Investment in the Nigerian Oil & Gas sector has suffered a significant decline of recent. Reports from the National Bureau of Statistics show that foreign investors have shunned Nigeria in favour of other African countries. Despite Nigeria being the largest oil producer in Africa and holding 38% of the continent’s hydrocarbon reserves[1], the country only has 5% of Africa’s total oil and gas investments. To promote investments and tackle the challenges to operators and investors in the oil and gas sector in Nigeria, the President of the Federal Republic of Nigeria and the Minister of Petroleum Resources, President Bola Ahmed Tinubu, on February 28, 2024, signed one (1) executive order and two (2) directives (the “Orders”) namely;
- Presidential Directive on Local Content Compliance Requirements, 2024;
- Oil and Gas Companies (Tax Incentives, Exemption, Remission, Etc.) Order, 2024; and
- Presidential Directive on Reduction of Petroleum Sector Contracting Costs and Timelines, 2024.
These Orders cover tax incentives, exemption and remission, direct local content requirements, and reduce contracting costs and timelines. These directives have significant implications for stakeholders within the energy sector. In this country news alert, we delve into the implications of these orders. Presidential Directive on Local Content Compliance Requirements, 2024
This Order acknowledges the insufficiency of local capacity for certain services and requires the Nigerian Content Monitoring and Development Board (“NCMDB” or “the Board”) in its implementation of the Nigerian Oil and Gas Industry Content Development Act, 2010 to act in a manner that does not hinder investments or the cost of competitiveness of oil and gas projects.
Secondly, this Order addresses the approval of a Nigerian Content Plan (NCP). By this Order, the Board shall;
- not approve an NCP where the intermediaries lack the essential capacity to perform the service;
- only approve NCPs that have contractors that meet the legal definition of Nigerian content and demonstrate genuine substantial and tangible capacity to independently execute projects within Nigeria.
By this Order, approval of an NCP with no demonstrable capacity as stated above shall be considered a violation of the local content requirements. A major implication of this Order is the projected boost and increase in competition for oil and gas projects by both indigenous and foreign companies that would have not been considered or had a lower chance of winning contracts because of the provisions of the provisions of the Nigerian Oil and Gas Industry Content Development Act (the Content Development Act) which gave preference for award of contracts in the sector to indigenous companies. This in turn is expected to result in an increase in capacity building and development for the indigenous companies to ensure they have the requisite capacity to be considered for approval and award of contracts.
Oil and Gas Companies (Tax Incentives, Exemption, Remission, Etc.) Order, 2024
In addition to tax incentives available to companies in the sector, the Oil and Gas Companies (Tax Incentives, Exemption, Remission, Etc.) Order, 2024 was issued to make the sector more attractive and investment friendly. This Order is divided into four (4) parts which are;
- Part 1: tax credits for non-associated gas greenfield development;
- Part 2: midstream capital and gas utilization investment allowance;
- Part 3: incentives for deep water oil and gas projects; and
- Part 4: miscellaneous
This Order provides tax credit incentives for Non-Associated Gas (NAG) greenfield developments in onshore and shallow water locations. This Order grants NAG projects having their first production date on or before 1st January 2029 tax credit at a rate of $1.00 per thousand cubic feet or thirty percent (30%) of the fiscal gas price, whichever is lower when the Hydrocarbon Liquids (HCL) content does not exceed thirty (30) barrels per million Standard Cubic Feet (SCF); and when the HCL is more than 30 barrels per million but not more than 100 barrels per million SCF, the tax credit shall be US$0.50 per thousand cubic feet or thirty percent (30%) of the fiscal gas price, whichever is lower. By the provisions of this Order, the tax credit shall apply for a period of ten (10) years after which it shall become gas tax allowance.
In addition, greenfield NAG projects with Hydrocarbon Liquid content of not more than 100 barrels per million SCF and having their first commercial production after 1st January 2029 shall be eligible for tax allowance at a rate of US$0.50 per thousand SCF or 30% of the fiscal gas price, whichever is lower.
By the Order, the tax credit;
- shall not exceed companies’ income tax for the year;
- shall not be combined with Associated Gas Framework Agreement (AGFA) incentives in respect of the same greenfield NAG project;
- can be carried forward to the subsequent year for a maximum period of 3 years; and
- shall be calculated with the same price used for determining royalties under the Petroleum Industry Act (PIA)
Part 2 of this Order grants gas companies gas utilization investment allowance at a rate of twenty five percent (25%) on qualifying expenditure on plant and equipment incurred by the company upon expiration of the tax-free period granted under section 39(1) of the Companies Income Tax Act. The gas utilization investment allowance shall be granted as an allowable deduction from the profits of the company form the year of purchase of the said plant and equipment and the gas utilization investment allowance shall not be taken into account in determining the residue of qualifying expenditure incurred on such plant and equipment. Paragraph 7- 9 of the Order provides guidance on how the gas utilization investment allowance is expected to apply in various instances where there is a sale or transfer of a plant and equipment.
