Oil was first discovered in commercial quantities in Nigeria in 1956 near Olobiri Village in the Rivers State. The discovery was made by Shell D'Arcy (a company of Anglo/Dutch origins). The company began production in 1958 with an average production of 6000 barrels per day (bpd). The national production rate is currently 2 million bpd.

Nigerian oil is light and low in sulphur, it consequently commands premium prices. Nigeria has oil reserves of 20 billion barrels. The government has set targets of 25 billion barrels of proven reserves and a production of 2.5 bpd to be achieved by 1999.

The excellent quality of her oil, her longstanding economic relationship with Europe and America (the largest markets for crude and petroleum products) and her geographical position has seen Nigeria emerge as a major player in the international oil market. Today, Nigeria is the 8th largest producer of oil in the world, the largest African producer, and the 5th largest OPEC producer. Oil exports account for 75% of Nigeria's Government revenue and 95% of her export earnings.

Soon after the Olobiri oil discovery and with the repeal of the law restricting the grant of exploration rights to British companies, other international companies joined Shell in the search for oil in Nigeria. These included Gulf Oil, Mobil, Texaco (American); Agip (Italian) and Elf (French) among others. Nevertheless Shell remained the leader, having gained a head start on its competitors, and it remains pre-eminent today.

The oil industry in Nigeria is dominated by the multinational companies who exploit the resources in co-operation with government.


In the 1960's, government's interest in the oil industry was limited to the collection of taxes, royalties and lease rentals. Many developing countries had begun to agitate for greater control over their natural resources, in reaction to the continued control of their economies by the old colonial masters. In 1962 the Resolution on Permanent Sovereignty over Natural Resources was adopted by a majority of the General Assembly of the United Nations. The Resolution asserted that the right of people to freely use and exploit their natural wealth and resources is inherent in their sovereignty. In this spirit, in 1969 the Petroleum Act was enacted which vested the entire ownership and control of all petroleum in, under or upon all land or Nigerian territorial waters in the Nigerian government.

In 1971 Nigeria joined the Organisation of Petroleum Exporting Countries (OPEC). OPEC'S was formed to improve the lot of oil producing countries by adopting a"group" stance (all resolutions adopted are binding on every member).

In accordance with OPEC'S 1968 and 1971 Resolutions urging member countries to participate in oil operations by acquiring ownership in the concessions held by foreign companies, Nigeria's Military government in 1971 established the Nigerian National Oil Corporation (NNOC) by Decree. The NNOC was empowered to acquire any asset and liability in existing oil companies on behalf of the Nigerian government, and to participate in all phases of the petroleum industry. In that same year, the government acquired 33% and 35% of the operating interests of Agip and Elf respectively. Further acquisitions occurred in 1973 and 1974 in the operations of all the other foreign oil companies. Government participation in the commercial oil sector continues to this day through the NNPC.

THE NNPC (The Nigerian National Petroleum Corporation)

The NNPC was formed in 1977. It inherited the commercial activities of the NNOC and the supervisory/regulatory role of the Federal Ministry of Petroleum Resources. However a de-merger took place in 1984 and presently, the NNPC undertakes commercial activities, whilst the Federal Ministry of Petroleum Resources acting through the Department of Petroleum Resources (DPR) is the regulatory authority.

Following a major reshuffle in 1995, the NNPC now consists of six Directorates:


National Petroleum Investments Management Services (NAPIMS)
National Petroleum Development Company (NPDC)
Integrated Data Services Limited (IDSL)
Nigeria Gas Company (NGC)

This Directorate is concerned with crude oil sales, monitoring of joint venture operations and direct exploration services.


Port-Harcourt Refining Company (PHRC)
Warri Refining and Petroleum Chemicals Company (WRPC)
Kaduna Refining and Petrochemicals Company (KRPC)
Pipeline Products Marketing Company (PPMC)
Eleme Petrochemicals Company (EPCL)


Nigerian Engineering and Technical Company (NETCO)
Material Managment Department
Pipeline and Tank Construction Division
Research and Development (R AND D)
Engineering and Technical Division (ETD)


This Directorate manages NNPC's investments in external commercial businesses, and downstream businesses.


