Upstream Decommissioning and Abandonment in Nigeria: From End-of-Life Obligations to Front-End Investment Risk

Introduction

Decommissioning and abandonment of upstream petroleum infrastructure has moved from a peripheral end of life consideration to a central legal and commercial issue in Nigeria’s upstream petroleum sector.

For decades, the focus of the regulatory leadership of Nigeria’s upstream petroleum sector was acreage award, exploration, production, incremental production and fiscal stability. Decommissioning was often viewed as a remote obligation to be addressed at the end of a field’s life cycle.

This approach is no longer the case. With assets maturing across the sector, the chronological proximity to depletion of reserves, international oil companies rebalancing their portfolios, and indigenous operators taking on a greater share of the onshore footprint, end-of-life obligations now directly affect asset value, operational risk and transactional outcomes. Late-life assets may remain commercially attractive, but their economics shift materially once decommissioning and abandonment costs are properly recognised.

In 2021, the Petroleum Industry Act, 2021 ("the Act") introduced the principal statutory framework for upstream decommissioning and abandonment in Nigeria. Section 232 of the Act establishes the obligation to decommission and abandon offshore and onshore petroleum wells, installations, structures, utilities, plants and pipelines in accordance with good international petroleum industry practices – as defined in the Act – guidelines issued by the Nigerian Upstream Petroleum Regulatory Commission (Commission or the Nigerian Upstream Regulator), and standards prescribed by the International Maritime Organisation on offshore petroleum installations and structures. Section 233 introduces the obligation to maintain a dedicated Decommissioning and Abandonment Fund ("a Fund"), being a ring-fenced fund held in escrow to pay for decommissioning and abandonment costs. Licensees and lessees are also required to prepare and obtain approval for a Decommissioning and Abandonment Plan ("D & A Plan"), being the comprehensive plan governing the suspension, abandonment and decommissioning of upstream petroleum assets.

Additionally, in 2026, the Commission issued the Nigeria Upstream Petroleum Decommissioning and Abandonment Regulations, 2026 ("the 2026 Regulations") setting out the operational rules for the implementation of the decommissioning and abandonment framework introduced by the Act. It is important to mention that the 2026 Regulations have revoked the 2023 Upstream Regulations on decommissioning and abandonment.

Together, the Act and the 2026 Regulations mark a decisive shift. Provisioning for decommissioning and abandonment is no longer treated as an unfunded future risk. It is a mandatory obligation that must be planned, funded and embedded into the life-cycle economics of upstream assets. Where decommissioning or abandonment obligations are inadequately planned, executed or funded, the resulting risks extend beyond the operator of the asset to the Nigerian Upstream Regulator and the State, creating environmental, safety and governance exposure that the Act seeks to cover.

The Petroleum Industry Act as the statutory anchor

The Act empowers the Commission to issue standards, guidelines and approvals governing decommissioning and abandonment. Each licensee and lessee is required to set up, maintain and manage a Fund held by a non-affiliated financial institution in the form of an escrow account, which is subject to regulatory oversight. The Fund is accessible by the Commission, as prescribed in the Act, and documented under the terms of the escrow agreement.

The Act provides that the Fund must be used exclusively to pay for decommissioning and abandonment costs. Where a licensee or lessee fails to comply with its decommissioning and abandonment plan, the Commission may, after notice and an opportunity to remedy, access the Fund to procure third-party performance of the defaulting party’s obligations, without relieving the licensee or lessee of ultimate responsibility.

The Act does not confine the decommissioning and abandonment framework to end-of-term operations. Decommissioning obligations are embedded at multiple regulatory touchpoints throughout the upstream project life cycle. For example, per Section 79(2) of the Act, approval of a Field Development Plan – being the comprehensive plan submitted to the Nigerian Upstream Regulator for the development and production of petroleum from a field – for a prospecting licence holder transitioning to the exploration of commercial discoveries, is expressly conditioned on the inclusion of a D & A Plan and Fund.

This transforms decommissioning from a general environmental obligation into a funded, enforceable legal requirement, operationalised by the 2026 Regulations.

