Introduction
Nigeria’s oil and gas industry has long been a cornerstone of the economy, contributing significantly to government revenue and foreign exchange. However, the sector has faced numerous challenges, including regulatory bottlenecks and environmental concerns. To address these issues, the Nigerian government initiated a comprehensive review of its regulatory framework, culminating in the enactment of the Petroleum Industry Act (PIA) in 2021.
Before the PIA, upstream regulation was largely administered by the Department of Petroleum Resources (DPR) by the Ministry of Petroleum Resources. Since 2021, the PIA has placed upstream oversight squarely under the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).
Amongst others, the PIA revised the fiscal regime applicable to upstream operations to attract investment to the sector while ensuring fair revenue distribution between the government and operators. Another significant focus of the Act is the requirement for operators to adhere to best practices in environmental management.
The practical implication of this framework is a more holistic, streamlined, and transparent upstream petroleum industry. For operators, this heightens the need for rigorous compliance discipline, as regulatory alignment directly affects operational continuity. Operators that adhere to applicable regulations and engage strategically with regulators are better positioned to safeguard their licences and sustain their operations.
Operational Mandates
The PIA sets specific obligations for upstream operators to maintain regulatory approval and safeguard their licences. These obligations are as follows:
- Licensing and Work Programme Obligations
- Fiscal Compliance
- Host Community Development Obligations
- Environmental and Safety Standards
Licensing and Work Programme Obligations
Under the PIA, petroleum prospecting licences (PPLs) and petroleum mining leases (PMLs) are subject to strict work programme commitments. Operators must submit detailed work programmes outlining exploration or production activities, timelines, and financial commitments within specified periods. Failure to execute approved work programmes or meet minimum work obligations can result in the expiration of an operator’s licence. Operators are also required to relinquish specified percentages of their licence areas at defined intervals if exploration activities do not progress as planned. This provision ensures that acreage is not held speculatively without meaningful development. For companies with multiple licences, this requires careful portfolio management and prioritisation of exploration and development activities.
Companies must maintain accurate records of production volumes, operating costs, capital expenditure, and revenue for regulatory review. Licensees and lessees are required to submit Reports disclosing detailed cost estimates, production data, and prior-year performance, with half-yearly updates on implementation progress. The NUPRC has the authority to audit these records, and any discrepancies may result in penalties.
Furthermore, the PIA replaced the Petroleum Profits Tax with the Hydrocarbon Tax (HCT), alongside the Companies Income Tax (CIT). The Nigeria Tax Act, 2025, also consolidates the tax framework for upstream operators. These taxes must be calculated correctly, while taking advantage of allowable deductions such as funds disbursed in relation to the Host Communities’ Development Trust (HCDT) and other applicable payments.
The recently enacted Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025 also introduces further tax incentives for operators that demonstrate cost efficiency. Operators must therefore implement robust cost tracking and internal controls to substantiate cost-recovery claims during regulatory audits and to demonstrate eligibility for cost-efficiency incentives.
Host Community Development Obligations
Section 235 of the PIA mandates the establishment of Host Community Development Trusts (HCDTs) in areas where petroleum operations are conducted. Upstream operators are required to contribute 3% of their actual operating expenditure in the preceding year to the HCDT. It is now a statutory obligation enforceable by the NUPRC, distinct from the previous regime characterised by the optional and occasional philanthropy of operators.
The PIA further provides that sabotage, vandalism, or other disruptions caused by host communities may result in a reduction of contributions for the affected period. Although this provision is designed to encourage peaceful coexistence, its implementation must be handled with caution to prevent resentment or disputes that could result in further operational instability.
Environmental and Safety Standards
The PIA strengthens environmental obligations for upstream operators. The Act requires operators to develop and implement Environmental Management Plans (EMPs), and make a financial contribution to an Environmental Remediation Fund established by the Commission or Authority for the rehabilitation or management of negative environmental impacts arising from petroleum operations.
