1. PRESENTATION TO THE KOREAN BUSINESS COMMUNITY ON THE PIB & OTHER PETROLEUM INDUSTRY MATTERS 9 th Floor St Nicholas House 11Catholic Mission Street Lagos, Nigeria Tel: +234 1 462 2094, 462 2480 Fax: + 234 1 461 3140 E-Mail: acas@acas-law.com www.acas-law.com Offices in: Lagos, Port-Harcourt and Abujaacas@acas-law.com www.acas-law.com NOVEMBER 2012 Barristers + Solicitors

2. 1 OVERVIEW OF CONTENTS I. THE PETROLEUM INDUSTRY BILL (PIB) 2012 II. LABOUR MATTERS IN THE OIL AND GAS INDUSTRY

3. I. THE PETROLEUM INDUSTRY BILL (PIB) 2012  Background to the PIB  Proposed Changes in Regulatory and Institutional Framework  Fiscal Terms  PIB Legislative Process 3

4. 1.BACKGROUND TO THE PIB (i) The inauguration of the Oil and Gas Sector Reform and Implementation Committee (“OGIC”) by the Federal Government of Nigeria (FGN) in 2000 led to the National Oil and Gas Policy (NOGP) 2004 and the Petroleum Industry Bill (PIB) 2008. The PIB 2008 was not enacted before the end of the previous National Assembly’s constitutional term. (ii)The NOGP outlined the policy objectives for a reformed oil and gas industry, aimed at separating policy, regulatory and commercial roles of the FGN institutions and agencies. (iii)The FGN formed a ‘Task Force on the PIB in 2012 to harmonize the PIB 2008 with evolving PIB drafts. On 18 th July 2012 the PIB 2012 was submitted to the National Assembly for legislative consideration. OGIC 2000 NOGP 2004 PIB 2008 2012 Task Force PIB 2012 4 This part of the presentation looks at the proposed changes to the: commercial and regulatory institutions and organization of the Industry; the fiscal terms: and the new upstream and downstream regulatory framework and labor issues.

5. 1.1. OVERRIDING NATIONAL POLICY OBJECTIVE OF REFORMS The overriding policy objective for the Nigerian oil and gas industry reform is to: - maximize the net economic benefits to Nigeria from her oil and gas resources; and - enhance the social and economic development of the people while meeting the nation’s need for fuels at a competitive cost, accomplishing all in an environmentally acceptable manner. Existing oil and gas industry legislation have been unable to guide the industry in meeting these objectives. The main existing legislation(s) include: - The Petroleum Act, CAP P10, Laws of the Federation of Nigeria, 2004 - The Petroleum Profits Tax Act (PPTA) CAP P13, Laws of the Federation of Nigeria, 2004 5

6. 1.1.1. OBJECTIVES OF THE PIB The objectives of the PIB are among others things, to: -create a conducive business environment for petroleum operations; -enhance exploration and exploitation of petroleum resources in Nigeria for the benefit of Nigerians; -optimize domestic gas supplies particularly for power generation and industrial development; -establish a fiscal framework to encourage further investment in the petroleum industry while optimizing revenues accruing to the Government; -establish commercially oriented and profit driven oil and gas entities; -deregulate and liberalize the downstream petroleum sector; -create efficient and effective regulatory agencies; -promote transparency and openness in the administration of petroleum resources in Nigeria; and -promote the development of Nigerian content in the petroleum industry. 6

7. 1.1.2. PIB PROPOSED CHANGES: REGULATORY AND INSTITUTIONAL The Minister Upstream Petroleum Inspectorate (UPI) Downstream Petroleum Regulatory Agency (DPRA) Funds Petroleum Technical Bureau Takes over DPR role- upstream oil & gas regulation Takes over DPR/PPPRA role- downstream oil & gas regulation -Petroleum Technology Development Fund -Petroleum Equalisation Fund -Petroleum Host Community Fund

8. PIB PROPOSED CHANGES: REGULATORY AND INSTITUTIONAL (CONTD) NNPC IN TRANSITION National Petroleum Assets Management Corporation National Petroleum Assets Management Company (NPAMC) Limited National Oil Company Plc National Gas Company (NGC) Plc -Takes over NNPC Gas industry assets currently managed by NGC Ltd - 49% equity in the Stock Market within 6years -Takes over NNPC assets & liabilities not transferred to the Corporation /NPAMC -30% equity available in the Stock Market within 6years -Subsidiary of the Corporation - Manage NNPC’s Unincorporated JV assets & liabilities -Holding Corporation - acquire & manage FGN investments Upstream

