• Tuesday, October 03, 2023
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Petroleum Industry Act: Impact on indigenous oil & gas companies and NNPC


The long-awaited Petroleum Industry Bill (PIB) was finally signed by the Nigerian President on 16 August 2021. The Petroleum Industry Act (“PIA” or “the Act”) aims to provide legal, governance, regulatory and fiscal framework for the Nigeria Petroleum Industry, the development of host communities and related matters. The Act essentially seeks to build a competitive and resilient petroleum industry that will attract investment, create a regulatory environment that would ensure efficiency and accountability across the oil and gas value chain, improve Nigeria’s revenue base, create jobs and support the country’s economic diversification agenda, amongst others.

This article is focused on the impacts that the Act will have on the activities of indigenous oil and gas companies e.g., marginal field operators, as well as on the Nigerian National Petroleum Corporation (“NNPC” or “the Corporation”).

Indigenous oil & gas companies

The impact of the PIA on these companies will result mainly from the fiscal framework of the Act on their operations. Among the objectives of the fiscal framework contemplated by the Act is to encourage investment in the petroleum industry, while also optimizing revenues accruing to the Government. Similarly, the regulatory framework also seeks to enshrine transparency in the administration of the sector and the promotion of Nigerian content in the industry through efficient and effective administration of the Act.

Read Also: Buhari approves steering committee on Petroleum Industry Act

We have highlighted below some of the impacts of the PIA on the indigenous companies and the NNPC:

Enactment of the PIA lays to rest the hitherto fiscal framework; the Petroleum Profit Tax (PPT), which is now replaced with Nigeria Hydrocarbon Tax (NHT) & Companies Income Tax (CIT) for companies engaged in upstream petroleum operations. Although, this might not seem incentivizing in the first instance, however, an evaluation of the change might be required on the operations of the companies to ascertain the actual impact before taking a position. A direct evaluation would be in the rates of the taxes. While the PPT contemplates a tax rate of 85% (or 65.75% for companies in their first 5 years of operations), the PIA provides for a NHT of 15% to 30% for onshore and shallow waters (and was silent on deep water i.e., deep offshore), and a 30% CIT rate. The combined tax rates do seem less than the PPTA rate of 85%. Thus, only a well simulated position would provide an optimizing position on the impact of the changes to the business’ operations.

The previous fiscal regime did allow for gas expenditure to be taken against oil income. However, with the PIA, this practice will no longer be allowed going forward.

Considering the huge capital requirements for new projects in the oil and gas industry, restrictions on the deductibility of some valid operating expenses such as head office costs incurred outside Nigeria as well as the maximum cost recovery limit of 65% might also require some evaluation to determine what impact it has on their operations. The restrictions do seem to be at cross purposes with the objective of promoting new foreign investment in the industry. On the positive side however, incurring such expenses in Nigeria to meet deductible requirements can result in more local involvement and increased revenue for the government.

The replacement of Investment Tax Allowance (ITA) & Investment Tax Credit (ITC) with production allowance is also another addition that now allows for uniformity in the fiscal provisions. However, already existing investments would need to ascertain how these changes might affect their economic projections, with a view to ensuring an optimizing option is opted for, as a sudden change could result in distortion in the project economics due to the loss of the capital uplift succor created by the ITA or ITC for companies. The production allowance is only claimable by companies that commence production post PIA or those who opt for a conversion.

The Introduction of cost consolidation for companies in the upstream petroleum operations now implies that losses from some assets can be offset against the profit-making ones thereby leading to reduced effective tax rates for companies in this category.

Though the Act seeks to reduce the royalty on oil in the onshore areas, gas royalty due on natural gas will lead to increased cost for oil and gas companies while increasing the revenue base of the government. Companies may need to evaluate the impact of this on their existing and potential business in view of the industry volatility and pricing of gas in Nigeria.

Nigerian National Petroleum Corporation (NNPC)

In Nigeria, prior to the PIA, the oil and gas industry was highly regulated by the government, with the NNPC acting as the agent of the government for purposes of the regulation. Being a player as well as a regulator creates some independence challenges, thus, could be a disincentive for private sector players in the industry i.e., to both existing and potential players/ investors.

However, the governance framework provided by the PIA now addresses that challenge and NNPC will now transform into a limited liability company i.e. it is commercially oriented, profit-driven and partially independent of the government. This development is expected to make the oil sector more competitive and effective by attracting more domestic and foreign investors.

The Federal government is mandated to within 90 day effect the changes and transformation of the Corporation. The transformation is expected to have a significant impact on the Corporation, as its hitherto functions and structure would be greatly impacted. Key among the considerations would be the effect of the restructuring on the employees of the Corporation. Under the former regime, employees of the NNPC and its ancillary agencies / subsidiaries were considered employees of the corporation. Post implementation of the PIA, what would be the fate of these employees, how would the assignment of staff be done and matching of skill sets to job requirements.

Another key consideration would be the impact of the employees related obligations in the area of retirement benefits etc. These are some key factors the Corporation must as a matter of urgency be looking at critically as it prepares to commence its unbundling.


The enactment of the PIB into law is a positive first step, considering the importance of attracting foreign direct investments (FDI) in the industry. However, some of the teething challenges which typically accompany implementation of new legislations would need to be looked at critically to ensure that the overarching objectives of introducing the Act are not watered down or lost in the course of its implementation. As only then would the objective of attracting new FDI into the industry be ensured.

Stakeholders should be interested in ensuring that their operations under the Act are not in any way sub-optimized, while also enhancing the sector’s fiscal stability, attracting FDI and also promoting and achieving the well-intended reform of the oil and gas industry.

Samagbeyi and Orobiyi write from EY in Nigeria