Oil was first discovered in commercial quantities in Nigeria in 1956 near Oloibiri Village in 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 of oil per day (bopd). Nigeria currently produces about 2 million bopd.

Nigerian oil is light and low in sulphur and consequently commands premium prices. Nigeria is the 9th largest world oil producer and the 5th largest OPEC producer. Nigeria also has huge natural gas reserves.

New deep water activity has yielded major discoveries such as

  • Bonga (operated by Shell)
  • Erha (operated by ExxonMobil)
  • Agbami (operated by Texaco)

National aspirations include

  1. the increase of reserves from the current level of 25 million barrels to 30 million barrels and increase in productivity from 2.2 million bopd to 3 million bopd in year 2003;
  2. further increase in reserves and productivity to 40 billion barrels and 4 million bopd respectively by year 2010; and
  3. attaining zero flaring associated gas through gainful gas utilization projects by year 2008

Government Participation

In the 1960s, government 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 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 and government’s participatory interest is 60% in all the JVs except the Shell operated JV where it is 55%.

The Stakeholders

Federal Government/NNPC

The Federal Government participates in the oil industry through the NNPC. 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.

NNPC is the group holding company headed by a Group Managing Director/Chief Executive. There are six divisions of NNPC, headed by Group Executive Directors i.e.

  1. Engineering and Technical
  2. Corporate Services
  3. Finance and Accounts
  4. Refining and Petro-Chemicals
  5. Exploration and Production
  6. Commercial and Investments.

NNPC’s subsidiaries are:

  1. PH Refineries I and II
  2. Kaduna Refinery and Petro-Chemicals
  3. Warri Refinery and Petro-Chemicals
  4. Pipelines, Products and Marketing Co Ltd.
  5. Nigerian Petroleum Development Co Ltd.
  6. Nigerian Gas Company Ltd.
  7. Integrated Data Services Ltd. [IDSL]
  8. National Engineering and Technical Co Ltd. [NETCO].

NNPC also holds shareholding interests in Nigeria LNG Limited and many oil service companies,

National Petroleum Investment Management Service, NAPIMS, a Business unit of the NNPC is responsible for the management of government investments in the petroleum sector. It is headed by a Group General Manager.

Currently NAPIMS, working directly under the E & P Directorate of NNPC, manages -

  1. The seven (7) NNPC/Multinational Oil Co Joint Ventures;
  2. Nine (9) Production Sharing Contracts and one (1) Service Contract (Agip Energy); and
  3. The Frontier Exploration in the Chad Basin.

The Multinationals

The major players in the Nigerian upstream are Shell, ExxonMobil, Chevron/Texaco, TotalElfFina Elf and Agip. These multinationals account for about 97% of Nigeria’s oil reserves and production. They participate in the petroleum industry in Joint Ventures with NNPC, as operators/contractors in the Nigerian deep water under production sharing contracts with NNPC; and in one instance under a service contract with NNPC.

In addition, some multinational companies have farmed into indigenous oil company concessions where they provide the technical expertise and funding required for E & P operations.

Indigenous Oil Companies

The Indigenous Concession Programme’s aim was to retain ownership and control of indigenous concessions in Nigerian hands and thereby encourage the growth of local expertise production in exploration, development and operations.

The first set of indigenous grants was in the 1970s/1980s to Henry Stevens Company, Nigus Petroleum and Niger Delta Oil Co.

Later, Dubri Oil acquired a concession by assignment from Philips Oil Company Ltd. in 1987. However, it was not until 1991 that Professor Jubril Aminu, the Minister of Petroleum at the time, awarded eleven (11) concession blocks to Nigeria entrepreneurs on a discretionary basis.

This was followed by another round of allocations in 1993, and eventually resulted in more than 40 Indigenous E & P companies holding OPLs under the programme. In 1999, OPLs for nine (9) blocks were awarded and subsequently cancelled. Finally, during the current Year 2000 Licensing Round 22 blocks were offered to the entire industry, both onshore and offshore, through a process of competitive bidding.

Host Communities

Though not direct stakeholders, host communities are nevertheless one of the most important stakeholders in the petroleum industry. The critical role and interests of the host communities, long neglected, is finally being recognised and addressed by the Federal Government , inter alia, by the passing of the Niger Delta Development Commission Act.