This Directorate manages NNPC's finances.


Corporate services consists of personnel, administrative, medical and legal divisions.

The network of NNPC'S eleven subsidiary companies, each separate legal entities with its own board and management, is overseen by the NNPC'S Directorates.


There are six major players in the Nigerian upstream sector. The six majors operate joint ventures with a 60-40 sharing arrangement between the NNPC and the companies. The six majors account for about 97% of Nigeria's oil reserves and production.

Shell Petroleum Development Company Of Nigeria (SPDC)

Nationality: English/Dutch.
Market share: Produces 50% of Nigeria's total crude production (950,000 bpd).

Current activities: In addition to more traditional exploration and production activities, a subsidiary company, SNEPCO (Shell Nigeria Exploration Production Company), was formed to undertake frontier exploration of blocks in the Benue and Gongola Basins and in the deep offshore. Deep water drilling under its production sharing contract on behalf of its partners (Esso, Agip and Elf) has raised expectations of success.


Nationality: American

Market share: 17% of total oil production (440,000bpd)

Current activities: Mobil is the most active in exploration activities. It is has one deep offshore block under a PSC with the NNPC.


Nationality: American.

Market share: 16% of total oil production.

Current activities: The company was awarded onshore acreage in the Benue Basin where it has conducted extensive exploration activities. It also has deep water interests.


Nationality: Italian.

Market share: 7%.

Current activities: It is involved in deep offshore activities. The company has assigned a substantial part of its interests under a production sharing contract (PSC) with the NNPC to Amoco and Exxon under a farm-out agreement.


Nationality: French Market share: 5% (127,000 bpd)

Current activities: The company has interests in SNEPCO'S offshore and deep offshore blocks, and PSCs for onshore blocks in the Benue Basin.


Nationality: American Market share: 3% (60,000 bpd)

Current activities: Presently the focus is on its deep water exploration activities. It has interests in deep water blocks operated by Statoil/BP.

Other multinationals explorers are Exxon, Phillips Oil Company Limited, Amoco, Conoco, Ashland Oil (Nigeria) Company and the Statoil/BP Alliance.


In accordance with government policy to encourage indigenous participation in the oil industry, shallow water concessions which had earlier been relinquished by the multinational operators were in 1990 allocated to several indigenous companies i.e. companies with only Nigerian shareholding.

These companies include Dubril Oil Company; Consolidated Oil Limited; Yinka Folawiyo Petroleum; Cavendish Petroleum; Amni International Petroleum Development Company Limited; Alfred James Petroleum Limited; Peak Petroleum Limited; Amalgamated Oil Limited; Atlas Petroleum International Limited; Express Petroleum and Gas and Summit Oil Limited.

The indigenous oil prospecting companies have made little impact on the oil industry to date. This is because many lack expertise and funding. These companies have difficulty attracting necessary foreign financing and technical capability due to foreign participation restrictions. The indigenous operators recently petitioned government through their association - Nigerian Association of Independent Petroleum Explorers and Producers (NAIPEC) - for fiscal incentives and tax reliefs.

Dubril Oil, the oldest indigenous player, operates a concession which was assigned to it by Phillips Oil Company Limited in 1987. It produces 1,000 bpd. Consolidated Oil Company is also in production, while Amni International Petroleum Development Company is expected to commence production shortly. Amni's technical partner is ABACAN of Canada. Atlas Petroleum found oil in commercial quantities in two exploratory wells drilled so far and is expected to begin production this year. Perhaps the most surprising discovery was made by Yinka Folawiyo Petroleum Company in the frontier Benin Basin. Initial tests on the oil well, Aje-1, showed that the well has a flow rate potential in excess of 5,500 bpd.


The Petroleum Act 1969 provides for the grant by the Minister of Petroleum Resources of three types of interest - exploration, prospecting and production rights.


