The Energy Sector: An Overview Of The Rudiments Of The Nigerian Oil And Gas Industry -By Nweke Chinonso
The Nigerian oil and gas industry is arguably the most valuable sector in the country’s economy. The Nigerian National Petroleum Corporation (NNPC) places Nigeria as the largest oil and gas producer in Africa and the sixth largest in the world. Nigeria also ranks sixteenth on the US Energy Information Administration’s table for Total Petroleum and Other Liquids Production 2017.
According to the NNPC, Nigeria has estimated petroleum reserves of 28.2 billion barrels of crude oil and 165 trillion standard cubic feet (scf) of gas (including 75.4 trillion scf of non-associated gas). Further, its average production capacity is 2 million barrels of crude oil per day (bpd) and 7.6 billion scf per day of gas. Crude oil from the Niger Delta basin comes in two types: light, and comparatively heavy – the lighter around 36 gravity and the heavier, 20–25 gravity. Both types are paraffinic and low in sulfur. Taking a trip down memory lane, the history of oil exploration in Nigeria started back in1903 when Nigerian Bitumen Corporation conducted exploratory work in the country; at the onset of World War I the firm’s operations were stopped. Due to the lack of technological and financial resources of small oil companies, large oil companies took over the exploration of commercial oil in the country. Thereafter, licenses were given to D’Arcy Exploration Company and Whitehall Petroleum but neither company found oil of commercial value and they returned their licenses in 1923.
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 Organization 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 April 1, 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 which is the group holding company is headed by a Group Managing Director/Chief Executive. There are six divisions of NNPC, headed by Group Executive Directors, they are to wit:
- Engineering and Technical
- Corporate Services
- Finance and Accounts
- Refining and Petro-Chemicals
- Exploration and Production
- Commercial and Investments.
NNPC’s subsidiaries are to wit: 
- PH Refineries I and II
- Kaduna Refinery and Petro-Chemicals
- Warri Refinery and Petro-Chemicals
- Pipelines, Products and Marketing Co Ltd.5. Nigerian Gas Company Ltd.
- Integrated Data Services Ltd. [IDSL]
- National Engineering and Technical Co Ltd. [NETCO].7. Nigerian Petroleum Development Co. Ltd
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. And 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.
Primary Laws and Regulations Governing the Oil and Gas Industry in Nigeria
There are various laws regulating oil and gas in Nigeria. The paramount among these laws is the 1999 Constitution of Nigeria (as amended) . The constitution vests control of all minerals, mineral oils and gas in, under or on any land in Nigeria and its territorial waters and exclusive economic zone in the government, to be managed in the manner prescribed by the National Assembly.
The Petroleum Act is the principal statute that governs petroleum operations, including exploration, production and use. It vests ownership and control of all petroleum exclusively in the government and the exercise of the powers consequent on this title in the minister of petroleum resources. Qualified persons wishing to carry out any form of petroleum operations can do so only on the basis of authorization granted by the minister. The Petroleum Act and its subsidiary legislation, including the Petroleum (Drilling and Production) Regulations, the Petroleum Regulations and the Petroleum Refining Regulations, govern petroleum operations in Nigeria including, but not limited to, exploration, development, production, storage, transportation, refining and marketing.
The Oil Pipelines Act and the Oil and Gas Pipelines Regulations provide the legal and regulatory framework for the establishment, operation and maintenance of pipelines that are incidental and supplementary to oil and gas operations in Nigeria. The Deep Offshore and Inland Basin Production Sharing Contracts Act prescribes fiscal incentives for companies operating in the deep offshore and inland basin areas of Nigeria under production sharing contracts.
The Nigerian National Petroleum Corporation Act establishes the Nigerian National Petroleum Corporation, which participates in petroleum operations on behalf of the government.
The Nigerian Oil and Gas Industry Content Development Act aims to enhance the development of indigenous capacity across the Nigerian oil and gas industry. It sets minimum Nigerian content prescriptions for various services and requires that first consideration be provided to companies incorporated in Nigeria (i.e. with 51% of equity owned by Nigerian parties) in the award of oil blocks and licenses. Nigerian companies with the relevant equipment and capacity to execute work on land and swamp-operating areas must be given exclusive consideration to bid for work in such areas
Government bodies charged with regulating the oil and gas industry and the extent of their powers
The Ministry of Petroleum Resources (headed by the minister of petroleum resources) is:
- responsible for policy formulation and regulating the Nigerian petroleum industry; and
- empowered to authorize petroleum activities (e.g., leases, licensees and permits).