The 2026 Regulations: an operational framework for the upstream sector

The 2026 Regulations apply to the decommissioning and abandonment of facilities used in (and wells, installations and facilities associated with) upstream petroleum operations in Nigeria by holders of interest in upstream petroleum concessions (ie, petroleum prospecting licences, petroleum mining leases, oil mining leases and oil prospecting licences). The Regulations translate statutory obligations into operational, financial and procedural requirements that govern upstream assets throughout their production and post-production life cycle.

Decommissioning plan as a front-end requirement

One of the key developments under the 2026 Regulations is the central role of the Decommissioning and Abandonment Plan ("the D & A Plan"). A licensee or lessee engaged in upstream petroleum operations must submit a Decommissioning and Abandonment Plan to the Commission regardless of its status. In other words, where, prior to the issuance of the 2026 Regulations, a D & A Plan had already been submitted and approved as part of a Field Development Plan, an updated D & A Plan must still be submitted in compliance with the 2026 Regulations.

The 2026 Regulations require upstream petroleum operations to be conducted in accordance with an approved D & A Plan, ensuring that the D & A Plan is not just a document, but it is a binding operational framework governing suspension, abandonment and decommissioning activities.

The timing requirements are also important. A Petroleum Prospecting Licence holder must submit the D & A Plan together with the application for approval of the work programme. A Petroleum Mining Lease holder must submit the D & A Plan together with the application for approval of the Field Development Plan. Approved D & A Plans that predate the 2026 Regulations must be updated and submitted for fresh approval within six months from the commencement date of the 2026 Regulations, being March 2026.

This moves decommissioning into the front end of project planning. In practice, it means that an upstream stakeholder must consider the abandonment and decommissioning assumptions at the same time as field development, production strategy and the corresponding capital expenditure are being considered.

Significantly, the 2026 Regulations also require that any desired modification to an approved D & A Plan must be submitted to the Commission for review and approval prior to implementation, and this reinforces continuous regulatory oversight rather than a one off approval.

Suspension, plugging and abandonment of wells

The Regulations contain detailed provisions on the suspension and abandonment of wells and highlight the Nigerian Upstream Regulator’s intentions to manage long-term safety risks.

Applications to permanently plug and abandon a well must be made as soon as drilling results are known where a well is dry, uneconomic or otherwise unsuitable for completion, and must include technical information relating to well condition and abandonment methodology.

Temporary suspension of wells is permitted but tightly controlled. Suspended wells must remain capable of safe re-entry, and operational shut-in periods are generally limited, subject to the Nigerian Upstream Regulator’s approval.

Where an operator fails to apply for suspension or abandonment approval, or where approval is denied and the operator fails to rectify the basis of denial and re-apply, the Nigerian Upstream Regulator may access the Decommissioning and Abandonment Fund to procure third-party involvement in abandonment of the well.

Funding the obligation

The most commercially significant part of the regime is the requirement to fund decommissioning and abandonment obligations. The Decommissioning and Abandonment Plan must state the amount to be contributed annually to the Decommissioning and Abandonment Fund.

Annual contributions are reviewed every ten years. However, if there are significant changes in cost, technology or additional assets to be decommissioned before that time, the Commission may direct a review, or the licensee or lessee may apply for approval of a review. Decommissioning and abandonment costs are inherently uncertain as they may be affected by new environmental standards, supply chain disruption and technological innovation. However, the possibility of revised contributions means that abandonment costs must be monitored throughout the life of the asset.

Domestic and offshore domiciliation of funds

One commercially sensitive issue is where the Fund must be domiciled. As a general rule, the Fund and 100% of the contributions to the Fund are to be fully domiciled in a qualifying Nigerian financial institution in the form of an escrow account. However, there is an important exception for assets involving international oil companies (IOCs).

Where a licence or lease is held by an IOC in a joint venture arrangement with NNPC Limited (the Nigerian National Petroleum Company Limited- Nigeria's national oil company), or where an IOC holds a participating or economic interest, at least 15% of the total annual contribution must be domiciled in a qualifying Nigerian financial institution in the form of an escrow account, while the balance may be domiciled in a qualifying foreign financial institution in the form of an escrow account.

Where the participating interest holders are Nigeria’s national oil company and the IOCs, domiciliation of the funding is split as follows between the qualifying Nigerian financial institution and the qualifying foreign institution: NNPC Limited must pay all its contributions into the Fund domiciled with the qualifying Nigerian financial institution, while an IOC must pay at least 15% of its pro-rata contribution into the Fund domiciled with the qualifying Nigerian financial institution.