Finally, this Order mandates the Minister for Finance to introduce fiscal incentives to ensure that investments for deep water oil and gas projects achieve a competitive Internal Rate of Return. Pending the introduction of the fiscal incentives, NNPC Limited is required to consider and implement commercial enablers for brownfield and greenfield investments in the deep waters.
Presidential Directive on reduction of petroleum sector contracting costs and timelines, 2024
The contracting cycle in Nigeria’s petroleum sector exceeds global industry standards by 4 to 6 times. Delays in obtaining approvals and licenses in the Nigerian oil and gas sector, have hindered the contracting process negatively impacting Nigeria’s attractiveness to potential investors in the sector. This Order reinforces the Business Facilitation Act 2022 aiming to enhance ease of doing business in Nigeria. Below are the key directives outlined this order:
Contracting Costs and Timelines:
- Shortened contracting cycle for investors to a period not more than 6 months.
- Increase of duration of third-party contracts awarded under a Product Sharing Contract or Joint Operating Agreement which now last 5 years and can be renewed for 2 years.
- Increase of the contract approval thresholds to accommodate the prevailing rate of inflation.
- The Ministry of Finance (MOFI) and Ministry of Petroleum Resources (MOPI) are directed to engage with the Nigerian National Petroleum Corporation Limited (NNPCL) to amend Product Sharing Contracts (PSC) or Joint Operating Agreements (JOA), increasing contract approval thresholds to a minimum of $10,000,000 USD or its naira equivalent based on NAFEX FMDQ rates, or any other platform determined by the Central Bank of Nigeria. MOFI and MOPI are also tasked with ensuring that these thresholds are periodically reviewed to align with inflation rates reported by the National Bureau of Statistics.
Consent Timelines:
- The Nigerian National Petroleum Corporation Limited (NNPCL) and Nigerian Upstream Investment Management Services Limited (NUIMS) along with the Nigerian Content Monitoring and Development Board (NCDMB) shall streamline the contract approval process by implementing a single level of approval at each stage of the contract, which will include prequalification, technical, commercial, and final approval stages. This entails:
- Ensuring that all approvals required for contracts and procurement under PSCs or JOAs are granted within 15 days of the application submission. If there is no response, within this time, approval is deemed granted.
- If the initial submission lacks necessary information, NNPCL and NUIMS will request for more details within 7 days. The applicant in turn, is required to provide the requested additional information within 7 days. If there is no response from NNPCL and NUIMS within the next subsequent 7 days, approval is deemed granted.
- NCDMB is mandated to review Nigerian Content Plans (NCP) within 10 days in accordance with the Nigerian Oil and Gas Industry Content Development Act. If there is no response, within this timeframe, the NCP shall be deemed approved. If the initial submission lacks necessary information, the NCDMB will ask for more details within 7 days and the applicant in turn is required to respond within 7 days. If there is no response from the NCDMB within subsequent 7 days, the approval is deemed granted.
- The NCDMB is required to direct an application for the expatriate quota to the Ministry of Interior or any relevant ministry or government department within 10 working days provided that all supporting documents are in place.
- Where there are matters that require NCDMB’s approval, and there is no specified timeline in the act, they must communicate their decision within 15 days of receiving the request otherwise, approval shall be considered granted.
These Orders show the government’s commitment to increasing investments into the country and are certainly welcome in the sector. The increase in the duration of third-party contracts to up to seven years will help project continuity and result in a more efficient use of resources while the deemed approvals by the NNPCL and NCDMB should compel these bodies to adhere to specified timelines and should reduce the bureaucracies that are typical of government agencies. For full implementation of the Orders, the relevant regulators including the Nigerian Content Monitoring and Development Board, Federal Inland Revenue Service, Nigerian Upstream Petroleum Regulatory Commission, Nigerian Midstream and Downstream Petroleum Regulatory Authority and other relevant stakeholders are expected to develop guidelines to work out the modalities of the Orders in order to achieve their purpose.
Our insightful investment guide for Nigeria as a destination of choice for investment and doing business can be consulted here
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Authors; Simisola Oso, Tamaraemi Jombai, Ariteshoma Etete, Centurion Law Group (Nigeria Office).