The minister acts primarily through the Department of Petroleum Resources, which carries out routine oversight and compliance monitoring functions.
The Nigerian Content Development and Monitoring Board, established by the Nigerian Oil and Gas Industry Content Development Act, supervises, coordinates, administers and monitors the implementation and development of Nigerian involvement in the oil and gas industry.
Other agencies involved in the regulation of the oil and gas industry include the Federal Ministry of Environment and the National Oil Spill Detection and Response Agency.
Exploration and Production
Right to oil and gas reserves
The Constitution, the Petroleum Act and the Exclusive Economic Zone Act grant the rights to, as well as the control of, all minerals, mineral oils and gas in Nigeria and its territorial waters and exclusive economic zone in the federal government.
Distinction between surface and subsurface rights?
The ownership of surface rights does not automatically confer subsurface title rights, which are vested in the government. Likewise, exploration and production rights are granted only in connection with the resources located within sub-surface regions. The Petroleum (Drilling and Production) Regulations prohibit the occupation or exercise of any concession rights in areas designated as sacred by state authorities.
Ministerial permission is required to obtain and exercise surface rights in certain areas (e.g., those set aside for public purposes or occupied for government purposes).
For privately owned land, ministerial permission is required subject to payment of compensation to lawful occupiers of such land.
Rules and procedures governing the grant of rights for exploration and production purposes (e.g. through licensees, leases, concessions, service contracts, production sharing agreements)
Exploration and production companies conduct petroleum operations through the following concessions:
- An oil exploration license – this license is non-exclusive and granted in respect of areas of unproven reserves for the exploration of petroleum. It expires on December 31st in the year that it was granted.
- An oil prospecting license – this license is an exclusive license, granted for any period determined by the minister of petroleum resources of up to five years for onshore areas and shallow waters and up to 10 years for deep offshore and inland basins. The oil prospecting license permits the licensee to conduct more extensive exploration activities and remove and dispose of petroleum discovered while prospecting.
- An oil mining lease – this license allows full-scale commercial production in a lease area. It is granted to oil prospecting license holders on the discovery of oil in commercial quantities (at least 10,000 barrels per day). It grants the lessee an exclusive right to prospect, explore, produce and undertake marketing activities in connection with the specified acreage for a period of 20 years. An oil mining lease may be renewed subject to the fulfilment of certain conditions.
- Farm out – the Petroleum Act empowers the president to farm out a marginal field that has been left unattended for at least 10 years from its first discovery to a third party (farmee). The farmee enters into a farm-out agreement with the holder of the oil mining lease, which permits the farmee to explore, prospect, win, work and remove petroleum during the validity of the lease.
- Production sharing contract – the Nigerian National Petroleum Corporation (NNPC) enters into production sharing contracts (as the proprietary holder of oil prospecting licensees or oil mining leases) with exploration and production companies as contractors to the NNPC. Under production sharing contract arrangements, the NNPC’s contractors bear the cost of petroleum operations within the contract area and, in return, can recoup costs (after defraying royalty) and realize profit (after allocating tax oil).
criteria considered in awarding exploration and production rights
The minister of petroleum has absolute discretion under the Petroleum Act to grant oil exploration, prospecting and mining licensees to companies incorporated in Nigeria.
The Petroleum (Drilling and Production) Regulations outline the application process and submission requirements, including evidence of the licensee’s financial status and technical competence and details of:
- the proposed work programme of the operations;
- the annual expenditure;
- the start date of the operations;
- the schemes for recruiting and training Nigerians;
- the licensee’s capacity to market petroleum;
- annual reports on the licensee’s exploration and production activities; and
- any other information that the minister of petroleum may require.
The government has awarded exploration and production rights (including marginal field and production sharing contract awards) through competitive bidding processes known as licensing rounds. Criteria for such awards vary, but are published by the ministry in pre-licensing round guidance notes and include:
- evidence of financial and technical capacity;
- the applicable premium (i.e., signature, prospectivity and production bonuses); and
- evidence of the commitment to projects of strategic national interest and minimum work programme commitments.