9. PIB PROPOSED CHANGES: REGULATORY AND INSTITUTIONAL (CONTD) (i)The Minister of Petroleum Resources (the “Minister”) remains the head of the regulatory structure for the Industry and will be responsible for coordinating the activities for the Industry and shall exercise general supervision over all operations and institutions in the Industry. (a)The major functions of the Minister includes: -the formulation, determination and monitoring of Government policy for the Industry; -advise the Government on all matters pertaining to the Industry; -represent Nigeria at meetings of international organizations primarily concerned with the Industry; -negotiate and execute international petroleum treaties and agreements with other countries and international organizations on behalf of the Government; - grant, amend, renew, extend, revoke upstream petroleum licenses and leases upon UPI’s advice; -grant, amend, renew, extend, revoke downstream petroleum licenses for gas transportation pipelines, gas distribution networks, LNG and GTL plants, petrochemicals plants and gas exports upon DPRA’s advice. 9

10. (ii)The Petroleum Technical Bureau (“PTB”) -The PIB proposes to create the PTB as a special unit in the office of the Minister to carry out the functions of the former Frontier Exploration Services of the Nigerian National Petroleum Corporation (“NNPC”). -The functions of the PTB includes providing technical and professional support to the Minister as well as assisting the Minister to formulate strategies, develop and monitor the implementation of Government policy on the Industry. 10 (iii) The Upstream Petroleum Inspectorate (“UPI”) The UPI is to be vested with the assets and liabilities of the current DPR relating to the upstream petroleum sector. The UPI shall also be responsible for the administration of all acreage for exploration, development and production of petroleum. (a) Functions of the UPI shall include: - enforcing compliance with the laws and policies as well as the terms and conditions of all upstream leases, licences, permits and authorizations; - to issue licences or permits for seismic and drilling activities and approve the design and construction of facilities for upstream operations; - conduct bid rounds for all unallocated acreage; - allocate petroleum production quotas; and - compute, assess and ensure payment of royalties, rentals, fees for upstream operations.

11. (iv)Downstream Petroleum Regulatory Agency (“DPRA”) The PIB proposes to create the DPRA which shall be vested with the functions, assets and liabilities of the current DPR relating to the downstream sector and the Petroleum Products Pricing and Regulatory Agency (“PPPRA”). (a) Functions of the DPRA shall include to: -administer and enforce policies and laws relating to the downstream sector of the Industry; -enforce compliance with the laws and policies as well as the terms and conditions of all downstream petroleum operations; -regulate bulk storage, transportation and transmission and set rules for common carrier systems for crude oil, gas and petroleum products in the downstream sector of the Industry; -regulation of third party access to downstream oil and gas infrastructure; -facilitate the supply of gas to the strategic sectors in accordance with the approved national gas pricing framework; and -issue, renew or terminate licences and permits for activities connected with downstream gas distribution, petroleum products, storage, retail outlets, transportation and the design and construction of facilities for gas and petrochemicals. 11

12. (v)The Petroleum Technology Development Fund (“PTDF”) The PTDF shall continue to exist after the PIB has been passed into law. The purpose of the PTDF is to fund the training of Nigerians to qualify as graduates, professionals, technicians and craftsmen in the fields of engineering, geology, science and management and other related fields in the Industry. (vi)The Petroleum Equalization Fund (“PEF”) The PEF shall continue to exist under the PIB. The PEF is a fund set up to, among other things, receive any net surplus revenue from petroleum products marketing companies; administer bridging and equalization allowances to petroleum products marketers. (vii)The Petroleum Host Communities Fund (“PHC Fund”) The PIB proposes to establish the PHC Fund whose function will be to develop the economic and social infrastructure in petroleum producing communities. Every upstream petroleum producing company shall remit 10% of its monthly net profits to the PHC Fund. The remittances amount to an advance payment of tax as the companies will reconcile their remittances against their actual tax returns files at the Federal Inland Revenue Service at the end of the fiscal year and settle any difference. 12

13. (viii) The Petroleum Training Institute (“PTI”) The PTI will continue to be supervised by the Minister after the PIB is passed. The objective of the PTI is to deliver quality education and provide efficient technological manpower for the needs of the Nigerian and African petroleum industries. (ix) The Nigerian Content Development and Monitoring Board (“NCDMB”) The NCDMB will also continue to be supervised by the Minister. Its objective is to develop Nigerian content in the upstream sector in accordance with the Nigerian Oil and Gas Industry Content Development Act 2010. 13