The 2026 Regulations further provide for periodic review of this minimum Nigerian domiciliation threshold after ten years. This reflects a measured compromise between regulatory oversight and foreign investor concerns. From the Nigerian Upstream Regulator’s perspective, local domiciliation supports regulatory supervision and domestic financial system participation. From an investor’s perspective, offshore domiciliation may address concerns around credit risk, currency convertibility, treasury policy and the scale of liabilities involved.

Tax treatment of fund contributions

Under the Act, annual contributions to the Decommissioning and Abandonment Fund are deductible for tax purposes. However, the Nigeria Tax Act, 2025 (NTA) has introduced new conditions in relation to contributions for the Fund that do not exist under the Petroleum Industry Act.

Petroleum concessions granted pursuant to the Petroleum Industry Act, 2021

In relation to petroleum concessions granted pursuant to the Petroleum Industry Act, ie, petroleum mining leases and petroleum prospecting licences, Section 86 of the NTA provides that contributions provisioned for the Fund by the holders of such petroleum concessions shall only be deductible for tax purposes:

• where the licensee or lessee deposits at least 15% of the annual contributions to the Fund with a qualifying Nigerian financial institution; and
• the relevant financial institution confirms the deposit.

Petroleum Mining Lease holders and Petroleum Prospecting Licence holders should therefore assess their Fund domiciliation arrangements not only against the 2026 Regulations but also against the NTA tax deductibility conditions, and structure their escrow arrangements accordingly from inception.

Petroleum concessions granted prior to the Petroleum Industry Act, 2021

The position differs for holders of oil prospecting licences and oil mining leases (ie the petroleum concessions granted prior to the enactment of the Petroleum Industry Act in 2021). Section 91 of the NTA does not impose the 15% domiciliation threshold for such holders to enjoy the deductibility benefit. The contributions made by such holders shall be deductible for tax purposes:

• if the contributions have been approved by the Nigerian Upstream Regulator; and
• the holder can produce a statement of account of the Fund.

In both cases (ie, Petroleum Concessions granted pursuant to the Petroleum Industry Act, 2021, and Petroleum Concessions granted prior to the Petroleum Industry Act, 2021), where a surplus remains in the Fund following completion of decommissioning and abandonment, that surplus is taxable upon return to the licensee or lessee.

Escrow accounts and ring-fenced funds

The 2026 Regulations require the Decommissioning and Abandonment Fund to be held in the form of an escrow account with qualifying financial institutions in Nigeria or offshore (as applicable).

The Nigerian Upstream Regulator must be a party to every escrow agreement for the Fund. The Nigerian Upstream Regulator also has access to the funds in accordance with the Regulations.

The escrow agreement must restrict the use of the funds to the implementation of the D & A Plan, prohibit any form of encumbrance or security interest over the funds, and limit investment of the funds to low risk instruments meeting prescribed credit rating thresholds. The funds must be held in US dollars. The licensee or lessee may only access the funds after securing the Commission's approval of a decommissioning or abandonment programme, while the Commission has independent access rights in the circumstances contemplated by the Act and the Regulations.

This is a strong ring-fencing mechanism. It is designed to ensure that funds set aside for abandonment are not diverted to general corporate purposes, pledged to creditors or lost.

Backstopping decommissioning and abandonment funding default with crude oil entitlements

The 2026 Regulations have particular significance for joint venturers and production sharing arrangements. In a joint venture, annual contributions to the Fund must be made by each participating interest holder on a pro-rata basis according to their participating interests.

If a party to a joint venture or production sharing contract defaults in funding its annual decommissioning and abandonment obligation, the Nigerian Upstream Regulator may authorise the lifting of the defaulting party’s share of crude oil equivalent to the value of the default. The relevant bill of lading would name the relevant Decommissioning and Abandonment escrow account as the beneficiary of the proceeds.

This is a significant enforcement tool. It means that decommissioning and abandonment funding default may affect crude lifting, offtake arrangements, cash flows and financing structures. Parties to joint operating agreements, production sharing contracts and crude marketing arrangements should review whether their documents adequately address this risk. The Nigerian Upstream Regulator – directed lifting – could, in some quarters, be criticised as a regulatory taking of the defaulting party’s lifting entitlement.