An Oil Exploration licence (OEL) is necessary to conduct preliminary exploration surveys. The licence is non-exclusive and is granted for a period of one year. It is renewable annually.


An Oil Prospecting Licence (OPL) allows for more extensive exploration surveys. It is an exclusive licence given for a period not exceeding 5 years. It includes the right to take away and dispose of oil discovered while prospecting. An OPL granted to a foreign company is now issued with a covenant by the foreign company to assign the OPL to the NNPC upon making a commercial discovery. The foreign company will then enter into a PSC or a Risk Service contract with the NNPC.


The grant of an Oil Mining Lease (OML) allows for full scale commercial production once oil is discovered in commercial quantities (currently defined as a flow rate of 10,000bpd). The Lease confers the exclusive right to carry out prospecting, exploration, production and marketing activities in and under the specified acreage for a period of 20 years.

OPLS and OMLS can be assigned with the prior consent of the Minister and are subject to revocation in certain clearly defined circumstances.

Holders of licences and leases are required to pay certain statutory fees - application and renewal fees, rents and royalties. OMLs attract stamp duties and should be registered in the Deeds Registry of the relevant State.

Additional non-statutory fees are charged in respect of OMLs. These are, bidding fees, data inspection fees, signature bonus and reserve value fees.


The different types of operating arrangements that exist between the E & P companies and the NNPC are:

  • Participatory Joint Ventures
  • Production Sharing Contracts
  • Risk Service Contracts
  • Indigenous Operation (Sole Risk Contracts)


There are six such Joint Ventures operated by the "Big Six" oil companies. The PJVs produce the bulk of Nigerian Oil & Gas.

The Nigerian PJV is an unincorporated vehicle with NNPC as majority partner. By the Participation Agreement, NNPC purchases 60% in the operations and assets of the E & P company.

Each joint venture participant contributes to the payment of all costs when called upon ("cash calls") in the proportion of their participating interest. A Joint Operating Agreement (JOA) governs the parties' administrative and financial relations. JOAs were signed with the major oil producers in 1991. The commercial terms for the PJV are governed by a Memorandum of Understanding (MOU) which provides an incentives package for the oil companies. The first MOU signed in 1986 was revised in 1991. The MOU provides a guaranteed fiscal margin of between $2.30 to $2.50 per barrel to the oil companies and a bonus for additions to oil reserves. Negotiations are currently taking place between the six majors and the NNPC to revise the MOU.


The first Nigerian PSC was the Ashland Oil PSC signed in 1973. Since then due to Nigeria's economic problems and its consequent inability to adequately meet its cash call obligations to fund JV operations, PSCs have become more favoured. The recent deep offshore and Benue/Gongola Basin acreages are PSCs. In the 1996 Budget, government announced that it will in future embark on PSCs with oil companies.

The elements common to PSCs are -

1 The contract is entered into between the NNPC and the E & P company (the contractor).

2. The NNPC is the holder of the OPL and OML which constitute the contract area.

3. The contractor is appointed and given exclusive rights to carry out the exploration and production operations in the contract area for a period of 30 years.

4. The contractor is responsible for the cost of development and operations.

5. Production is divided into "Royalty Oil", "Cost Oil", "Tax oil" and "Profit Oil" in that order of priority.

6. "Royalty Oil" - is the quantity of available oil allocated to pay the sum of Royalties payable during a month of production and the amount of concession rentals payable for that period.

"Cost Oil" is sold to provide revenues for the recovery of qualifying pre-production costs and operating costs.

"Tax Oil" is the oil allocated to cover the Petroleum Profit Tax payable. Companies Income Tax is not payable in respect of petroleum operations.

"Profit" - is the oil remaining after all the above have been allocated. The profit oil is allocated to each party in pre-agreed percentages.

7. A Joint Management Committee is responsible for overseeing petrochemical operations and the agreed work programme,


The OPL is held by the NNPC while the service company funds development. Each service contract relates to a single concession. The primary term is for a period of 2 or 3 years renewable at NNPC's option for a further 2 years. As the contractor only gets reimbursed from funds derived from the sale of the concession's available oil, if oil is not discovered in commercial quantities then the contractor does not recover his cost.

