A Consideration Of The Presidential Order And Directives To Accelerate And Support Investment In The Nigerian Petroleum Sector – Shareholders

Introduction

By virtue of the powers conferred by the Constitution of the
Federal Republic of Nigeria, 1999 (as amended) and other applicable
laws, the President of the Federal Republic of Nigeria and Minister
of Petroleum Resources, Bola Ahmed Tinubu (the
“President“), on 6 March 2024, issued an
Executive Order and two Policy Directives (the
“Directives“) that are aimed at
accelerating and supporting investments in Nigeria’s oil and
gas sector. The Order and Directives are timely intervention
measures given the significant challenges that the country faces in
attracting investments in the oil and gas sector.

As stated in the press release by the State House, the Order and
Directives issued by the President are to achieve the following
objectives:

1. the introduction of fiscal incentives for non-associated gas,
   midstream and deep-water developments;




2. streamlining of the contracting process to compress the
   contracting cycle to 6 months; and

• the application of local content requirements without hindering
  investments or cost competitiveness.

This Note provides an overview of the President’s Order and
Directives and highlights aspects that we believe are of importance
to operators and potential investors in the Nigerian petroleum
sector.

1. Oil and Gas Companies (Tax Incentives, Exemption,
   Remission, etc.) Order, 2024 (“Fiscal Incentives
   Order”)

The Fiscal Incentives Order covers the applicability of new
fiscal incentives to three aspects of oil and gas projects that are
capital intensive and for which incentives are very much needed to
attract the required investments. These are the development of
non-associated gas greenfield projects, midstream gas
infrastructure projects and deep water oil and gas projects.

• Tax Credits for Non-Associated Gas (NAG) Greenfield
  Development

Subject to certain qualifications, the Fiscal Incentives Order
offers a gas tax credit or gas tax allowance for NAG greenfield
developments in onshore and shallow water areas, depending on
whether first gas production is achieved on or before 1 January
2029 or later. Where it is on or before 1 January 2029, a tax
credit assessed as the lesser of:

• either US$1.00 or US$0.50 per thousand cubic feet (Mscf) of
  gas, depending on whether the hydrocarbon liquid content is equal
  to or less than 30 barrels per million standard cubic feet (MMscf)
  of gas or exceeds same, or




• 30% of the fiscal gas price,

is applicable. The gas tax credit is to apply for a maximum of
ten (10) years, after which it would become a gas tax allowance
claimable at the above-mentioned rates.

Where the first commercial production for a NAG greenfield
development is after 1 January 2029 and the hydrocarbon liquid
content does not exceed 100 barrels per MMscf, a gas tax allowance
may be claimed at the lesser of US$0.50 per Mscf or 30% of the
fiscal gas price.

• Midstream Capital and Gas Utilisation Investment
  Allowance

The Fiscal Incentives Order provides for a gas utilisation
investment allowance (the “Allowance“)
on qualifying expenditure on plant and equipment incurred by
‘gas companies’ engaged in new or ongoing midstream gas
utilisation projects as at the date of the Fiscal Incentives Order,
i.e., 28 February 2024. This Allowance is granted at the rate of
25% of the actual expenditure incurred on the purchase of such
plant and equipment and would only be applicable following the
expiration of the initial 3 + 2 years renewal taxfree period under
the Companies Income Tax Act, 1977 as amended
(CITA). In addition, to ensure the Allowance
actually incentivises investments in gas utilisation projects, the
Fiscal Incentives Order excludes its applicability where within a
period of 5 years from the date on which the qualifying expenditure
was incurred:

• the plant and equipment is sold and would be used for a purpose
  other than for gas utilisation or as scrap; or




• the acquired plant and equipment is used for a purpose other
  than for a gas utilisation project; or




• it is ascertained that the expenditure was made in respect of
  an artificial or fictitious transaction.

Also of note is that notwithstanding the applicability of the
Allowance, a company engaged in gas utilisation would still be able
to claim the capital allowance provided under CITA.

• Fiscal Incentives for Deep Water Oil and Gas
  Projects

The Fiscal Incentives Order directs the Minister of Finance to
introduce fiscal incentives aimed at ensuring a competitive
Internal Rate of Return (IRR) for investments in
deep water oil and gas projects. Pending the Minister of
Finance’s introduction of the incentives, the shareholders of
Nigerian National Petroleum Company Limited
(NNPCL), i.e., the Ministry of Finance
Incorporated (MOFI) and Ministry of Petroleum
Resources Incorporated (MOPI) are to procure that
NNPCL considers and implements commercial enablers for new
brownfield and greenfield investments in deep water areas.

Unlike the other incentives for NAG and midstream gas
infrastructure developments, there are no definitive incentives
provided for deep water oil and gas projects. What this achieves is
a mandate to the Minister of Finance and NNPCL’s shareholders
to consider strategies that may be adopted to create a better
operating environment for deep water projects and guarantee better
returns on investment.

2. Presidential Directive on Reduction of Petroleum
   Sector Contracting Costs and Timelines, 2024 (the “Contracting
   Directive”)

The Contracting Directive is applicable to the shareholders of
NNPCL, i.e., MOFI and MOPI, the Nigerian Upstream Investment
Management Services Limited (NUIMS) and the
Nigerian Content Monitoring and Development Board
(NCDMB), and primarily places on obligation on
these entities to ensure the reduction of contracting timelines and
costs by the:

• increase of contractual approval thresholds that NNPCL joint
  ventures (under relevant joint operating agreements
  (JOA)), and production sharing contracts
  (PSC) are subject, to a minimum of US$10,000,000
  or the applicable Naira equivalent, and reviewed annually based on
  the rate of consumer inflation published by the National Bureau of
  Statistics;




• simplification of the contracting cycle for upstream projects
  as a result of prescribed timelines for the grant of consent or
  approvals by NNPCL, NUIMS and NCDMB, failing which relevant
  applications for consent or approval will be deemed granted;
  and




• increase of the duration of 3rd party contracts awarded
  pursuant to JOAs and PSCs from 3 years to 5 years with the option
  of renewing such contracts for an additional period of 2
  years.

3. Presidential Directive on Local Content Compliance
   Requirements, 2024 (the “Local Content
   Directive”)

The Local Content Directive proposes to reduce the cost of
upstream operations and ensure projects are delivered on schedule
by ensuring the Nigerian contractor parties have the requisite
capacity. It therefore mandates the NCDMB to refrain from approving
any Nigerian Content Plan (“NCP“) that
contains intermediary entities with no demonstrable capacity to
independently execute projects or perform required services within
Nigeria.

Furthermore, in consultation with industry stakeholders, the
Board of the NCDMB is to develop guidelines for the assessment and
verification of the capacity of Nigerian companies that seek to be
contracted to undertake specified activities. Given that the
application of this Local Content Directive is hinged on the NCDMB
Board’s issuance of the guidelines referred to above, it would
have been helpful if there was a prescribed timeline for the
engagement with industry stakeholders and issuance of the
guidelines.

Conclusion

By addressing critical issues such as investment barriers,
contracting delays and the effective application of local content
requirements, the Order and Directives represent a conscious effort
and commitment of the Nigerian government to foster an environment
that not only accelerates investment in the oil and gas sector but
also ensures that the benefits of such investments impact the
Nigerian economy.

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.

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