EXIT, BUT AT WHAT COST? DECOMMISSIONING AND ENVIRONMENTAL RISKS IN NIGERIA’S PETROLEUM SECTOR DIVESTMENTS

INTRODUCTION

Nigeria’s petroleum sector is undergoing a significant transition. International Oil Companies (“IOCs”) are steadily divesting from onshore and shallow water assets, creating opportunities for indigenous operators to expand their footprint. While these transactions present clear commercial upside, they also raise a critical question: Who ultimately bears the cost of environmental damage and asset end-of-life obligations?

At the heart of this issue lies the growing importance of Decommissioning and Abandonment (“D&A”) obligations and environmental liabilities. These are not merely technical or operational concerns, they are legal, financial, and reputational risks that can materially affect the value and viability of a transaction. This briefing note seeks to examine the legal, commercial and operational frameworks that govern D&A obligations and how transacting parties can better manage these obligations in an asset-divestment scenario.

LEGAL FRAMEWORK AND KEY REQUIREMENTS FOR D&A AND ENVIRONMENTAL LIABILITIES

a.    Petroleum Industry Act, 2021

The Petroleum Industry Act 2021 (“PIA”) establishes a comprehensive framework governing decommissioning, abandonment, and environmental remediation in Nigeria. The PIA imposes clear obligations on licensees and lessees to prepare and submit a comprehensive decommissioning and abandonment plan to the relevant regulator, detailing how petroleum facilities will be safely decommissioned and the environment restored at the end of operations. The PIA requires the establishment and maintenance of a dedicated Decommissioning and Abandonment fund (“the D&A Fund”)[1], which must be periodically funded by the operator to ensure that adequate financial resources are available when decommissioning obligations arise. That said, the Nigeria Tax Act 2025 (“NTA”) has introduced a new complexity to D&A Funds, specifically in relation to its tax deductibility. The NTA  provides that a provision made for a  D&A Fund shall not be deductible for tax purposes except: (a) the licensee or lessee deposits a minimum of 15% of the D&A Fund with a Nigerian bank in the form of an escrow account accessible by the Nigerian Upstream Petroleum Regulatory Commission (the “NUPRC” or the “Commission”) or the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the “NMDPRA” or the “Authority”); and (b) the Nigerian bank shall confirm the deposit.[2] It is necessary for licensees and lessee to take into cognizance the above provisions of the NTA for tax-planning purposes in relation to D&A Funds.

Ultimately, the PIA[3] places the responsibility for compliance and costs on the licensee or lessee, ensuring that environmental restoration and facility removal are not neglected or transferred without proper regulatory oversight.

b.    Nigeria Upstream Petroleum Decommissioning and Abandonment Regulations, 2026 & Midstream and Downstream Decommissioning and Abandonment Regulations, 2023.

The NUPRC has issued a detailed regulation with regard to D&A, known as the Nigeria Upstream Petroleum Decommissioning and Abandonment Regulations 2026 (the “NUPRC Regulations”), that requires licensees and lessees to prepare and obtain approval for comprehensive D&A Plans[4], setting out technical procedures, timelines, and environmental restoration measures. The NUPRC Regulations equally mandates the use of prescribed cost estimation methodologies and periodic updates to ensure accuracy of projected liabilities. It further provides for the establishment of a D&A Fund[5] and compulsory contributions into a dedicated D&A Fund to guarantee financial readiness.[6]

Similarly, the NMDPRA has issued the Midstream and Downstream Decommissioning and Abandonment Regulations 2023 (the “NMDPRA Regulations”) which equally highlights the duty of the licensee, whether new or existing, to submit a D&Aplan to the Authority.[7] Consistent with the provisions of the PIA, there is the provision for the establishment of a D&A[8] Fund, as well as mandatory contributions to the D&A Fund.[9]

ROLE OF REGULATORS

Under the PIA, the Commission and the Authority are responsible for ensuring compliance with applicable laws, regulations, and industry standards,[10] including those relating to environmental protection and end-of-life obligations for petroleum assets. This overarching mandate forms the legal basis upon which the Commission and the Authority oversee D&A activities across the petroleum sector.

The NUPRC Regulations and the NMDPRA Regulations (the “Regulations”) require licensees and lessees to prepare and submit D&A plans for approval, maintain dedicated D&A Funds, and carry out environmental restoration in line with prescribed standards. In practice, the Commission and the Authority serve as the approving and monitoring authority for these obligations, ensuring that operators comply with approved plans and execute decommissioning and abandonment activities in accordance with statutory requirements.[11]

Environmental oversight is further exercised by the National Oil Spill Detection and Response Agency (“NOSDRA”) which plays a role in ensuring that operators comply with spill reporting obligations, undertake remediation of impacted sites, while also bearing responsibility for environmental damage. In the context of divestments, NOSDRA’s involvement is particularly significant in addressing legacy contamination and verifying that remediation obligations are properly discharged before and after asset transfers.

Additionally, the Federal Ministry of Environment (the “FME”) retains overarching responsibility for environmental policy, standards, and enforcement. Through its regulatory instruments, such as the Environmental Impact Assessment (EIA) approvals and environmental guidelines, the FME ensures that decommissioning activities are conducted in a manner that safeguards public health and the environment.