Gas flaring, a longstanding environmental concern in Nigeria’s oil and gas sector, is subject to stricter regulation under the PIA. While the Act does not impose an outright ban, it mandates that operators obtain flare permits and pay penalties for any flaring that occurs contrary to the Act’s provisions. Operators are encouraged to invest in gas utilization projects to reduce flaring and improve compliance.
Bottom-Line Impact
The operational mandates introduced by the PIA, the Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025, and related regulations have direct and measurable implications for the financial performance and risk profile of upstream operators. Regulatory compliance is a central determinant of profitability and security of leases and licences.
The expanded environmental and host community obligations under the PIA expenditures result in higher compliance costs. Operators must allocate additional resources to specialised personnel, regulatory reporting systems, auditing mechanisms, and advisory services to ensure regulatory compliance.
Environmental compliance also carries cost implications. Conducting EIAs, obtaining permits, implementing EMPs, and investing in gas utilisation infrastructure require consistent capital investment. Operators that do not budget properly risk regulatory sanctions, operational interruptions and reputational risk, all of which carry financial consequences.
The PIA’s fiscal framework introduces a more structured yet restrictive cost-recovery regime. Operators can not rely on broad interpretations of allowable costs, but must ensure that all expenditures meet the PIA’s criteria for cost recovery, including direct relevance to petroleum operations and compliance with approved budgets. The Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025, however, provides a potential upside for operators who prioritise operational efficiency. The Order establishes benchmarks for unit operating costs across different field types and production levels. Operators who consistently achieve costs below these benchmarks qualify for tax credits for realised savings directly linked to their operating costs and production volume.
For operators, this creates both an opportunity and a challenge. The opportunity lies in potential fiscal relief for efficient operations; the challenge is that qualifying for these incentives requires detailed documentation, regular reporting to the NUPRC, and third-party verification of cost savings. Operators must therefore invest in cost-management systems and benchmarking capabilities to leverage the Order’s provisions.
Community-related disruptions remain a significant risk to upstream operations in Nigeria. Operators that take a proactive approach to community engagement are better positioned to minimise disruptions and protect production levels.
One of the most significant bottom-line impacts of the PIA is the increased risk to licence security. Non-compliance with obligations under the Act can result in the suspension, non-renewal, or revocation of an operator’s licence or lease. For operators, losing a licence means losing the right to produce oil and gas from that acreage, which directly affects revenue and value.
In sum, operators that prioritise regulatory discipline, fiscal efficiency, and effective stakeholder management and adjust their strategies accordingly will be best positioned to protect their bottom lines.
Conclusion
The Petroleum Industry Act has significantly changed the upstream landscape in Nigeria, indicating a move towards a more organised, transparent, and compliance-oriented regime. When read alongside the Nigerian Upstream Petroleum (Commercial) Regulations 2025, the Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025, and the Nigeria Tax Act 2025, it becomes evident that the operating environment now places greater emphasis on accountability, fiscal discipline, environmental stewardship, and measurable performance. Compliance is no longer a peripheral obligation but a central feature of operational continuity and license security.
For operators, this evolving framework presents both increased responsibility and strategic opportunity. Companies that proactively manage their work programme commitments, maintain accurate cost and production records, invest in environmental safeguards, and sustain constructive relationships with host communities are better positioned to reduce risk, qualify for incentives, and protect asset value over the long term.
For optimal success, compliance must be embedded into the core business strategy rather than treated as a reactive or isolated function. Operators that align regulatory discipline with operational efficiency and long-term planning will be best placed to safeguard their licenses, optimise financial performance, and maintain stable operations. In a sector where regulatory alignment increasingly determines commercial success, preparedness and strategic adaptation will distinguish resilient operators from vulnerable ones.
Ituah Imhanze, FCArb, is the Managing Partner, KENNA and heads the Energy & Natural Resources Practice Unit, while Ozioma Soludo, ACArb, and Yasir Abubakar-Sadiq are associates in the same unit.
KENNA is a full-service law firm with a client-first approach, delivering bespoke legal solutions across diverse sectors, both locally and internationally.
Contact: www.kennalp.com
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