In addition to the above, the Nigerian Oil and Gas Industry Content Development Act entrenches the principle of according first consideration to Nigerian operators in the award of oil blocks, oil field licenses, oil lifting licenses and contracts for the execution of projects in the Nigerian oil and gas industry.
the general legal framework governing the transportation and storage of oil and gas resources
Oil and gas resources are primarily transported via pipeline networks that connect several fields and lead to storage tank farms, refining-petrochemical facilities or oil terminals for onward shipping.
The Oil Pipelines Act and Oil and Gas Pipelines Regulation govern the operation of petroleum pipelines. The grant of a license is preceded by a survey of the proposed pipeline route, which is conducted with the minister of petroleum’s permission.
The Petroleum (Drilling and Production) Regulations require licensees and lessees to use approved methods and practices for the storage of petroleum obtained from relevant areas of operations.
In order to determine fiscal obligations, licensees or lessees are required by the Petroleum (Drilling and Production) Regulations to act in accordance with the Department of Petroleum Resources’ Procedure Guide for the Determination of the Quantity and Quality of Petroleum and Petroleum Products in Nigeria. The guide describes methods to be used and standards to be complied with in carrying out quantity and quality measurements for liquid petroleum and petroleum products at designated facilities, as well as procedures for the calibration and certification of measuring equipment.
The Oil Terminal Dues Act is relevant to the export of crude oil. It provides for the levying and payment of terminal dues by vessels evacuating crude oil at terminals in Nigeria. The act also prohibits the installation and operation of oil terminals, except with the written approval of the minister of petroleum, among other requirements.
Crude oil is evacuated at oil terminals by ocean tankers that must comply with the Crude (Transportation and Shipment) Regulations which, among other things, require all declarations regarding the capacity of a vessel in which crude oil is carried to be verified by the appropriate government authority.
Regulation of cross-border transportation of oil and gas
Cross-border transportation is generally governed by the contract between the vessel owner and the charterer on standardized terms of international time or voyage charter contracts.
A petroleum exporter will also require export permits issued by the Department of Petroleum Resources and the Federal Ministry of Industry, Trade and Investment to export oil or gas.
The Pre-shipment Inspection of Exports Act subject’s exports from Nigeria (including crude oil exports) to inspection by pre-shipment inspection agents. The act also requires exporters of goods, including petroleum products, to open, maintain and operate a foreign currency domiciliary account in Nigeria, into which all export proceeds must be paid.
Provisions governing marine and ground transportation of oil and gas resources
Further, the Coastal and Inland Shipping (Cabotage) Act restricts the use of foreign vessels for the carriage of goods within coastal territorial inland waters, or any point within the waters of Nigeria’s exclusive economic zone. The act also restricts vessels, tugs or barges that are not beneficially owned by a Nigerian citizen from the carriage of materials or supply services to and from oil rigs, platforms and installations, whether offshore or onshore or within any ports in Nigerian waters.
Construction and infrastructure
Regulation of construction and operation of pipelines, storage facilities and related infrastructure
The Oil Pipelines Act empowers the minister of petroleum to grant permits to survey routes for pipelines and, thereafter, issue licenses to construct, maintain and operate such pipelines, together with any ancillary installations necessary for the operation of oil pipelines, including storage tanks, pumping stations and loading terminals.
The Oil and Gas Pipelines Regulations and the Department of Petroleum Resources’ Guidelines and Procedures for Construction Operation and Maintenance of Oil and Gas Pipelines prescribe, at length, standards to be adhered to in the design, construction, operation, maintenance and upgrade of petroleum pipelines in Nigeria.
The department’s Procedure Guide for the Construction and Maintenance of Fixed Offshore Platforms and Procedure Guide for the Design and Construction of Oil and Gas Surface Production Facilities prescribe standards for the design, construction, commissioning, maintenance and decommissioning and abandonment of certain facilities, depending on the nature of the related infrastructure.
Other notable legislation includes the Mineral Oils (Safety) Regulations and the Environmental Impact Assessment Act.
Labour law provisions with specific relevance to the oil and gas industry (eg, with regard to use of native and foreign personnel)
Labour Act and applicability of common law – Generally, there are two broad categories of employee in Nigeria. Under the Labour Act, ‘workers’ are defined as persons who perform manual or clerical work. Other employees who exercise administrative, executive, technical or professional functions are defined as ‘non-workers’. Workers’ terms of employment are governed by the Labour Act, while non-workers are subject to their respective employment contracts.
