Production Sharing Contract (Nigeria)

A Production Sharing Contract in Nigeria governs the relationship between the parties by fixing what each must do.

The legal framework for PSCs in Nigeria was substantially reformed by the Petroleum Industry Act 2021 (PIA 2021), which replaced the Petroleum Act (Cap P10, LFN 2004) and the Deep Offshore and Inland Basin Production Sharing Contracts Act (Cap D3, LFN 2004). Under the PIA 2021, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) is the principal upstream regulator, replacing the former Department of Petroleum Resources (DPR). The PIA 2021 introduced new licence categories — Petroleum Prospecting Licences (PPLs) and Petroleum Mining Leases (PMLs) — replacing the former Oil Prospecting Licences (OPLs) and Oil Mining Leases (OMLs). Existing PSCs entered into under the former legislation were transitioned to new PIA 2021 instruments pursuant to Section 309 of the PIA 2021 transition provisions.

Under a Nigerian PSC, the contractor bears all exploration, development, and production costs ("contract costs") and recovers these costs from a defined portion of gross production known as "cost oil" or "cost petroleum." After cost recovery, the remaining production ("profit oil" or "profit petroleum") is shared between NNPC Ltd and the contractor in proportions defined by the PSC's production sharing formula — which typically steps up in favour of NNPC Ltd as production volumes increase. The contractor's share of profit oil is subject to Petroleum Profits Tax (PPT) at 50% for PSC arrangements under the Petroleum Profits Tax Act (Cap P13, LFN 2004), as amended by the Finance Acts, and the Hydrocarbon Tax introduced by the PIA 2021.

The Deep Offshore and Inland Basin PSC Act (Cap D3, LFN 2004) — as amended in 2019 following protracted negotiations between the Federal Government and IOCs — governs the fiscal terms for deepwater PSCs (water depths exceeding 200 metres) and inland basin PSCs. The 2019 amendment to the Act revised the royalty rates and production sharing triggers, significantly increasing government take from deepwater operations and addressing a longstanding fiscal dispute that had deterred new deepwater investment.

Nigerian PSCs must also comply with the Local Content Act 2010 (Nigerian Oil and Gas Industry Content Development Act 2010), which requires contractors and operators to give preferential treatment to Nigerian companies, labour, goods, and services, and to submit Nigerian Content Plans to the Nigerian Content Development and Monitoring Board (NCDMB) for approval before commencing operations.

The legal framework governing the Production Sharing Contract (Nigeria) in Nigeria draws on several key statutes and regulatory bodies. Under Nigerian law, the Companies and Allied Matters Act 2020 (CAMA) regulates corporate entities through the Corporate Affairs Commission (CAC). The Labour Act (Cap L1 LFN 2004) and the National Industrial Court of Nigeria (NICN) govern employment disputes. The Nigeria Data Protection Regulation (NDPR) 2019 and the Nigeria Data Protection Commission (NDPC) protect personal data. The Federal Inland Revenue Service (FIRS) administers tax obligations under the Companies Income Tax Act. The Federal High Court and state High Courts have jurisdiction over civil matters. Parties executing a Production Sharing Contract (Nigeria) in Nigeria should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Companies and Allied Matters Act (CAMA) 2020 sets the foundational requirements.

A Production Sharing Contract is required in Nigeria whenever an upstream petroleum operator wishes to explore for and produce petroleum in a contract area where NNPC Ltd holds the concession rights on behalf of the Federal Republic of Nigeria.

A Production Sharing Contract is needed when an international oil company (IOC) — such as Shell, TotalEnergies, ExxonMobil, Chevron, ENI, or Equinor — wishes to participate in deepwater offshore exploration blocks in the Niger Delta basin at water depths exceeding 200 metres, where the PSC structure (rather than a joint venture) is the standard contractual arrangement.

A Production Sharing Contract is required when an indigenous upstream operator licensed by the NUPRC under the PIA 2021 obtains a Petroleum Prospecting Licence (PPL) for an inland basin block and enters into a contractual arrangement with NNPC Ltd as concessionaire for the development of the block.

A Production Sharing Contract is needed when existing Oil Mining Lease (OML) holders transition their upstream assets to the new PIA 2021 licence framework under the transition provisions of Section 309 of the PIA 2021, requiring a new PSC or petroleum contract to be executed with NNPC Ltd.