The consequences are multi-dimensional: a licence or lease holder in default faces the administrative financial penalty under Regulation 24(3) and, potentially, loss of lifting entitlement under Regulation 24(4) in the case of joint ventures and production-sharing contracts, making annual contributions to the Fund a priority obligation.

Ultimately, the interaction with existing crude lifting agreements and offtake contracts requires careful consideration. Joint ventures typically operate under lifting procedures that regulate each party’s entitlement to lift crude oil, scheduling windows, make-up and over-lift positions and the consequences of lifting default.

Offshore decommissioning and longer planning horizons

The 2026 Regulations require a 60-month advance application for decommissioning offshore installations, structures, utilities, plants, pipelines and offshore oil or gas fields.

This five-year lead time reflects the technical, safety and environmental complexity of offshore operations – late applications risk increased costs and delayed regulatory approval.

The 2026 Regulations require detailed information on support structures, topsides, subsea equipment, pipelines, umbilicals, seabed materials, drill cuttings and debris. They also require proposals for seabed debris clearance, including a 500-metre radius around installations and a 100-metre corridor along pipelines, as well as independent verification of seabed clearance.

Buyers of late-life offshore assets must price decommissioning risk early, conducting technical, environmental and cost diligence before assuming that the remaining reserves justify the acquisition price.

Public consultation and community risk

The 2026 Regulations recognise that decommissioning and abandonment affect more than the operator and the Nigerian Upstream Regulator. It can affect stakeholders such as the host communities, fishing interests, contractors, employees, local and public authorities and the wider environment.

The Nigerian Upstream Regulator, together with the licensee or lessee, must conduct public consultations with relevant stakeholders before approving a decommissioning and abandonment application. Relevant information must be disclosed to stakeholders before consultation and comments received during consultations must be recorded and taken into account.

This is especially important in the Niger Delta and sensitive environments, where inadequate consultation may lead to restiveness and reputational harm.

Residual liability where infrastructure remains

A major commercial issue in decommissioning is whether infrastructure should be removed completely, partly removed or left in place. The 2026 Regulations recognise that, in limited and justified circumstances, installations, structures or pipelines may be partly removed or left disused and in situ, subject to the Nigerian Upstream Regulator’s approval. In such cases, the licensee or lessee must describe the post-decommissioning monitoring and maintenance phase, including steps to ensure maintenance and safety.

For offshore infrastructure, where any installation, structure or pipeline is partly removed, the licensee or lessee remains liable for residual liability arising from the infrastructure not removed in accordance with the approved Decommissioning and Abandonment Plan.

This expressly preserves long-term liability exposure where full removal is not undertaken, including obligations relating to monitoring, maintenance and remediation.

Regulatory intervention and third-party performance

The Nigerian Upstream Regulator has significant powers under the 2026 Regulations. It may direct a licensee or lessee to decommission and abandon a well, installation, structure, utility, plant or pipeline associated with a licence or lease, and the licensee or lessee must comply.

If a licensee or lessee fails to comply with the directive, the Nigerian Upstream Regulator may access the Fund to pay for third-party services. The licensee or lessee remains liable for complete decommissioning and abandonment even where a third party performs the work. If the licensee or lessee becomes insolvent or bankrupt, the Nigerian Upstream Regulator may also access the Fund to procure third-party services.

Penalties and enforcement exposure

The administrative penalties are substantial:

• USD500,000 for every year of non-compliance for failure to submit a D & A Plan or establish the Fund within the prescribed timeline;
• An amount equal to one year’s contribution for failure to make a yearly contribution to the Fund; and
• USD1 million for commencing or carrying out an abandonment or suspension of a well or decommissioning without approval.

The 2026 Regulations provide that the administrative penalties are not cost recoverable. The defaulter is also at risk of licence or lease revocation.

Transactional implications for upstream acquisitions and divestments

Decommissioning is now integral to upstream transaction structuring, valuation and regulatory approval. Buyers can no longer rely solely on reserves and production profiles. A buyer must assess end-of-life liabilities to determine if it is inheriting a significant share of end-of-life costs. Apparent value can be materially overstated if decommissioning and abandonment assumptions are not rigorously priced in.