Where oil is found, then the contractor is paid his costs back in instalments, in cash or crude allocation, The contractor is renumerated by payment of a fixed amount. It does not have a participation share and does not acquire title to any crude produced, As such the contractor is liable to pay Companies Income Tax and not Petroleum Profit Tax.


The long awaited legislation on Marginal Fields was promulgated in August 1996, the Petroleum (Amendment) Decree 1996.

The law provides that the holder of an OML may of its own accord, farm out any marginal field within the leased area, with the consent of the Head of State.

The Head of State may compulsorily farm-out a marginal field where it has been left unattended for 10 years or more from the date of first discovery of the marginal field. The preconditions for a compulsory farm out are:

  • Public interest, and
  • acceptability of the partners to the government.

Draft "Guidelines for Farm-out and Operations of Marginal fields" prepared by the DPR in September 1996 provide that:

(1) Current holders of OPL/OML, except indigenous oil companies, are excluded from farming into marginal fields. Indigenous companies must relinquish existing OPL/OML to be eligible.

(2) Only technically qualified Nigerian citizens who own locally incorporated companies may apply.

Marginal fields may only be operated on a "Sole Risk" basis. The agreement shall be for an initial period of 5 years, renewable thereafter every 5 years until the expiry of the lease.

A farmee may have a foreign technical partner with not more than 40% interest in the marginal field.

Various fees, Premium, Rents and Royalties are prescribed, while Petroleum Profit Tax is charged at the rate of 65.75%.

The draft guidelines are yet to be approved.

The oil majors understandably view any compulsory acquisition of portions of their OMLs as an act of expropriation and in breach of the terms under which the Leases were granted.


Public concern over the degradation of the environment in the oil producing areas - the Niger Delta - has grown with increasing awareness of the extent of continuous gas flaring and oil spills.

More recently, the Ogoni saga culminating in the execution of the environmental activist, Ken Saro-Wiwa, has more harshly spotlighted environmental issues in the oil industry.

The Department of Petroleum Resources is charged with the responsibility of monitoring and regulating oil operators to ensure compliance with petroleum control legislation and regulations and sound environmental management. The basic guidelines are set out in the "Environmental Guidelines and Standards for the Petroleum Industry in Nigeria" (1991).

A Federal Environmental Protection Agency (FEPA). was also established in 1988. FEPA is responsible for environmental matters nationwide.

Recent government environmental initiatives include:

  • Establishment of The Niger Delta Environmental Survey (NDES) to catalogue the physical and biological diversity of the Delta. The Survey is being conducted by an independent steering committee comprising both national and international organisations.
  • Preparation of a National Oil Spill Contingency Plan to cover major or catastrophic oil pollution incidents. Plans are already in place to deal with small and medium spills by means of company owned facilities and the local oil spill combat co-operative, Clean Nigeria Associates
  • All E & P Companies, oil marketing companies and oil service companies are required to initiate pro-active programmes to address environmental problems in areas of their operations. Such programmes must be reflected in their annual budgets.


Companies engaged in petroleum operations are exempted from paying Companies Income Tax. Instead Petroleum Profits Tax is paid on chargeable profits of petroleum operations and the standard rate charged is 85%,

- Guaranteed Margin

A profit margin per barrel of $2.30 after payment of tax and Royalty is guaranteed to the multinational regardless of the price at which the oil is sold.

The rate of PPT is all embracing as to exclude payment of other local taxes - and is stated as such in the 1996 budget. As such education tax imposed by the government in 1993 shall be treated as a charge and an allowable expenditure.

The withholding tax rate for off-shore companies is 5%.



Despite the government's ambitious oil & gas utilisation programmes, Nigeria still remains short of light and refined petroleum products. The Nigerian National Petroleum Corporation (NNPC) owns four refineries with a combined capacity of 445,000 barrels per day.