Law & Policy Makers And Regulators

The President is currently the de facto Petroleum Minister, acting under advice from the Presidential Adviser on Petroleum and Energy.

The National Assembly as the Legislative arm of government is empowered to pass legislation on Petroleum matters – which is on the Exclusive Legislative List.

Federal Ministry of Petroleum - is responsible for formulating and implementing Government policy.

Department of Petroleum Resources is the Regulatory arm of the oil and gas industry.

DPR’s Mission Statement is -

"To serve as the watchdog over the development of our nation’s oil and gas resources, by employing modern tools and techniques to direct, influence and achieve the optimum exploitation, conversion and utilisation of petroleum and its derivatives for the maximum benefit of Nigerians while ensuring minimal damage to the environment."

Ministry of Environment/FEPA - The Federal Environmental Protection Agency was established in 1988 (Decree no 50) to protect, restore and preserve the ecosystem of the Nigerian environment.

There is an overlap of jurisdiction between Ministry of Environment and DPR in the area of environmental protection matters as it pertains to the petroleum industry. It is important that there is only one lead agency dealing with industry operators and a memorandum of understanding between the various regulatory agencies on inter-agency co-operation.

The Federation Inland Revenue Board is responsible for collection of Royalties and PPT on behalf of Government.

Interests & Rights

The most important petroleum legislation in Nigeria is the Petroleum Act, 1969, Section 1 of which provides that -

  1. The entire ownership and control of all petroleum in, under or upon any lands to which this section applies shall be vested in the State.
  2. This section applies to all land (including land covered by water) which -
    1. is in Nigeria ; or
    2. is under the territorial waters of Nigeria; or
    3. forms part of the continental shelf; or
    4. forms part of the Exclusive Economic Zone of Nigeria."

The Petroleum Act 1969 provides for the grant by the Minister of Petroleum Resources of three types of interests – 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.

The Minister exercises general supervision over all operations carried on under licences and leases (Section 8) and may make regulations prescribing anything required to be done under the Act (Section 9).

Operating Contracts

Participatory Joint Ventures/JOA/MOU

The seven (7) Joint Ventures operated by foreign oil companies in partnership with the Federal Government are –



Joint Ventures

% of Partner's Participation



Govt. (NNPC)

Oil Company








NNPC/ Shell/ Elf/ Agip





NNPC/ Texaco/ Chevron







NNPC/ Agip/ Philips







NNPC/ Mobil





NNPC/ Chevron










NNPC/ Pan Ocean





The JV is an unincorporated vehicle. Each JV partner shares the exploration and financial risks. Each JV participant contributes to the payment of all costs when called upon ("Cash Calls") in the proportion of its participating interest.

Ownership, funding and production sharing are all based on each partner’s equity share.

A Joint Operating Agreement (JOA) governs the parties’ administrative and operational relations.

The commercial terms of the JV’s are governed by a Memorandum of Understanding (MOU) which modifies the fiscal regime by providing fiscal incentives to ensure that the oil company realises a minimum profit margin and a bonus for additions to oil reserves.

The first MOU signed in 1986 was revised in 1991 and the current one is the MOU, 2000.

Production Sharing Contracts (PSC)

The first Nigerian PSC was the Ashland Oil PSC signed in 1973. Since then, due to Nigeria’s inability to adequately meet its cash call obligations to fund JV operations, all new government contracts with oil companies are PSCs.

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 exclusively responsible for financing all petroleum operations.
  5. Only in the event of successful development of discoveries will the oil company recover exploration and development costs. Hence all exploration and development risks are taken by the oil company.
  6. Production is divided into "Royalty Oil", "Cost Oil", "Tax Oil" and "Profit Oil" in that order of priority.
  7. "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.
  8. "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 applied to petroleum operations.

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

  9. A Joint Management Committee is responsible for overseeing petroleum operations and the agreed work programme.

The Deep Offshore and Inland Basin Production Sharing Contracts Act, 1999, provides legislative backing for the contract terms and fiscal regime governing PSCs.

Risk Service Contracts

The OPL is held by NNPC while the service company funds petroleum operations. 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, the contractor does not recover its cost.

Where oil is found, the contractor is paid its cost back in installments, in cash or crude allocation. The contractor is remunerated 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.