The Nigerian Oil and Gas Industry Content Development Act 2010 (Local Content Act) requires an operator’s Nigerian content plan to indicate how Nigerians will be given prior consideration for training and employment opportunities. The Local Content Act also prescribes minimum Nigerian content thresholds, expressed as man-hour percentages, which must be deployed on certain projects. Further, operators must have a succession plan for expatriate positions and provide for Nigerians to understudy each expatriate worker with the aim of making the position available to Nigerian nationals. The Local Content Act further provides that only Nigerians will be employed in junior and intermediary cadres of employment and that a maximum of 5% of management positions, as may be approved by the Nigerian Content Development and Monitoring Board (NCDMB), may be retained as expatriate positions to take care of investor interest.
In a bid to increase local participation in the Nigerian oil and gas industry, the NCDMB launched a $2 million Nigerian Content Intervention Fund. The pool of funds provides loans to Nigerian companies involved in manufacturing in the oil and gas industry as well as firms seeking to acquire assets, especially rigs and marine vessels. Beneficiaries can get loans up to $10 million, repayable after five years at 8% interest rate.
The Petroleum Act requires oil mining lease holders to ensure that, within 10 years from the grant of the lease, the number of Nigerians employed in managerial, professional and supervisory grades is at least 75%, and that Nigerians in any category represent no less than 60% of the workforce. All skilled, semi-skilled and unskilled workers must be Nigerians.
The Petroleum (Drilling and Production) Regulations require licensees and lessees to submit a detailed programme for the recruitment and training of Nigerians for minister of petroleum approval.
Under Guidelines 1 of 2015 for the Release of Staff in the Nigerian Oil and Gas Industry, every employer must obtain ministerial consent before the release of any Nigerian national from employment, whether as a result of resignation, retirement or otherwise.
The environmental protection requirements applicable to the operation of oil and gas facilities
Under the Environmental Guidelines and Standards for the Petroleum Industry in Nigeria, operators must obtain permits for all aspects of oil-related effluent discharges from all point sources (i.e., gaseous, liquid and solid) and oil-related project development.
In relation to gas operations, the Associated Gas Re-injection Act requires operators to obtain the minister of petroleum’s permission before flaring gas produced in association with oil.
The Oil and Gas Pipelines Regulations require a pipeline licensee to implement emergency plans to ensure prompt and remedial action for protecting the environment.
The Petroleum (Drilling and Production) Regulations require licensees and lessees to adopt precautions to prevent pollution and dispose of waste from petroleum operations in accordance with applicable regulations, as may be approved by the Department of Petroleum Resources.
The Flare Gas (Prevention of Waste and Pollution) Regulation 2018 was introduced by the minister of petroleum resources and aims to:
- reduce the environmental and social impact of flaring natural gas;
- protect the environment;
- prevent the waste of natural resources; and
- create social and economic benefits from gas flare capture.
The Flare Gas Regulation vests the federal government with the right to take natural gas produced with crude oil free of cost at the flare and without payment of royalty. Under the regulation, the minister of petroleum resources may, through a permit to access flare gas, authorize a qualified applicant to take flare gas on behalf of the federal government at any flare site specified in the permit.
Further, the regulation prohibits the routine flaring and venting of natural gas from any facility operated by such permit holder and from any Greenfield project. The regulation not only prevents the pollution of the environment due to gas flaring, but also commercializes gas flare capture as a result of the production of crude oil.
The consequences of failure to adhere to the relevant environmental regulations and to what extent can operators be held liable for environmental damage
Some of the consequences for breaches of key environmental laws are to wi:
- Under the Oil in Navigable Waters Act, it is a finable offence for any person to discharge oil from a ship. It is also a criminal offence, punishable by life imprisonment under the Harmful Wastes (Special Criminal Provisions) Act, for any person to dump harmful waste in Nigerian territory. Any device used to commit the offence will also be forfeited to the government. Where the offence is committed by a corporate body, its officers could be found severally guilty of the offence.
- Any party that fails to comply with the provisions of the Environmental Impact Assessment Act is liable on conviction to:
- a fine of N100,000 or five years’ imprisonment in the case of an individual; and
- a fine of between N50,000 and N1,000,000 in the case of a corporation.
Under the National Oil Spill Detection and Response Agency Act,  a party that fails to report an oil spillage to the National Oil Spill Detection and Response Agency within 24 hours is liable to a daily penalty of N500,000. Further, failure to clean up the impacted site can result in a penalty of N1,000,000
The minister of petroleum has powers to revoke an authorization for failure to comply with applicable laws, including environmental regulations. The Environmental Guidelines and Standards for the Petroleum Industry in Nigeria also impose fines for various environmental infractions and the obligation to pay compensation to affected persons and remediate any environmental damage.