14. 1.1.2. Other Key Regulatory and Institutional Implications i. Initial shares of NOC to be held by government (Ministry of Petroleum Resources and Ministry of Finance Incorporated). ii. Initial 2years work programme of NPAMC is to be funded by the Holding Corporation. Initial shares of NPAMC to be held by the Corporation (99%) and Ministry of Petroleum (1%). iii. NGC Plc will not be bound by the Fiscal Responsibility Act and Public Procurement Act. The Ministry of Petroleum and Ministry of Finance Incorporated are to be initial shareholders of NGC Plc. 49% of NGC Plc shares to be listed public within 6years of enactment. iv. The board composition of the NOC or NGC Plc is not clearly and comprehensively addressed. NPAMC board is also heavily dependent on the presidency. v. The Corporation shall maintain a fund to its subsidiaries. The FGN shall be the primary contributor to the fund. Where a taxable person contributes to the fund, such contribution shall be tax deductible. 14

15. 15 (ii)The PIB also extends the provisions of the Companies Income Tax Act (CITA) to profits derived from upstream petroleum operations amongst others. The table below highlights the innovations of the NHT and how the PIB intends to apply CITA. No.SubjectNigerian Hydrocarbon TaxCompanies Income Tax 1.Tax BaseChargeable profits from upstream petroleum operations in Nigeria. Chargeable profits from upstream and downstream petroleum operations that are deemed to accrue in, derived from, brought into or received in Nigeria. 2.Taxable Entities (i) Any company engaged in upstream petroleum operations; (ii) Partnerships, Joint Ventures, schemes or arrangements made pursuant to FIRS rules; and (iii) Any person other than a company who engages in petroleum operations. 1.2. FISCAL TERMS (i)Profits of each accounting period of companies engaged in upstream petroleum operations will be subject to the Nigerian Hydrocarbon Tax (“NHT”) instead of the current Petroleum Profits Tax (“PPT”). The provisions of the PPT are largely replicated in the NHT.

16. 16 No.SubjectNigerian Hydrocarbon TaxCompanies Income Tax 3.Tax RateThe assessable tax shall be a percentage of the chargeable profits as follows: (i) 50% of the chargeable profits for onshore and shallow water areas; and (ii) 25% of the chargeable profits for bitumen, frontier acreages and deep water areas. 30% of the profits of the company. 4.Fees, Rents and Royalties Same as currently obtainable under the PPTA, that is fees, rents and royalties shall be as may be prescribed by the Minister of Finance in any laws or regulations in force at any relevant time. Payment of statutory fees, rents and royalties are inapplicable. - existing subsidiary legislation that are not inconsistent with the contents of the PIB, will remain in force following the enactment of the PIB, until they are repealed. Therefore, the Petroleum (Drilling and Production) Regulations 1969 and the Marginal Fields Operation (Fiscal Regime) Regulations which, among other things, provide for royalty rates for large oil and gas fields and marginal fields will continue to subsist until repealed.

17. 17 No.SubjectNigerian Hydrocarbon TaxCompanies Income Tax 5.Deductible Expenses Same as currently obtainable under the PPTA, but will now include contributions made to the Petroleum Host Community Fund. Same as presently applicable for companies liable to CIT, but will now include: (i)Rents and royalties payable on upstream petroleum operations. (ii) A contractor party will also be entitled to deduct expenses incurred for the creation of assets to be owned by a licensee or lessee. 6.Other Notable Provisions or Omissions It is notable that interests on related party loans would no longer be deductible expenses. Section 22(1) of the CITA has been amended by directly making reference to the Transfer Pricing Rules of the FIRS (to be released in the coming months).

18. 18 No.SubjectNigerian Hydrocarbon TaxCompanies Income Tax 7.Allowances & Incentives Capital Allowances (CA) and Production Allowances (PA) are deductible to arrive at Assessable/Chargeable Profits. CA will be claimable by a contractor under a PSC who contractually finances the National Oil Company’s acquisition of equipment PA will be introduced to replace Investment Tax Credit (ITC) or Investment Tax Allowance (ITA). The PA is to encourage investment in crude oil and gas production with specified rates per barrel either as a fixed amount per barrel or a percentage of Official Selling Price (OSP) subject to cascading thresholds. This is to reward result in form of production rather than effort in terms of capital expenditure. Same as presently applicable for companies liable to CIT, but: Gas utilization incentives available for downstream operations have now been extended to companies: engaged in LNG export operations & downstream gas distribution; operating gas extraction facilities; operating downstream crude oil processing facilities such as refineries. Tax holiday for companies in upstream gas operations supplying gas solely to the domestic market. Capital allowances will be claimable for “Qualifying Upstream Petroleum Expenditure” and in respect of assets that are purchased by a Licensee or Lessee with Cost Oil, Cost Gas of Cost Condensates