Key diligence considerations include the following:

• Is there an approved Decommissioning and Abandonment Plan and does it comply with the requirements of the 2026 Regulations and the Act?
• What is the approved annual contribution to the Fund?
• Has the Fund been established?
• Are all annual contributions up to date?
• Are there unfunded liabilities?
• Do the approved plans contemplate infrastructure remaining in situ, and if so, what residual monitoring and maintenance obligations arise?
• Are there unresolved environmental or host community issues?
• Has the Nigerian Upstream Regulator raised any concerns in relation to decommissioning or abandonment obligations or funding adequacy?
• Are there existing contractual indemnities for historic liabilities?

Parties seeking to divest upstream interests must also manage their exit residual risk carefully. The Act allows erstwhile licensees or lessees to be recalled for decommissioning obligations in certain circumstances. In the case of a divestment, where the buyer has assumed all the obligations under an approved divestment, the divesting party should be entitled to a clean break from residual decommissioning and abandonment liabilities. Nonetheless, it is worth noting that the relevant provisions of the Act and the 2026 Regulations on:

• the powers of the Nigerian Upstream Regulator to recall the divesting party;
• the point at which the divesting party’s residual liability becomes completely extinguished; and
• the determinative point at which the buyer is seen, in the eyes of the law, as the party responsible for the divesting party’s residual liability

have been the subject of controversy and debate because of the ambiguity in those provisions.

Therefore, transaction documentation must clearly address the transfer of decommissioning responsibility, funding adequacy, historic liabilities, conditions precedent, regulatory consents and the enforceability of indemnities.

Financing implications

For lenders, decommissioning and abandonment affect credit risk. Decommissioning and abandonment obligations now sit alongside reserves, production profiles and operating costs in the assessment of upstream credit risk. Decommissioning and abandonment costs are real obligations that could compete with debt service, reinvestment and distributions, and they may crystallise at a point when an asset is already in decline.

Lenders should focus on whether obligations are properly planned, funded and monitored. Key areas include:

• evidence of an approved Decommissioning and Abandonment Plan;
• confirmation that the Fund has been established;
• covenants requiring ongoing compliance;
• restrictions on asset transfers without decommissioning and abandonment diligence;
• review rights over escrow arrangements;
• modelling of future abandonment contributions; and
• interaction with its internal ESG protocols.

The crude lifting remedy available to the Nigerian Upstream Regulator would be a particular concern for project financiers who hold security over production entitlements.

The Commission’s power to direct a lifting and redirect proceeds to the escrow account creates direct tension with a secured lender’s rights to the receivables under the relevant crude sale and crude lifting agreements. The 2026 Regulations do not address priority ranking between the Nigerian Upstream Regulator’s regulatory remedy and a prior-ranking security interest.

Lenders should ensure their security documentation, representations and covenants adequately address the regulatory lifting risk.

Practical considerations for operators

Operators should adopt a lifecycle approach to asset management. Operators should consider the following:

• reviewing existing Field Development Plans;
• updating Decommissioning and Abandonment Plans;
• validating cost assumptions and methodologies used in calculating abandonment and decommissioning liabilities;
• establishing compliant escrow accounts;
• aligning joint venture documentation with contribution obligations;
• monitoring annual funding requirements;
• preparing stakeholder engagement plans;
• maintaining records of assets, installations and pipelines; and
• building decommissioning into corporate risk registers.

Conclusion

The Petroleum Industry Act, 2021 and the Nigeria Upstream Petroleum Decommissioning and Abandonment Regulations, 2026 have changed the legal and commercial approach to decommissioning and abandonment in Nigeria.

From the Nigerian Upstream Regulator’s point of view, the direction of travel is clear. Decommissioning and abandonment must be addressed early. They should be factored into asset acquisition and divestment analysis, field development, planning, financing structures and long term operational strategy.

Although there are a few provisions in the Petroleum Industry Act, 2021 and the Nigeria Upstream Petroleum Decommissioning and Abandonment Regulations, 2026 that could benefit from clearer language, the framework is an enabler for front-end risk management, and if properly implemented and enforced, can reduce unfunded liabilities and support a sustainable upstream sector.

The companies best positioned under this regime will be those that understand decommissioning not as the end of the asset life cessation programme, but as an obligation that begins even before commercial discoveries are achieved.