Overview
IntroductionSince the discovery of oil in commercial quantities in 1956 in Bayelsa State, the Nigerian petroleum sector has been integral to the country’s development, accounting for about 90% of Nigeria’s export value. Nigeria retains the ownership and control over its natural resources, including oil and gas, as stated in Section 44(3) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended). This ownership right is also recognised in International Law, primarily through the UN Resolution on Permanent Sovereignty over Natural Resources (1962), affirming States’ rights to manage their resources. Post-independence, Nigeria enacted laws to assert this control, notably the Petroleum Act of 1969 and the Constitution of the Federal Republic of Nigeria, 1979.
Today, this sovereignty over petroleum resources is consolidated under the Petroleum Industry Act, 2021 (PIA).[3] From this endowment, Nigeria explores its petroleum resources and grants exploration and production rights to companies through various concession arrangements. Concession Arrangements in the Petroleum Sector under the PIA, 2021. Concession arrangements are common worldwide, as many governments lack the capital and technical expertise to undertake exploration independently. Consequently, governments partner with corporations through different contractual frameworks to exploit petroleum resources. Nigeria employs four major types of concession arrangements, which are: 1.
Concessions Traditional concessions, largely utilised by the British during colonial times, granted oil companies (OCs) exclusive rights to explore, produce, and market oil with minimal government oversight. This often resulted in OCs having more control over the country’s resources than the government. The Petroleum Industry Act (2021) introduced modern concessions, giving Nigeria greater control over the exploration and production of petroleum resources. Under these concessions, the government grants exploration and production rights to OCs through licenses and leases. These include: i. Oil Exploration License (OEL) This allows oil companies to conduct surveys and exploration activities for a specified period, typically less than a year. It does not grant exclusive rights and allows for other licenses in the same area. ii.
Oil Prospecting License (OPL) This license grants the exclusive right to explore and prospect for oil, including drilling, in a designated area for a period of 6 to 10 years. Under this license, oil found during prospecting operations belongs to the license holder. iii. Oil Mining Lease (OML) OMLs are granted to oil companies that find oil in commercial quantities (usually at least 10,000 barrels/ day). The OML provides the exclusive right to explore, develop, produce, store, and transport petroleum within the leased area for up to 20 years. OMLs are subject to compulsory relinquishment of part of the leased area after ten years. Companies holding OMLs are required to pay royalties and other prescribed fees.2.
Joint Venture or Operating Agreement (JVA) In a JVA, the government and OCs jointly participate in exploration and production, sharing the financial costs and operational responsibilities. The government contributes capital through cash calls, while the OC typically acts as the operator of the venture. The oil produced is shared between the parties based on their respective participating interests, subject to royalty and tax obligations. JVA can take several forms: i. Incorporated Ventures, which involves the parties concerned incorporating a non-profit company for the venture; ii. Incorporated Profit-Making Operating Company, which involves the parties incorporating a company to manage the venture, run operations, and sell the petroleum on their behalf; and iii.
Non-Incorporated Ventures, which involve direct participation and contribution by the parties who then share the produced oil based on their contributions.3. Production Sharing Contract (PSC) Under a PSC, the OC bears all costs associated with exploration and production. It has no right to profit or reimbursement until oil is found in commercial quantities. Once oil is discovered, the OC is reimbursed for its investments, and profits are shared between the OC and the government according to an agreed percentage. PSCs are generally more favourable to the government than JVA, as the government begins receiving revenue once production starts without having to contribute financially. 4. Service Contract Arrangement (SCA)The SCA is like the PSC but differs in several key aspects.
In an SCA, the OC undertakes exploration and production at its own risk and does not gain any ownership rights to the oil discovered. If the oil is found in commercial quantities, the contractor is reimbursed for its costs and paid for its services. The oil produced belongs entirely to the government, and the contractor only receives payment for its work. SCAs are typically shorter than PSCs and do not grant any long-term rights to the contractor. ConclusionNigeria’s ability to explore and produce its oil resources has been central to its economic development. The country has also established various concession arrangements to facilitate oil exploration and production, ensuring the participation of international oil companies while maintaining control over its resources.
While Nigeria has heavily utilised traditional concession arrangements and Joint Venture Agreements, it is believed that Production Sharing Contracts may also provide high benefits to the country. This is because there is little or no financial burden on the government during the exploration and production activities until oil is discovered in commercial quantities.