Indigenous Operations – Sole Risk Contracts

The operating company holds the OPL or OML. There is no government participatory interest (although government reserves the right to exercise an option to participate at any time). Government interest is limited to collection of Royalty and Petroleum Profit Tax. All concessions under the Indigenous Concession Programme are granted on a sole risk basis.

Marginal Fields

The long awaited legislation on marginal fields was promulgated in August 1996, as 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 pre-conditions 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, inter alia, 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.

The draft guidelines are yet to be approved.

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 oil majors 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.


Nigeria has been described as a gas province with a little bit of oil! This is testimony to our huge gas reserves which is estimated at 120 trillion cubic feet. Our position as the world leader in gas flaring is well known.

The good news is that the Nigerian Government is committed to a "flares out" date of 2008.

The current gas legislation is the Associated Gas Re-injection Act, 1979. In pursuance of government policy, generous fiscal incentives for gas utilization have been granted. Gas incentives include royalties at zero per cent, gas development under the Companies Income Tax Act and duty/VAT exemptions for gas developments.

Gas utilization opportunities include

  • Independent Power Projects (IPPs)
  • Liquefied Natural Gas (LNG)
  • Natural Gas Liquids (NGL)
  • Gas – to- Liquids (GTL)
  • West African Gas Pipeline
  • Domestic gas utilization.

There is a need for the publication of the long awaited National Gas policy.

The Environment

Public awareness and concern over the degradation of our natural environment is growing. Both Government and the public are now fully sensitised to the issues of environmental management and protection. Clear evidence of this is the formation of the new Ministry for Environment.

The sources of environment law are myriad and include –

  1. International law – Treaties, customary international law.
  2. Statutes –e.g. FEPA Act, Environmental Impact Assessment Act, 1992, Oil in Navigable Water Act [Cap 337] LFN 1990.
  3. Subsidiary Legislation –Mineral Oils (Safety) Regs 1995, Petroleum (Drilling and Production) Regulations [Cap 350] LFN 1990
  4. Environmental Standards and Guidelines for the Petroleum Industry in Nigeria, 1991

The National Oil Spill Contingency Plan deserved a mention. The plan which was prepared to establish a national system for responding promptly and efficiently to oil pollution incidents was drafted in compliance with Nigeria’s international obligations as a signatory to the International Convention on Oil Pollution Preparedness, Response and Cooperation, 1990.


The supply sub-sector of the Downstream sector is completely and exclusively dominated by NNPC through ownership of all the existing refineries and government regulation of pricing.

The distribution sub-sector is also entirely controlled by NNPC through ownership of the distribution pipelines, depots and oil import jetties.

Only in the marketing sub-sector do we see control shared by the eight major marketers (40% of the fuels retail market) and the Independent Marketers (60% of the fuels retail market).

It has already been noted that the supply and distribution assets of NNPC are slated for partial privatisation. Further, government’s 40% interests in the marketing sub-sector – Unipetrol Plc, National Oil and Chemical Co Ltd and African Petroleum Plc – have recently been fully privatised through sale to core investors.

The Downstream sector is governed by the Petroleum Act, 1969 and Regulations made under it.


The Privatisation policy of the Federal Government is premised on the need to manage public funds efficiently, attract foreign capital and new technology and raise funds for Government to be used for infrastructure and social development.

The enabling legislation is the Public Enterprises (Privatisation and Commercialisation) Act, 1999, which establishes the National Council on Privatisation as the governing body, and the Bureau of Public Enterprises as the implementation organ.

Under the Privatisation Act, NNPC is slated for full commercialisaion and the following NNPC subsidiaries are to be partially privatised, i.e. Government retains 40% equity stake :

  1. PH Refinery I and II
  2. Kaduna Refinery and Petro-Chemicals
  3. Warri Refinery and Petro-Chemicals
  4. Pipelines, Products and Marketing Co Ltd.
  5. Nigerian Petroleum Development Co Ltd.
  6. Nigerian Gas Company Ltd.

An Ideal Legal Framework

In order to attract investment to the petroleum sector, laws, regulations and policy governing the industry should be -

  • Clear,
  • Complete,
  • Transparent,
  • Accessible,
  • Flexible, and
  • Practical.

A consultative process should be institutionalised to ensure periodic dialogue with operators to ensure that regulations are technically feasible and cost effective.

Legal processes must be quick and remedies efficient and effective.

Stability of fiscal contract terms is essential.

Finally, the law should further the national energy policy objectives of the Federal Government.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.