A Production Sharing Contract is required when a new licensing round is conducted by the NUPRC under the PIA 2021 framework and successful bidders for offshore or frontier basin blocks must enter into PSC arrangements with NNPC Ltd as a condition of the PPL award.

A Production Sharing Contract is needed when a marginal field operator awarded a marginal field acreage under the NUPRC Marginal Fields Programme (established under the PIA 2021) requires a contractual framework with NNPC Ltd or with the host company (the OML holder from whom the marginal field was carved out) governing the terms of field development and production sharing.

Parties in Nigeria should prepare a Production Sharing Contract (Nigeria) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under Nigerian law, the Companies and Allied Matters Act 2020 (CAMA) regulates corporate entities through the Corporate Affairs Commission (CAC). The Labour Act (Cap L1 LFN 2004) and the National Industrial Court of Nigeria (NICN) govern employment disputes. The Nigeria Data Protection Regulation (NDPR) 2019 and the Nigeria Data Protection Commission (NDPC) protect personal data. The Federal Inland Revenue Service (FIRS) administers tax obligations under the Companies Income Tax Act. The Federal High Court and state High Courts have jurisdiction over civil matters. Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.

A Production Sharing Contract for Nigeria under the PIA 2021 framework must contain the following essential provisions.

Parties and Regulatory Authority: NNPC Ltd (as concessionaire) and the contractor(s) — full legal names, CAMA 2020 RC numbers, NUPRC licence details. The NUPRC's approval of the PSC as the competent authority under the PIA 2021 must be referenced.

Contract Area: A precise description of the contract area — geographical coordinates, blocks, OML/OPL/PPL reference numbers, location (onshore, shallow water, deepwater), and acreage. The NUPRC-approved map of the contract area should be attached as a schedule.

Work Programme and Minimum Expenditure Obligations: The mandatory work programme for each exploration phase — seismic surveys (2D/3D), exploration wells to be drilled, appraisal activities — and the minimum financial commitments per phase. The NUPRC requires a firm minimum work obligation as a condition of the PPL.

Cost Petroleum and Cost Recovery: The maximum percentage of gross production allocable to cost recovery in any year (the "cost oil ceiling," typically 60–80% of gross production), the permitted cost categories recoverable as cost oil, and the order of cost recovery (operating costs, then capital costs, then unrecovered prior costs).

Profit Petroleum Sharing Formula: The production sharing formula — typically a sliding scale based on monthly or daily production rate — specifying NNPC Ltd's share and the contractor's share at each production tier. For deepwater PSCs under the Deep Offshore and Inland Basin PSC Act 2004 (as amended 2019), the profit sharing formula and royalty rates at various water depths must be specified.

Tax and Fiscal Provisions: Reference to applicable taxes — Petroleum Profits Tax (PPT) at 50% under the PPTA, the Hydrocarbon Tax under the PIA 2021, and any applicable WHT — and the mechanism for tax payments. Confirmation of the PIA 2021's Petroleum Profits Tax Act transitional provisions.

Local Content Obligations: The contractor's Nigerian Content commitments under the Nigerian Oil and Gas Industry Content Development Act 2010, including the Nigerian Content Plan approved by the NCDMB and minimum percentages for Nigerian labour, goods, and services.

Decommissioning and Abandonment: Provisions for the establishment of a decommissioning fund and the responsibilities of NNPC Ltd and the contractor for end-of-field-life decommissioning, pursuant to the PIA 2021 requirements.

Governance and Operator: Identification of the operator responsible for day-to-day field operations and the governance mechanism for the contract — typically an Operating Committee and a Technical Committee — with NNPC Ltd participation.

Governing Law and Dispute Resolution: Nigerian law (PIA 2021, PPTA, Arbitration and Mediation Act 2023) with international arbitration under ICC or LCIA Rules, with seat in London or Lagos.

Additional compliance elements for a Production Sharing Contract (Nigeria) used in Nigeria include: Under Nigerian law, the Companies and Allied Matters Act 2020 (CAMA) regulates corporate entities through the Corporate Affairs Commission (CAC). The Labour Act (Cap L1 LFN 2004) and the National Industrial Court of Nigeria (NICN) govern employment disputes. The Nigeria Data Protection Regulation (NDPR) 2019 and the Nigeria Data Protection Commission (NDPC) protect personal data. The Federal Inland Revenue Service (FIRS) administers tax obligations under the Companies Income Tax Act. The Federal High Court and state High Courts have jurisdiction over civil matters. Forms-legal.com provides this template as a starting point for Nigeria-compliant documentation.