In addition to applicable federal legislation, a number of Nigerian states have enacted environmental laws that impose penalties on erring operators.
Nigerian courts have also awarded special, exemplary and general damages in actions arising from environmental pollution. These actions are brought under the common law principles of the torts of nuisance, trespass, negligence and strict liability. Notable among toxic waste cases is the Koko saga of 1988.
This study examined the rudiments of the Nigerian oil and gas industry with a detailed research. The results embodies among other things the historical development of the Nigerian oil and gas industry-cum-the nitty-gritty of the oil and gas industry in Nigeria. It further revealed the significant positive impact of the oil and gas industry on the economy and its indispensability in economic growth.
Therefore, there is an urgent need for the government to provide environment that is conducive for investment in the gas industry as this will lead to additional income to both the people and government of Nigeria. The passage and signing into law of the proposed Petroleum Industry Bill (PIB) could as well be the answer to the puzzle obstructing the development of Nigerian gas industry as it will enhance investors’ confidence in the industry.
- Oil and Gas in Nigeria accessible at https://www.lexology.com/library/detail.aspx?g=38ab9ccc-2392-4cd6-b0dc-997695d924b6
- David Thomas (13 November 1995). “Niger Delta Oil Production, Reserves, Field Sizes Assessed “ .Industry Briefs. Oil and Gas Journal. Accessed on 25th April 2021.
- Frynas, J.G. (1999). Oil in Nigeria: Conflict and Litigation Between Oil Companies and Village Communities. Münster: Lit Verlag.
- Nigeria – 1969 Petroleum Act accessible at https://resourcegovernance.org/analysis-tools/publications/nigeria-1969-petroleum-act
6.Brief overview of the NNPC’s history available at https://www.legit.ng/amp/1114719-history-nnpc-operating-arms.html
- Exploration and Production (E&P) accessible at https://www.investopedia.com/terms/e/exploration-production-company.asp#:~:text=An%20exploration%20%26%20production%20(E%26P),used%20in%20the%20energy%20busine
- A critical examination of the role of public participation in Petroleum development contract in Nigeria accessible athttps://www.emerald.com/insight/content/doi/10.1108/IJLMA-02-2018-0032/full/html?skipTracking=true.
- 9 Things every Nigerian should know about the Labour Act, accessible at https://lawpadi.com/9-things-every-nigerian-know-labour-act/Ibid
11.Oil and gas regulations in Nigeria – oil & gas policies. Accessible at https://www.lexology.com/library/detail.aspx?g=2faf6c4e-a2b9-41aa-b32b-29bcec453c88
- Overview Of Nigerian Local Content Law In Oil and Gas Industry accessible at https://www.mondaq.com/nigeria/oil-gas-electricity/1019096/overview-of-nigerian-local-content-law-in-oil-and-gas-industry
- Oil and gas occupational health and safety labour issues in Nigeria accessible at https://www.lexology.com/library/detail.aspx?g=687ca684-b7b4-4755-8c33-1c5a9550d111
Highlights of the Flare Gas (PWP) Regulations, 2018 accessible at https://home.kpmg/ng/en/home/insights/2018/10/Highlights-of-the-Flare-Gas-Prevention-of-Waste-and-Pollution-Regulations-2018.html#:~:text=Highlights%20of%20the%20Flare%20Gas%20(PWP)%20Regulations%2C%202018,-18%20October%202018&text=The%20Regulations%20seek%20to%20minimize,benefits%20from%20gas%20flare%20capture.
- Nigeria National Oil Spill Detection & Response Agency Act 2006 accessible at https://extractiveshub.org/resource/view/id/4099
16. Koko community can never recover from 1988 toxic waste saga – Professor Akaruese accessible at https://punchng.com/koko-community-can-never-recover-from-1988-toxic-waste-saga-prof-akaruese/?amp
Call Bridget Edokwe Esq on 08060798767 or send your email to email@example.com
07044444999 or 08181999888. Visit our website: www.alexandernigeria.com/
CLICK HERE TO BUY NIGERIAN CURRENT BEST-SELLER ON LAW AND PRACTICE OF COURT MARTIAL IN NIGERIA