19. 19 1.3. PIB LEGISLATIVE PROCESS The PIB is currently before the National Assembly. The following table highlights the required stages of the ongoing legislative process. LEGISLATIVE STAGECOMMENTS First readingThe introduction or submission by a sponsor. The Federal Government submitted the PIB on 18 th July 2012. Second readingMore extensive consideration of Bill’s proposals and clauses. Both the Senate and House of Representatives are currently considering the PIB proposals. Committee(s) stage or date of referral Intense consideration is given to the proposals and clauses. At the 6 th National Assembly (2007 – 2011), this was carried out by a Joint Petroleum Committee of both House of Representatives and the Senate. Due to the urgency and seriousness of the FGN to ensure the PIB is enacted, the current National Assembly may also adopt a Joint Committee approach. At this stage the Committee organizes a public hearing to receive memoranda from interested stakeholders and the public. The aim is to receive various stakeholder views on the proposals of the Bill. Date of reported out of committee: Committee(s) submits their report.

20. 20 Third reading and passage This may be done at a sitting of both houses depending on the urgency attached to the process and seriousness of the Government. Where a Bill is passed by one House of the National Assembly, it must be separately considered and passed by the other House and any differences harmonized before it is sent to the President for his assent. Conference report Legislative report on the Bill is presented and forwarded to the Presidency. Presidential Assent The 1999 Constitution provides that the power of the National Assembly to make laws shall be exercised by bills passed by both the Senate and the House of Representatives and assented to by the President. Where a bill is presented to the President for assent. The President shall signify his assent or withholding of same within 30days. Where the President withholds his assent, it can be passed by two-thirds majority by each House of the National Assembly. PIB LEGISLATIVE PROCESS (CONTD)

21. LABOUR MATTERS IN THE OIL AND GAS INDUSTRY 21

22. II. LABOUR MATTERS 2.0LABOUR MATTERS IN THE OIL AND GAS INDUSTRY 2.1The main legislation which deals with labour matters in the Industry is the Nigerian Oil and Gas Content Development Act 2010 (the “Local Content Act”). The salient provisions of the Local Content Act as it relates to employment issues are set out below. 2.2Nigerians must be given first consideration for employment and training in any project by an operator or project promoter in the Nigerian oil and gas industry. 2.3Operators or project promoters must maintain a reasonable number of personnel from areas it has significant operations. 2.4Operators or project promoters must submit an Employment and Training Plan (“E and T Plan”) to the Nigerian Content and Monitoring Board (the “Board”) which should include: (i)an outline of their hiring and training needs, a breakdown of skills needed; 22

23. LABOUR MATTERS (CONTD.) (ii)the anticipated skills shortage in the Nigerian labour force; and (iii)project specific training requirements. 2.5Where Nigerians are not employed because of lack of training, operators shall make every effort to supply such training locally or elsewhere and the procedure for its execution shall be contained in the operator’s E and T Plan. 2.6Operators are required to submit to the Board a succession plan for any position not held by Nigerians. Nigerians must understudy each incumbent expatriate for a maximum of 4 years at the end of which the position should be Nigerianised. 2.7Operators and project promoters may retain a maximum of 5% of management positions as may be approved by the Board as expatriate positions to take care of investor interests. 23

24. LABOUR MATTERS (CONTD.) 2.8All projects or contracts with a total budget exceeding US$100 million must contain a labour clause mandating the use of a minimum percentage of Nigerian labour in specific cadres as may be stipulated by the Board. 2.9All operators and companies operating in the Nigerian oil and gas industry are required to employ only Nigerians in their junior and intermediate cadre or any other corresponding grades designated by the operator or company. 2.10The minimum Nigerian Content level (including man hours) in projects executed in the Nigerian oil and gas industry is specified in Schedule A of the Local Content Act. 24 The Local Content Act defines an “Operator” as including the Nigerian National Petroleum Corporation, its subsidiaries and joint venture partners, Nigerian and foreign oil & gas companies operating in the Nigerian Oil and Gas Industry under any Petroleum Arrangement

25. ADEPETUN CAXTON-MARTINS AGBOR & SEGUN CONTACT DETAILS Afolabi Caxton-Martins Head of Corporate and Commercial Department 9 th Floor, St. Nicholas House, Catholic Mission Street Lagos, Nigeria Tel: + 234 4613142 Cell: + 234 803 304 6616 Email: acaxton-martins@acas-law.comacaxton-martins@acas-law.com Ben Unaegbunam Partner, Corporate and Commercial Department 9 th Floor, St. Nicholas House, Catholic Mission Street Lagos, Nigeria Tel: + 234 4613142 Cell: + 234 803 302 5829 Email: bunaegbunam@acas-law.combunaegbunam@acas-law.com 25