Part III – Upstream Petroleum

Part III deals with upstream petroleum matters save for the fiscal aspects and comprises thirty six sections. Section 170 vests the Inspectorate with the power to administer all acreage in Nigeria. The Inspectorate is required to administer acreage under a new national grid system under which a basic unit is a parcel of two kilometres by two kilometres.  The national grid system will be utilised in the definition of licence and lease areas, relinquishments, bid procedures, identification of well systems amongst other things. Existing licences and leases which do not conform to the proposed grid system will not be affected and shall remain unaltered.

Licence Regime: PEL & PPL

Section 172 introduces the Petroleum Exploration Licence (“PEL”), the Petroleum Prospecting Licence (“PPL”) and the Petroleum Mining Lease (“PML”) to replace the existing Oil Exploration Licence (“OEL”), Oil Prospecting Licence (“OPL”) and Oil Mining Lease (“OML”) respectively. The PEL is a non-exclusive licence to explore an area, which shall be valid for not more than three years.  The PPL grants an exclusive right to prospect for oil, including a right to carry away and dispose of oil, natural gas or bitumen found during prospecting operations. The term of the PPL is divided into three – the initial period, the renewal period and the appraisal period. The duration of each period is dependent on the terrain. The table below indicates the appropriate duration:

Terrain Initial Period Renewal Period Appraisal Period
Onshore and Shallow Waters 3 years 2 years 2 years
Deep water areas and frontier acreage 5 years 3 years 2 years

Under the Petroleum Industry Bill, the holder of a PPL is required to commit to drilling of at least one exploration well to a specified minimum depth during the initial period as well as during the renewal period. Where a PPL covers an area of more than ten parcels at least 50% of the original licence area must be relinquished after the initial period. Where a discovery of petroleum merits appraisal, the licensee is required to submit an appraisal programme for the Inspectorate’s approval. Section 178 also introduces the concept of the significant gas discovery retention area. This concept applies to an area over which the licensee has declared a significant gas discovery. The licensee is entitled to a retention period of not more than ten years over such an area. The retention period shall subsist even where the PPL has expired. Under section 179, where a licensee declares a commercial discovery, it is required to submit a field development plan for the approval of the Inspectorate. The Inspectorate is required to give such approval within sixty days of submission of the development plan.


Licence Regime: PML

The PML shall be granted to the holder of a PPL, where it has fulfilled all the terms and conditions of its licence and approval has been granted for its field development plan. A PML may also be granted under a bidding process, where an area contains commercial discovery of oil, natural gas or bitumen, or producing acreage with revoked or expired leases. The PML grants the lessee the exclusive right to conduct petroleum operations over the lease area. Lessees are subject to the domestic gas supply obligation as may be determined by the Inspectorate, where they are producing natural gas.

The duration of a PML shall be not more than twenty years and renewable for not more than 10 years, where the lease continues to be in commercial production. Provided that where a PML is derived from a PPL, the holder shall be allowed to utilise its entire PPL duration. This means that the overall period in onshore and shallow waters shall be twenty seven years from the date of the grant of the PPL and thirty years with respect to deep water and frontier areas. The Bill introduces development periods with respect to PMLs. The development period for onshore and shallow waters is five years and seven years for frontier and deep water leases. A PML not in commercial production within the relevant development periods may be revoked. Section 186 (5) provides for the relinquishment of all parcels that are not in commercial production or over which firm commitments have not been made after ten years of the grant of the lease.

Award Process

The Bill provides for the process by which PPLs and PMLs not derived from PPLs may be awarded. Section 190(1) requires that the grant shall be by open, transparent and competitive bidding process. The winning bidder is to be determined by a single bid parameter or a combination of bid parameters as laid out in section 190(2). The Bill does however grant the President the unfettered discretionary power to grant a licence or a lease.


Relinquishment from current licences

Prior to the relinquishment or expiration dates of existing OPLs or OMLs, the relevant holders are required to select portions of their licences or leases which they intend to continue to explore, develop and produce or wish to propose commercial discoveries, as appraisal areas or significant gas discovery retention areas. The provisions of the Bill shall apply with respect to any declaration made under section 193. In addition to the areas over which declarations have been made, the licensee/lessee may also select all or part of the remaining acreage as a PPL subject to commitment to drilling of a well of at least 3000 meters depth below the ground surface or the sea bed during the renewal period. All areas not selected must be relinquished on or prior to the relinquishment or expiry date of the OPL or OML.

Section 193 also entitles Marginal field operators to apply for PMLs over fields being operated as marginal fields at the date the Bill comes into force.

Assignment, mergers and acquisitions

Section 194 requires the written consent of the Minister for the assignment of a licence, lease or contract rights held by a contractor under a production sharing contract or a service contract. For the purposes of the bill an assignment includes mergers between a licensee/lessee and another company, acquisition of a licensee/lessee by another company including a change of control of a foreign parent company. The Bill specifies conditions which must be met by the proposed assignee, which are a good reputation; sufficient technical knowledge, experience or financial resources to enable it effectively carry out its responsibilities; and where the assignee is to serve as operator, proven operating experience or support by a competent operator under a technical service agreement. It should be noted that unlike previous drafts of the Bill, the Minister is not mandated to grant consent where these conditions are met.


Environment, Abandonment & Gas Flaring

All licensees or lessees carrying out upstream petroleum operations are required to submit an environmental management plan (“EMP”) for the approval of the Inspectorate. The EMP is to be submitted within one year of the commencement of the Act and three months of the grant of new licences or leases. The EMP shall contain:

  • Environmental policy, objectives and targets; and
  • Commitment to comply with the relevant environmental laws, regulations, guidelines and standards.

Amongst other things, the EMP is required to consider the impact of the licensee/lessee’s operations on the environment and socio-economic conditions of persons directly affected by the operations. In addition the Bill requires the development of an environmental awareness plan for employees and a remediation plan for plan for pollution or environmental degradation caused by the activities of the licensee/lessee.

Section 204 requires the licensee/lessee to provide a decommissioning plan/programme for the approval of the Inspectorate. The plan shall set out an estimate of the costs, details of the measures proposed; and steps to be taken to safeguard health and safety and the environment where any installations, structures or pipelines are to remain disused and in position or are to be partly removed.

Section 201 provides that lessees shall pay such gas flaring penalties as the Minister may from time to time determine.  Lessees are also required to install all measurement equipment to properly measure the amount of gas being flared as may be ordered by the Inspectorate.

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