licence (OEL), (In practice, OEL’s are no

longer issued)

§Oil Prospecting Licence (OPL)

§Oil Mining Lease (OML).

 Oil Prospecting Licence, OPL

An OPL confers on the grantee the exclusive right to conduct

petroleum operations in the OPL area and to produce and
dispose of the produced hydrocarbons.

The duration of an OPL for onshore areas and shallow waters

is 5 years.

the duration of an OPL for Deep Offshore and Inland Basins is

10 years.
 Oil Mining Lease (OML)
An OML confers on the grantee the exclusive right to search for,
win, work, carry away and dispose of all petroleum in, under or
throughout the area covered by the OML.

An OML confers essentially the same rights as an OPL but the

duration of an OML is 20 years and may be renewed for a further
period of 20 years.

The applicant for an OML must be a holder of an OPL who has

discovered crude oil in commercial quantity.

Commercial quantity is deemed to have been achieved if the

OPL holder can satisfy the authorities that a production of
10,000 barrels per day of crude oil can be obtained from the OPL
area.
 Typical Host Government (HG) Objectives

Ø To ensure maximum economic benefits to the country.

Ø Other objectives:
§ Efficient resource development
§ Manpower development and training of nationals
§ Technology acquisitions
 Classification of Petroleum Fiscal System

q There are three types of petroleum agreements in the

upstream oil and gas sector:
ü Concessionary
ü Contractual
ü Joint Venture

v Fundamental difference:
§ Ownership of petroleum resources and
§ Taxation mechanism and imposition.
 Classification of PFS
Concessionary systems
Ø Concessionary systems allow private ownership of the
resources through transfer of rights and payments of
bonuses, royalties and taxes to HG.

§This was the arrangement operating in Nigeria

prior to the 1960s and 1970s

§ It has evolved over the years and now there are

several fiscal devices with layers of taxation methods
and levies in the system
 Classification of PFS
Contractual Systems
Ø Under contractual systems, the HG retains ownership of
petroleum resources

Ø Contractual arrangements are divided into two broad

categories:
i. Service contracts (Pure or Risk)
ii. Production sharing contracts (PSC) or PSA

v The primary difference between the two is the method of

payment for service, whether fee is taken by cash (service) or
in kind (PSC)
 Service Contracts
a) Pure Service Contract
Ø Under the pure service contract arrangement, the
contactor may undertake E&P activity for a flat fee payment
in cash or in oil for services rendered.

Ø In this type of arrangement, the contracting firm is working

for the host government and has no equity position, no
ownership of the discovered petroleum
 Service Contracts
b) Risk Service Contracts
Ø If exploration phase not successful
§ All costs borne by the contractor

Ø If exploration successful, development agreed

§Contractor is responsible for any cost overruns – Risk
§ NOC becomes operator after commissioning

Ø Once actual amortization period starts (buyback period)

§ Contractor must secure its payback in 5-8 years
 Production Sharing Contracts (PSC)
Ø PSC was first introduced in Indonesia in 1966.
§ Egypt and Libya adopted the arrangements early as
well.

Ø The Contractor is responsible for financing all the costs of

the various stages of petroleum operations, i.e. exploration,
development and production.

If the exploration is successful, the Contractor will be

entitled to recover its costs together with reasonable profit
on commencement of commercial production.

If the operation is not successful, then the Contractor will

bear all the losses.
 Joint Ventures
Joint Venture (JV) refers to the arrangements between the
government and IOCs, whereby both parties provide funding for the
exploration, development and production of petroleum, and the
hydrocarbons produced is shared in proportion to each party’s
participating interest.

The IOC is typically the operator, with a management committee

established to supervise operations.

This was the petroleum arrangement adopted in the 1960s and the
70s when OPEC countries decided to acquire participating interests
in petroleum operations in their countries.
 Joint Venture Types
q JVs broadly fall into one of three categories:
Ø Full asset JV with specific set of existing asset(s) or to develop
asset(s)--upstream JVs, pipelines, refineries and LNG projects.
§ Upstream full asset JV is the most common type

Ø Full business JV combines the resources of entire businesses to

create marketing, supply chain, production and scale synergies
§ Usually occurs in downstream, chemicals and midstream
businesses; as well as in oil field services companies within the
upstream sector

ØMarketing alliance JV has intent of jointly marketing product(s),

e.g., motor fuels retailers and convenience stores joining forces
 Joint Venture Activities

Ø May substantially weakened incentives for independent

competitive actions

Ø Enable the sharing of unusually large risks

Ø Facilitate smaller firms and investors entry into industry

they will not be able to enter individually

Ø Can promote efficiency in operations depending on the

partners
 Royalty

q Royalty is a percentage of gross value on amount of production

§ royalty = royalty rate (%) * production (bbl) * oil price ($/bbl)

Ø It can be paid in cash or kind and represents a cost of doing

business.
 Royalties- Nigeria Example
The Royalty rates prescribed by the Petroleum (Drilling and
Production) (Amendment) Regulation of 2006.

The royalty rate for crude oil production are as follows:

(a) In onshore areas ……….. 20%
In areas up to 100m water depth … … … 18.5%
In areas up to 200m water depth … … 16.5%
In areas from 201m to 500m water depth … 12.00%
In areas from 501m to 800m water depth … 8.00%
In areas from 801m to 1000m water depth …8%
In areas in water depth higher than 1000m …8%
Inland basins … … 10.0%
 Value Added Tax
VAT is generally applicable to oil and gas operations at a flat
rate of 5%.
However, exports, including export of hydrocarbons, is
exempted from VAT.

Other taxes and levies

There are also other taxes such as
§Education tax and
§Niger Delta Development Commission (“NDDC”) levy
§Etc
 Taxation on Profit
Ø Profit based taxation
Ø Reflects government share of risk
Ø Type of taxes
§ Corporate income tax
§ Special petroleum tax
§ and other taxes
q Oil Service Companies
Ø Activities of service companies operating in either the
upstream or downstream sector is subject to the Companies
Income tax which is assessed at the rate of 30%. Typically, oil.

ØActivities in the downstream sectors is subject to Companies

Income Tax and not petroleum profits tax.
 Downstream Fiscal incentives for gas utilization projects
qThere are a wide range of fiscal incentives for gas utilization projects including the
following:
§ An initial tax holiday period of 3 years which may be renewed for an additional
period of two years subject to the satisfactory performance of the business.

§ The tax – free period of a Company will start on the day the Company
commences production as certified by the Ministry of Energy.

§ Accelerated capital allowances after the tax holiday of 90% annual allowance
with 10% retention for investment in plant and machinery.

§ An Investment Tax Allowance (“ITA”) for qualifying capital expenditure of 15%

which shall not reduce the value of the asset.

§ Allowance of interest on loans for gas project as deductible expenses provided

that prior approval is obtained from the Federal Ministry of Finance.

§ Exemption of plant, machinery and equipment purchased for utilization of gas in

downstream petroleum operations from VAT.