The refineries are owned by three separate NNPC subsidiaries: the old Port Harcourt Refinery (60,000 bpd) and the new Port Harcourt Refinery (150,000 bpd) are jointly owned by the Port Harcourt Refinery Company. The Warri Refinery (125,000 bpd) and the Kaduna Refinery (110,000 bpd) are under separate ownership.

Poor maintenance and management of all these refineries has resulted in reduced output and a consistent need to supplement the production short fall through the importation of refined products to meet domestic demands.

In the 1996 budget, the government approved a crude oil allocation of 250,000 bpd for local consumption although reports suggest that only 150,000 barrels per day are refined locally. The remaining 100,000 barrels were reported to have been traded with overseas refineries in exchange for refined petroleum products. The continuing problems of the refineries such as inadequate maintenance of equipment, over staffing of the plants, and low allocation of petroleum sales proceeds to NNPC, who is responsible for funding the refineries, has led to calls for the privatisation of the refineries. The government has so far baulked at full privatisation.

The Federal Minister of Finance admitted at the 1996 Nigerian Economic Summit that the government is unable to provide the funds required to bring the refineries up to scratch. The estimates of investment needed varies from =N=16 Billion by the Minister of State for Petroleum, to =N=70 Billion by NNPC. The Federal Minister of Finance argued for a partial privatisation of both the refineries and the Petrochemical industry.

The indispensable precondition of any arrangement capable of attracting private investment is that the risk takers should set the price in a deregulated market. In the 1997 Budget announcement the government would not commit itself further except to say that a Privatisation Panel would be set up to look at all the available alternatives and advise government accordingly.

Meanwhile the government has given approval to two private companies to build refineries to process a total of 300,000 bpd. The refineries will be located at Brass in Rivers State and Ibeno in Akwa Ibom State.


Like the refineries, petrochemical enterprises were slated for contract leasing in the 1995 Budget, which policy was later revised in the 1996 Budget to Management contract arrangements. It now appears that we will have to await the findings of the promised Privatisation Panel for the future of the Petrochemical industry.

The Eleme Petrochemicals project, is a government project, owned by an NNPC subsidiary, the Eleme Petrochemical Company.

The project to date has gulped close to US$ 2 billion and a large proportion of the development cost was obtained through Japanese, French and Italian financial institutions.

Its major products are polyethylene and polypropylene. Export marketing agreements were concluded with Dupont (Canada) and Tecint International (Italy) for marketing polyethylene and for polypropylene respectively.

The Eleme Petrochemical company has fallen behind in its debt repayment requirements and is estimated to owe a total of US$ 600 million as loan repayments and sums accrued in respect of plant supplies.


Every oil industry service company must be registered annually with the Department of Petroleum Resources (DPR) as an accredited oil service contractor. Registration falls under two categories -

  • specialised services and
  • general purpose oil industry service companies.

A fee of =N=250,000 is payable upon application and annual renewal for the specialised categories. Separate registration, and fees, are required for each separate specialist category.

The fee payable for the general purpose category is =N=5,000.

Although foreign companies in technical partnerships or joint venture with a Nigerian oil industry service company are allowed to register with the DPR, it is necessary to consider the effect of the new government policy - "The New Deal" - announced by the Minister for Petroleum Resources in August 1996.

The Minister said "all contracts in the oil industry shall henceforth be awarded to only Nigerian-registered companies".

The exclusion of foreign registered oil service companies from the award of contracts is a result of tax avoidance schemes perpetrated by some of such companies. 100% foreign ownership of locally registered oil service companies is permitted. Service companies are subject to Companies Income Tax (30%).


Akinjide & Co. is a leading Nigerian law firm based in Lagos, Nigeria, with branch offices in Ikeja and Ibadan and with a representative London office.

This guide on the energy sector is intended to provide general guidance and information only. Specific questions and enquiries should be referred to:

Jumoke Kola-Balogun (Mrs)
Akinjide & Co.
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Lagos, Nigeria.
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