Petroleum royalty, gas incentives, the Frontier Exploration Fund, marginal fields, decommissioning and the host community trust

A company produces two million barrels a month onshore. Before it touches a tax computation it must work out its royalty. Royalty has two parts: a rate by volume that depends on where the field is, and a rate by price that rises with the Brent price.

It must also pay 3% of its operating costs into a trust for the host communities, put money aside for the day the field is closed, and, if it develops gas, claim a credit that depends on how much oil comes out with the gas. None of these is income tax, yet each decides how much cash the company keeps and how much it may deduct.

This topic covers petroleum royalty, the tax credits and allowances for gas and deep offshore projects, the Frontier Exploration Fund, marginal fields, the decommissioning and abandonment fund and the host community development trust. The previous topic covered hydrocarbon tax and company income tax. The next covers offences, filing and enforcement.

Key terms in plain English

Syllabus check

This topic is in syllabus area F (taxation of incomes of extractive industries, 20% of marks). It covers:

• royalty, gas and deep offshore incentives, tax credits and the Order of 2024;
• the Frontier Exploration Fund, drilling by NNPC Limited and the Frontier Basin Exploration and Development Plan Committee;
• marginal fields, the decommissioning and abandonment fund and the host community development trust.

CAMA 2020 and these obligations

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Petroleum royalty

Royalty is worked out each month. For crude oil and condensate it is by production and by price; for natural gas and natural gas liquids it is by production. Condensate is treated as crude oil and natural gas liquids as natural gas. The Petroleum Industry Act (PIA) 2021 set the rates, and s. 89 and the Seventh Schedule of the NTA confirm them.

By production, on the chargeable volume of the field in the month:

A deep offshore field producing not more than 50,000 barrels a day pays 5%, and the share above that pays the rate in the table.

By price, on the Brent price per barrel:

Between US$50 and US$100, and between US$100 and US$150, the rate is found by straight-line interpolation. There is no royalty by price for frontier acreage, and royalty by price is credited to the Nigerian Sovereign Investment Authority. Royalty is deductible, and outside the cost price ratio.

Gas incentives under the NTA (s. 85)

For non-associated gas greenfield developments onshore and in shallow water that reach first commercial production between the start of the Act and 1 January 2029:

• The credit applies to sales of non-associated gas for 10 years from first gas. After that, a gas production allowance at the same rates applies instead; the credit and allowance are not given for the same period.
• The credit used in a year cannot be more than the tax payable on that income for the year, subject to any minimum tax. An unused credit is carried forward for up to 3 years.
• Projects with first gas after 1 January 2029 get only the gas production allowance, at the lower of US$0.50 and 30% of the fiscal gas price, where liquids do not exceed 100 barrels.
• The fiscal gas price is the one used for royalty; the Commission certifies the liquids ratios.
• A company that has claimed Associated Gas Framework Agreement incentives for the same project may not claim these.
• Force majeure may suspend the timelines with the Commission’s approval.

The Oil and Gas Companies (Tax Incentives, Exemption, Remission, etc.) Order 2024 started this framework, with implementation guidelines from the revenue service and the Commission. It also created a gas utilisation investment allowance of 25% of the cost of plant and equipment for midstream gas companies licensed by the NMDPRA, which is lost if the plant is sold or used for another purpose within five years, or the cost is artificial.

Its limits include unclear rules on the switch from credit to allowance, on measuring liquids and on monitoring.

Deep offshore. The Deep Offshore Oil and Gas Projects Incentives (Tax Remission) Order 2026, signed on 6 August 2026, gives qualifying deep offshore oil and non-associated gas developments production tax credits. For gas with liquids up to 30 barrels per million cubic feet the credit is the lower of US$1.00 per thousand cubic feet and 30% of the fiscal gas price, and future leases get a further US$1.00 a barrel for crude oil.

In a month when the fiscal oil price is below US$50 the credits are paid at half the rate. The credits cannot be combined with the production allowance or the Associated Gas Framework Agreement incentives. The Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025 lets a company that cuts operating cost below the benchmark keep up to half the saving as tax credits.

The Frontier Exploration Fund

• The Commission sets up a Frontier Exploration Fund Escrow Account within 90 days of the regulations, and uses it to promote exploration in the frontier basins.
• NNPC Limited pays into it 30% of the proceeds of profit oil, and of profit gas and its liquids, under production sharing contracts, at the fiscal price.
• The Commission runs studies, builds a data base and a frontier data catalogue (geophysical, gravity, electromagnetic, aeromagnetic and other data) in the National Data Repository, finds and ranks prospects and leads, and may ask NNPC Limited to drill the best of them on a service fee. If NNPC Limited does not offer a programme in time, the Commission licenses the area in a bidding round.
• Before approving a drilling programme the Commission checks that earlier licences have ended, the data has been evaluated, no other programme exists and the fund can pay the budget, which must also be appropriated by the National Assembly.
• NNPC Limited has a right of first refusal on a commercial find; if it declines, the Commission may offer the area to others.
• The Frontier Basin Exploration and Development Plan Committee, chaired by the Commission’s chief executive, prepares the annual plan, the funding proposal and contractor selection rules, and reviews NNPC Limited’s work each quarter. Frontier acreage is outside hydrocarbon tax until reclassified.

