Petroleum industry: regulators, licences, fiscal regimes and conversion under the PIA

A company holds an old oil mining lease granted in the 1990s and a new petroleum mining lease granted after 2021. The old lease is taxed under the Petroleum Profits Tax Act. The new one is taxed under the Petroleum Industry Act (PIA) 2021 with hydrocarbon tax and company income tax. One return, three computations, and a split year if the old lease was converted part-way through.

Before any figure can be worked out, you need to know who regulates the company, which licence it holds and which fiscal regime applies. That is the work of this topic.

This topic covers the ownership of petroleum, the regulators and the national oil company, the three upstream licences, the fiscal and operating arrangements, the accounting period, and conversion and transition from the old regime. It opens the extractive industries part of the syllabus (area F, 20% of marks). The previous topic covered tax accounting and reporting. The next covers hydrocarbon tax and company income tax of petroleum companies.

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:

• governance and regulatory institutions in the oil and gas industry;
• general administration, licences and leases;
• fiscal and operating regimes in the upstream sector, accounting period, conversion and transition.

CAMA 2020 and the petroleum industry

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

Ownership and aims of the PIA

The property in petroleum, in Nigeria, its territorial waters, continental shelf and exclusive economic zone, is vested in the Government of the Federation. The PIA 2021 sets out to create efficient institutions with separate roles, set up a commercially minded national oil company, promote transparency and accountability, create a good climate for business and deepen local content.

Its general aims include the efficient and sustainable development of the industry, safe infrastructure, third-party access to infrastructure, local and foreign investment, competitive markets, safe and affordable petroleum products, local processing and the protection of health, safety and the environment.

The institutions

NNPC Limited’s objectives. To carry on petroleum operations commercially; to be concessionaire of production sharing, profit sharing and risk service contracts for the Federation; to lift and sell royalty oil for the Commission and tax oil for the revenue service for an agreed fee; to remit the proceeds of profit oil and profit gas, with 30% going to the Frontier Exploration Fund; to carry out test marketing; to hold rights to natural gas under production sharing contracts; to take over NNPC’s working interests in joint operating agreements; to invest in renewables; to promote domestic gas use; and to be the supplier of last resort, with costs for the Federation.

The old NNPC’s assets and liabilities are transferred to NNPC Limited within 18 months of the effective date. The old NNPC ceases to exist when its remaining assets and liabilities are settled. Employees move on terms no less favourable.

The three upstream licences

Fiscal and operating arrangements

• Joint venture. NNPC Limited and a partner work together under a joint operating agreement. Profits are taxed under the new Act as hydrocarbon tax and company income tax. Parties may voluntarily restructure as an incorporated joint venture company, a limited liability company run on commercial principles and outside the Fiscal Responsibility Act and the Public Procurement Act.
• Production sharing contract. The contractor takes the exploration and production cost and risk and recovers costs from a share of production; the rest is split between government and contractor.
• Risk service contract. The contractor provides services and is paid a fee, bearing the risk and cost of exploration and production.
• Oil and gas free trade zone. A designated area with favourable regulatory and fiscal terms to attract investment.

The accounting period

For a company in upstream operations, the accounting period is:

• the year from 1 January to 31 December for an ongoing business;
• a shorter period from the date of its first sale or bulk disposal of chargeable oil to 31 December of the same year; or
• a period from 1 January to the date it stops petroleum operations.

If the date of first sale or cessation is disputed, the Commission decides and there is no appeal. The accounting date is 31 December each year. Hydrocarbon tax and income tax on petroleum operations both use the actual year basis.

Conversion and transition

• Conversion. Old oil prospecting licences and oil mining leases may convert to PPLs and PMLs. The voluntary window ran for 18 months from the effective date of 16 August 2021; a conversion contract is signed with the regulator. A holder who does not convert stays under the old regime until the licence or lease expires, and after that can continue only under the PIA.
• Tax after conversion. Hydrocarbon tax and company income tax replace the petroleum profits tax. Unabsorbed losses and unrecouped capital allowances under the old Act carry into hydrocarbon tax and company income tax; the old investment tax credit does not.
• Year of conversion. The old Act applies from 1 January to the conversion date and the PIA rules from that date to 31 December, and the tax is computed under each.
• Mixed licences. A company with converted and unconverted assets files one annual return with three computations: petroleum profits tax for the unconverted assets, and hydrocarbon tax and company income tax for the converted. The petroleum profits tax is usually at the rate of 85%. Failure to separate the computations invites penalties. The company must notify the revenue service on conversion and give the documents.
• Compliance on conversion: separation of upstream, midstream and downstream; a host community development trust; a decommissioning and abandonment plan; an environmental management plan; and returns on the new basis, with self-assessment forms and evidence of payment.

Worked examples

1. (a) A petroleum exploration licence: non-exclusive, 3 + 3 years, no right to carry away petroleum; the data belongs to the Commission, and a data use licence needs approval.
2. (b) A petroleum prospecting licence: exclusive right to drill exploration and appraisal wells and to sell test production.
3. (c) A petroleum mining lease: exclusive right to win and sell, up to 20 years.

1. The lease can last up to 20 years, until 31 December 2042, and can be renewed for further terms of up to 20 years each while it produces in paying quantities.
2. After 10 years, on 1 January 2033, the lessee must give up parcels outside the producing field and deeper formations.
3. If the lessee fails to remedy a default after a notice of at least 60 days, the Minister may revoke the lease.

1. One annual return, with three computations.
2. (1) Petroleum profits tax for the unconverted lease, usually at 85%.
3. (2) Hydrocarbon tax for the converted lease. (3) Company income tax for the converted lease.

1. It may retain 20% to grow the business: ₦20bn.
2. The balance may be declared as dividends to the Ministry of Finance Incorporated and the Ministry of Petroleum Incorporated in equal parts, ₦40bn each.
3. It also pays its share of royalties, rents and taxes like any other company.

How to score full marks

• Name the body, its section and its role: upstream, midstream or commercial.
• Set out licences in a table: right, term, who grants.
• Give the dates: 16 August 2021, 18 months, 31 December.
• State the three computations for mixed assets.
• Add what carries across on conversion and what does not.

Common mistakes in the exam

• Giving NUPRC the midstream functions.
• Saying a PEL grants exclusive rights.
• Writing 10 years as the PML term, instead of up to 20 with relinquishment at 10.
• Carrying the investment tax credit into hydrocarbon tax.
• Using two computations for a mixed company instead of three.
• Forgetting that the accounting period ends on 31 December.

Quick revision

• Petroleum belongs to the Federation.
• NUPRC upstream; NMDPRA midstream and downstream; NNPC Limited commercial.
• PEL 3 + 3; PPL exclusive drilling; PML up to 20 years, relinquishment at 10.
• JV, IJVC, PSC, RSC, free trade zone.
• Conversion window: 18 months from 16 August 2021; year-end 31 December.
• 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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