The production sharing contract (PSC) has become a cornerstone of upstream petroleum exploration and production in Nigeria, particularly for offshore and inland basin resources. PSCs offer a distinct contractual framework that encourages foreign investment by allowing international oil companies (IOCs) to bear the financial and operational risks of exploration and production. These contracts enable resource ownership to remain with the state while granting IOCs a share of the produced crude oil to recoup costs and generate profit. This arrangement has replaced the joint venture contracts (JVCs) previously used, addressing challenges such as the Nigerian government's inability to meet cash call obligations under the JVC system. Despite its advantages, Nigeria's PSC framework is plagued by fiscal and regulatory uncertainties, particularly concerning taxation and cost recovery. Disputes between the Nigerian National Petroleum Corporation (NNPC) and IOCs frequently arise, creating an adversarial rather than collaborative relationship. Key issues include ambiguities in the Deep Offshore and Inland Basin Production Sharing Contracts Act and the Petroleum Profits Tax Act, conflicting court decisions on cost consolidation and recovery, and a lack of transparency in fiscal regimes. These challenges hinder Nigeria’s ability to maximize revenue from its petroleum resources while undermining investor confidence.
This study examines the fiscal framework governing PSCs in Nigeria, exploring the underlying legal and policy issues. It highlights the critical need for reforms to address ambiguities, promote transparency, and establish a coherent tax regime. The research underscores the importance of striking a balance between national interests and creating a favorable investment climate in Nigeria’s upstream petroleum sector.
TABLE OF CONTENTS
Title i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Table of Statutes vi
Table of Cases x
List of Abbreviations xiii
Table of Contents xiv
Abstract xxii
CHAPTER ONE
GENERAL INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Research Problem 6
1.3 Aim and Objectives of the Research 8
1.4 Scope and Limitations of the Research 9
1.5 Research Methodology 9
1.6 Literature Review 10
1.7 Justification of the Research 20
1.8 Organizational Layout 20
CHAPTER TWO
CONCEPTUAL ANALYSIS OF PRODUCTION SHARING CONTRACTS IN NIGERIA
2.1 Introduction 24
2.2 The Concept and Features of Production Sharing Contracts 25
2.3 History of Production Sharing Contracts in Nigeria 29
2.3.1 The 1973 Production Sharing Contract 30
2.3.2 The 1993 Model Production Sharing Contract 33
2.3.3 The Post 1993 Model Production Sharing Contracts 39
2.4 General Outline of Production Sharing Contracts 40
2.4.1 Recital/Preamble 40
2.4.2 Definitions 40
2.4.3 Scope 41
2.4.4 Term 41
2.4.5 Exclusion of Areas 42
2.4.6 Work Programme and Expenditure 43
2.4.7 Management Committee 44
2.4.7.1 Powers and Duties of the Management Committee 44
2.4.7.2 Appointment and Membership of the Management Committee 46
2.4.7.3 Procedure of Meetings of the Management Committee 48
2.4.7.4 Decision making Procedure of the Management Committee 49
2.4.7.5 Emergency Decision Making Procedure of the Management Committee 51
2.4.7.6 Sub-Committees of the Management Committee 52
2.4.8 Rights and Obligation of the Parties to the Production Sharing Contract 53
2.4.8.1 Rights and Obligations of the Contractor 53
2.4.8.2 Rights and Obligations of the Corporation 56
2.4.9 Recovery of Operating Costs and Crude Oil Allocation under the Production
Sharing Contract 57
2.4.10 Valuation of available Crude Oil under the Production Sharing Contract 61
2.4.11 Payments under the Production Sharing Contracts 64
2.4.12 Title to Equipment under the Production Sharing Contract 64
2.4.13 Employment and Training of Nigerian Personnel under the Production Sharing
Contract 66
2.4.14 Books and Accounts, Audit and Overhead Charges under the Production
Sharing Contract 68
2.4.14.1 Books and Accounts 68
2.4.14.2 Audits 68
2.4.14.3 Home Office Overhead Charges 69
2.4.15 Bonuses 70
2.4.15.1 Signature Bonus 70
2.4.15.2 Production Bonus 71
2.4.16 Royalty and Taxes 71
2.4.16.1 Royalty 71
2.4.16.2 Taxes and investment tax credit 73
2.4.17 Insurance 74
2.4.18 Confidentiality and Public Announcements 75
2.4.19 Force Majeure 79
2.4.20 Laws and Regulations 80
2.4.21 Utilization of natural gas 83
2.4.22 Consultation and Arbitration 84
2.4.23 Effectiveness and Notices 86
2.4.24 Other parts of the 1993 production sharing contracts 87
2.5 Differences between Production Sharing Contracts and other Petroleum
Arrangements in Nigeria 87
2.5.1 The Concession System 88
2.5.2 The Joint Venture Contract System 91
2.5.3 The Service Contracts System 96
2.5.4 Marginal Fields 100
CHAPTER THREE
FISCAL FRAMEWORK FOR PRODUCTION SHARING CONTRACTS IN NIGERIA
3.1 Introduction 104
3.2 Fiscal Framework of Production Sharing Contracts 106
3.2.1 The Deep Offshore and Inland Basin Production Sharing Act 106
3.2.2 Duration of Oil Prospecting Licences Relating to Production Sharing Contracts- 110
3.2.3 Determination and Payment of Applicable Taxes and Royalties under the Deep