Marginal fields

A marginal field is one declared marginal before 1 January 2021, or idle for seven years after its first find before the effective date. Producing marginal fields keep their original royalty rates and terms and convert automatically to petroleum mining leases within 18 months. Non-producing marginal fields convert to petroleum prospecting licences for onshore and shallow water acreage, valid for up to six years (three years plus an optional three).

A holder that does not develop a field must present a field development plan or farm it out with the Commission’s permission. A field surrendered to the government can be offered afresh in a bid round. The PIA does not allow new finds to be declared marginal fields.

Decommissioning and abandonment fund

Section 233 of the PIA requires every lessee and licensee to set up, keep and manage a fund used only to pay for decommissioning and abandonment. The upstream Commission regulates it, and the Authority regulates it for midstream and downstream operations.

Access is only with written approval of the programme; an excess after approved work is income and is returned after profit oil and tax; a shortfall is made good by the licensee. Contributions are deductible.

For the tax deduction, s. 86 of the NTA requires the licensee or lessee to deposit at least 30% of the fund with a Nigerian bank, in an escrow account open to the Commission or Authority. The bank must confirm the deposit.

Holders of old licences who have not converted are outside this rule until the licence ends. Their contributions are deductible if the fund is approved by the Commission and the statement of account is produced.

The host community development trust

Section 234 of the PIA creates the trust to foster prosperity, give direct social and economic benefit, encourage peaceful co-existence and support development. The settlor (the licensee or lessee, through the operator) incorporates a trust with a board of trustees registered by the Corporate Affairs Commission, in consultation with the host communities:

• within 12 months of the effective date for existing mining leases and designated facilities;
• before applying for a field development plan under an old prospecting licence, a new prospecting licence or a new mining lease; or
• before commercial operations begin for a designated facility.

Failure can lead to revocation of the licence or lease (s. 238). The trust’s objects include projects and infrastructure, economic development, education, health, local environmental and security initiatives and investment of part of the fund (s. 239).

Funding (s. 240). Each settlor pays every year 3% of its actual operating expenditure of the previous financial year in the upstream operations affecting the host communities. The trust may also take donations and grants, and profit on the reserve fund is added to the fund.

Allocation (s. 244). Each year the trustees put 75% in the capital fund for projects (unspent sums roll over), 20% in the reserve fund (invested for use when contributions stop) and not more than 5% to cost of administration and special projects (unused sums go to the capital fund). The settlor gives a matrix for sharing the fund among communities and accounts for its use; the trust’s year ends on 31 December.

The regulators may allow cost cuts, such as fewer trustees and meetings, when funds are short. The contribution is a deductible expense and sits outside the cost price ratio.

Worked examples

1. Royalty by production.
   15% × 2,000,000 = 300,000 barrels.
2. Royalty by price at US$80: between US$50 (0%) and US$100 (5%), so 5% × (80 − 50) ÷ 50 = 3%
   3% × 2,000,000 = 60,000 barrels.
3. Total = 360,000 barrels, worth 360,000 × US$80 = US$28.8m.

1. US$75: 5% × (75 − 50) ÷ 50 = 2.5%.
2. US$125: 5% + 5% × (125 − 100) ÷ 50 = 7.5%.

1. Credit per thousand cubic feet.
   lower of US$1.00 and 30% × 3.00 = US$0.90, so US$0.90.
2. Sales = 40,000 million = 40,000,000 thousand cubic feet.
   Credit = 0.90 × 40,000,000 = US$36m.
3. It cannot exceed the tax payable, so US$30m is used and US$6m is carried forward for up to 3 years.

1. Contribution = 3% × 200 = US$6m.
2. Capital fund 75% = US$4.5m; reserve fund 20% = US$1.2m; administration up to 5% = US$0.3m.
3. The contribution is deductible for tax and sits outside the cost price ratio.

1. To deduct the contribution, at least 30% of the fund, US$30m, must be in an escrow account with a Nigerian bank, confirmed by the bank.
2. If US$30m is in escrow, the US$12m is deductible. If only US$20m is there, the condition is not met.
3. Any surplus at the end is taxable income.

How to score full marks

• Split royalty into the rate by production (by terrain) and the rate by price.
• Interpolate in a straight line and show the working.
• State the conditions of each incentive: liquids content, first gas date, 10 years, 3 years.
• Give the 3% contribution and its 75, 20 and 5 split for the host community trust.
• Quote the section: NTA s. 85, s. 86 and s. 89; PIA ss. 233 and 234.

Common mistakes in the exam

• Giving one rate for all terrains.
• Forgetting that royalty by price is additional to royalty by production.
• Letting a gas tax credit exceed the tax payable.
• Using 15% as the escrow deposit for the decommissioning deduction.
• Putting the 3% on revenue instead of operating expenditure.
• Treating the host community contribution as non-deductible.

Quick revision

• Royalty: 15%, 12.5%, 7.5%, 7.5%; price: 0 below US$50, 5% at US$100, 10% at US$150.
• Gas credit: US$1.00 or 30% (up to 30 barrels); US$0.50 or 30% (30 to 100); 10 years; carry forward 3 years.
• Frontier Exploration Fund: 30% of NNPC Limited’s profit oil and gas.
• Decommissioning fund: at least 30% in a Nigerian bank to deduct.
• Host community trust: 3% of operating expenditure; 75, 20, 5.
• CAMA 2020: ss. 54, 119, 305, 308, 377(1), 378.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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