Nigeria primarily offers production-sharing agreements and sole risk contracts for upstream operations.

Inland basins and deepwater areas are governed by production-sharing agreements, which levy a royalty of up to 20% on gross production based on the location of the field and the prevailing oil price. Petroleum profits tax is payable at a rate of 50% and costs are recoverable up to a limit of 80%.

Previously, joint venture (JV) agreements traditionally governed petroleum operations. Under JV agreements, a royalty of up to 20% is payable based on the project’s location. Petroleum profits tax is levied at a rate of 65.75% until capital expenditures are fully amortised, after this, the rate increases to 85%. The Niger Delta Development Commission (NDDC) also imposes a tax of 3% on the total costs of capital and operating expenditure and an education tax equalling 2% of assessable profits is levied.

Production-sharing agreements currently offer the most competitive fiscal terms available in Nigeria upstream under notional development scenarios, although the framework has become less attractive over time, most recently with an amendment to the deep offshore and inland basin production sharing contracts decree in November 2019. The amendment increases the royalty rates on crude oil and condensate production from future projects located in inland basins and deepwater areas and imposes penalties for non-compliance.

Nigeria’s regime is one of the least attractive along the West African margin. The country has plans to boost production to three million barrels of crude oil per day by 2023, in part through securing exploration investment from a licensing round planned in 2020. Depending on the acreage offered, the increased financial burden for new investments may reduce the level of interest in the upcoming round.

Figure: Nigeria fiscal terms comparison, global context. Credit: GlobalData.

In addition, the government is seeking to generate immediate revenue from the recent amendment, meaning that current producers may face an additional fiscal burden. Though stability clauses in existing contracts may prevent this, these measures could impact investor confidence for future investments, particularly as the provisions under the new amendment allow for the terms to be reviewed every eight years.

The non-passage of the petroleum industry bill, now split into four separate bills, also reduces the stability of Nigeria’s investment climate and increases uncertainty for investors. This may extend into the medium term, particularly as the planned bills are expected to overhaul current petroleum regulations, including the existing deepwater production sharing agreement framework.