Offshore and Inland Basin Production Sharing Contracts Act 111
3.2.3.1 Determination and Payment of Petroleum Profits Tax 112
3.2.3.2 Determination of Investment Tax Credit and Investment Tax Allowance 117
3.2.3.3 Determination and Payment of Royalty under Production Sharing Contracts 123
3.2.4 Allocation of Crude Oil under Production Sharing Contracts 126
3.2.4.1 Allocation of Royalty Oil 127
3.2.4.2 Allocation of Cost Oil 127
3.2.4.3 Allocation of Tax Oil 130
3.2.4.4 Allocation of Profit Oil 130
3.2.5 Adaptation of Laws and Periodic Review of the Deep Offshore and Inland
Basin Production Sharing Contracts Act 131
3.3.1 Deep Offshore and Inland Basin Production Sharing Contracts
(Amendment) Act, 2019 137
3.3.1.1 Determination and Payment of Royalty under the Deep Offshore and Inland
Basin Production Sharing Contracts (Amendment) Act, 2019 138
3.3.1.2 Periodic Review of Production Sharing Contracts under the Deep Offshore
and Inland Basin Production Sharing Contracts (Amendment) Act, 2019 143
3.3.1.3 Penalty regime for non-compliance with the Deep Offshore and Inland
Basin Production Sharing Contracts (Amendment) Act, 2019 146
3.4.1 Petroleum Profits Tax Act 151
3.4.1.1 Imposition of Chargeable Tax 153
3.4.1.2 Ascertainment of Profits, Adjusted Profits, Assessable Profits and Chargeable
Profits 155
3.4.1.3 Allowed deductions under Petroleum Profits Tax Act 160
3.4.1.4 Deductions not allowed and artificial transactions 164
3.4.1.5 Assessable tax 168
3.4.1.6 Accounting and return of estimated tax 168
3.4.1.7 Notice of assessment and objections 170
3.4.1.8 Notice of refusal to amend 171
3.4.1.9 Appeals 171
3.5 Other Fiscal Obligations Applicable to Production Sharing Contracts- 172
3.5.1 Rents 172
3.5.2 Fees 173
3.5.3 Bonuses 174
3.5.4 Oil terminal dues 175
CHAPTER FOUR
AN APPRAISAL OF THE LEGAL FRAMEWORK FOR REGULATION OF PRODUCTION SHARING CONTRACTS IN NIGERIA
4.1 Introduction 177
4.2 The Petroleum Act and the Minister of Petroleum Resources 178
4.2.1 The right of pre-emption and the powers of the Minister of Petroleum Resources- 180
4.2.2 Offences under the Petroleum Act 183
4.3 Regulatory Institutions for Production Sharing Contracts 186
4.3.1 The Ministry of Petroleum Resources 186
4.3.2 The Role of the Department of Petroleum Resources as an arm of the Ministry of
Petroleum Resources 188
4.3.4 The Nigerian National Petroleum Corporation 192
4.3.4.1 General duties of the Nigerian National Petroleum Corporation 194
4.3.4.2 Powers of the Nigerian National Petroleum Corporation 196
4.3.4.3 The role of National Petroleum Investment Management Services as an Arm of the
Nigerian National Petroleum Corporation 197
4.3.5 The Nigerian Content Development and Monitoring Board - 199
4.3.5.1 The functions of the Nigerian Content Development and Monitoring Board- 202
4.3.5.2 Offences and penalties under the Nigerian Oil and Gas Industry Content
Development Act 205
4.3.6 The Nigeria Extractive Industries Transparency Initiative 206
4.3.6.1 The objectives of the Nigeria Extractive Industries Transparency Initiative - 208
4.3.6.2 The functions of the Nigeria Extractive Industries Transparency Initiative 208
4.3.6.3 Offences and penalties under the Nigeria Extractive Industries Transparency Initiative Act 211
4.3.7 The Federal Inland Revenue Service 213
4.3.7.1 The Functions of the Federal Inland Revenue Service 214
4.3.7.2 Tax Administration by the Federal Inland Revenue Service 217
CHAPTER FIVE
PROSPECTS AND CHALLENGES IN THE OPERATION OF PRODUCTION SHARING CONTRACTS IN NIGERIA
5.1 Introduction 220
5.2 Challenging Clauses in Production Sharing Contracts 221
5.2.1 Background of the Dispute leading to the Arbitration between Statoil Nig. Ltd
& Anor. vs NNPC over Production Sharing Contracts 222
5.2.2 Jurisdiction of the Arbitration Tribunal and Arbitrability of tax Disputes under
Production Sharing Contracts 224
5.2.3 Costs Consolidation as opposed to costs ring-fencing for Costs Recovery and
Petroleum Profits Tax Purposes 237
5.2.4 Investment tax credit: whether the claimants are entitled thereto 246
5.2.5 Dispute over Interests on Inter-Company Loan as Allowable Tax Deductions Pursuant to
Section 10 of the Petroleum Profits Tax Act 252
5.3 Select Decisions of the Federal High Court on the Operation of Production
Sharing Contracts in Nigeria 257
5.3.1 Nigerian National Petroleum Corporation and Statoil Nig. Ltd & Texaco Nig.
Outer Shelf Ltd 258
5.4 Proposed Reforms in the Petroleum Industry 262
5.4.1 The Petroleum Industry Governance Bill 262
5.4.2 The functions and powers of the Minister of Petroleum Resources under the
Petroleum Industry Governance Bill 263
5.4.3 The Establishment of the Nigeria Petroleum Regulatory Commission 265
5.4.4 The Establishment of the Ministry of Petroleum Incorporated 266
5.4.5 The Nigeria Petroleum Assets Management Company and The National
Petroleum Company 267
5.4.6 The Nigeria Petroleum Liability Management Company 272
5.4.7 Adaptation and repeal of existing laws in the petroleum industry under the Bill - 273
CHAPTER SIX
SUMMARY AND CONCLUSION
6.1 Summary 277
6.2 Findings 278
6.3 Recommendations 281
Bibliography 285
