Nigeria - New Law on Production Sharing Contracts

The Deep Offshore and Inland Basin Production Sharing Contracts Decree 1999 was recently promulgated by the Federal Government. This Decree provides, amongst other things, for the amendment of certain legislation in order to give effect to the fiscal incentives granted to various petroleum exploration and production companies who operate in the deep offshore and inland basin areas under production sharing contracts with Nigerian holders of oil prospecting licenses.

Specifically, the Decree does the following.

It amends the Petroleum Profits Tax Act so far as petroleum operations within a production sharing contract area is concerned. For such operations the petroleum profits tax rate is to be 50% instead of the usual 85% of chargeable profits.

It provides that in respect of production sharing contracts entered into prior to 1st July 1998 the parties shall be entitled to an Investment Tax Credit equivalent to 50% of the qualifying expenditure for the accounting period in which an asset was first used. This Investment Tax Credit is to be set off against assessable tax. For production sharing contracts entered into after 1st July 1998 the parties shall be entitled to an Investment Tax Allowance equivalent to 50% of the qualifying expenditure for the accounting period in which an asset was first used. This Investment Tax Allowance is to be set off against profits rather than taxes.

It amends the Petroleum (Drilling and Production) Regulations to provide that royalty payable in respect of oil produced within deep offshore production sharing contract areas is to run from 0% for areas in excess of 1,000 meters water depth to 12% for areas between 201 and 500 meters water depth.

The provisions are to be subject to review to ensure that if the price of crude oil should exceed $20 per barrel the share of the Federal Government in the additional revenue shall be adjusted "to such extent that the Production Sharing Contracts shall be economically beneficial to the Government". In any case, the provisions are to be reviewed in 2008 and every five years thereafter.