President Muhammadu Buhari today signed into law, a Bill to amend the Deep Offshore (and Inland Basin Production Sharing Contract) Act [the PSC Act].

Production Sharing Contract (PSC) is a contractual arrangement for exploration and production of petroleum resources where the contractor undertakes all the financial, technical and operational risks associated with petroleum operation in return for a share of profit oil after payment of royalty, cost and tax oil.

The arrangement was introduced during the 1991 licensing round while the PSC Act became effective on 1 January 1993. The price of oil per barrel at the time was around US$13 per barrel. It was considered that certain incentives were necessary to encourage activities in the deep offshore which requires significant investment and technology. The special incentive regime includes:

  • longer duration of oil prospecting licenses
  • reduction in the petroleum profit tax rate 
  • investment tax credit or investment tax allowance 
  • lower royalty regime 

Section 16 of the PSC Act provides for the incentives to be reviewed where the price of oil exceeds US$20 per barrel or in any event after 15 years from inception and every 5 years thereafter.

The new amendment now introduces the following key changes:

  1. Introduction of incremental royalty rate based on the price of oil
  2. Periodic review of the PSC arrangement every 8 years
  3. Significant penalty for offences including imprisonment

The federal government estimates that the changes will generate about $500m in additional revenues for the government in 2020, and over $1bn from 2021. The changes are expected to take effect from fiscal year 2020.

Below is our alert and a copy of the Bill as passed by the National Assembly:

Download PwC Tax Alert_Changes to Deep Offshore Act_Nov2019

Download Deep-Offshore-and-Inland-Basin-Production-Sharing-Contract-Act-AmendmentBill-2019-as-Passed-by-the-Senate

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