MARKET CONTEXT WITHIN THE FRAMEWORK OF DIVESTMENTS

Nigeria has witnessed a sustained wave of divestments by IOCs, particularly from onshore and shallow water assets in the Niger Delta. This trend is driven by a convergence of factors, including persistent security challenges such as pipeline vandalism and crude theft, which have significantly increased operational costs and risks. In addition, IOCs are increasingly rebalancing their global portfolios towards deepwater operations and gas-focused projects, which are perceived as more commercially viable and aligned with long-term energy transition strategies. Environmental, Social, and Governance (ESG) pressures from investors and regulators have further accelerated this shift, as companies seek to reduce exposure to high-risk, carbon-intensive, and environmentally sensitive assets.[12]

From a statutory perspective, the divestment landscape is now shaped by the PIA, which introduces clearer regulatory oversight of asset transfers and imposes continuing obligations on licensees in respect of decommissioning and environmental remediation. Notably, regulatory consent requirements and the retention of certain liabilities, particularly those relating to environmental damage and abandonment obligations, mean that divestments do not always result in a clean break for exiting IOCs. To be clear, the Commission or Authority, as the case may be, are empowered by the PIA, to enforce compliance by any holder of a current licence or lease or a holder of an expired licence or lease who was responsible for the applicable decommissioning and abandonment plan with respect to a licence or lease that has expired, to carry out its remaining or unfulfilled decommissioning and abandonment obligations under the PIA.[13]

ENVIRONMENTAL LIABILITIES IN DIVESTMENT TRANSACTIONS

Environmental liabilities remain a significant risk in Nigeria’s upstream divestment landscape, particularly in light of the prevalence of oil spills in onshore operations and their attendant regulatory, financial, and reputational consequences. Operators may be exposed to substantial clean-up costs, administrative sanctions, and compensation claims from affected parties. The PIA reinforces this exposure by imposing a general obligation on licensees and lessees to prevent pollution and remediate environmental damage, including the requirement to prepare and submit environmental management plans for regulatory approval.

A recurring challenge in upstream divestments is the existence of legacy contamination in ageing assets, where environmental issues may be unresolved, inadequately documented, or insufficiently disclosed at the point of transfer. Under the PIA framework, remediation obligations are effectively tied to the asset rather than solely to the operator, creating a risk that incoming investors may inherit liability for pre-existing environmental damage irrespective of fault. This underscores the importance of negotiating water-tight contractual protections that clearly prescribe the party responsible for pre-existing environmental liabilities .

Consequently, operators bear primary responsibility for restoring impacted environments, creating significant exposure for new entrants acquiring environmentally distressed assets. Without robust due diligence and appropriate contractual or regulatory safeguards, acquirers may assume both current and historical liabilities, which can materially affect asset value and operational viability. In addition, environmental issues frequently give rise to disputes with host communities. Although the PIA introduces the Host Community Development Trust framework to promote engagement and reduce conflict[14], unresolved legacy environmental concerns continue to pose material risks to asset performance, operational stability, and project timelines.

A critical legal consideration in this context is the extent to which environmental liabilities can be effectively transferred from sellers to buyers. Under the PIA, any assignment or transfer of a licence or lease is subject to the consent of the Minister of Petroleum Resources upon the recommendation of the Commission, and such consent may be conditioned on the satisfactory treatment of decommissioning and environmental remediation obligations. In practice, this reflects a regulatory position that liabilities “follow the asset,” with regulators retaining the discretion to hold prior operators accountable for pre-transfer obligations in appropriate circumstances[15].

FACTORING D&A AND ENVIRONMENTAL REMEDIATION OBLIGATIONS INTO ASSET DIVESTMENTS

Comprehensive environmental due diligence is a critical first step in any asset divestment, enabling prospective buyers to identify historical contamination, assess compliance with decommissioning requirements under Section 232 of the PIA, and quantify potential remediation costs. The outcome of this process often directly influences deal viability and pricing.

To manage environmental and decommissioning risks in upstream transactions, parties rely on a combination of contractual and financial protections to allocate liability effectively. Indemnities serve as the primary risk-shifting tool, with sellers typically covering pre-completion environmental liabilities such as legacy spills and regulatory breaches, subject to agreed limitations on scope, duration, and claims procedures. Warranties complement this by addressing compliance status, disclosure accuracy, and the absence of undisclosed contamination, with breaches triggering damages or price adjustments. These protections are often reinforced by financial safeguards such as escrow arrangements and retention sums, which secure the seller’s obligations and provide buyers with accessible recourse. That said, it is not commercially unusual for such legacy environmental obligations to be contractually assigned to the buyer albeit within the confines of applicable laws.

Additionally, parties may adopt structuring mechanisms such as deferred consideration, earn-outs, or liability ring-fencing through special purpose vehicles. Be that as it may,  the effectiveness of such arrangements remains subject to regulatory scrutiny and overarching statutory responsibilities.

These risks significantly affect transaction value, often leading to price reductions or contingent payment structures, as the purchase price typically reflects the cost of environmental remediation and decommissioning obligations assumed by the buyer. In effect, the allocation of environmental risk becomes a central commercial issue in upstream divestments that shapes both deal structure and final valuation.

CONCLUSION

Nigeria’s divestment wave presents a compelling opportunity for indigenous operators to scale and consolidate their position in the petroleum sector. However, these transactions are not without significant risk. Decommissioning and environmental liabilities can materially alter the economics of a transaction.

The PIA has strengthened the regulatory framework, ensuring that D&A and environmental responsibilities are no longer deferred or ignored. For both buyers and sellers, the implication is clear: exit strategies must be carefully structured, and environmental obligations must be fully understood, priced, and managed.

Ultimately, successful participation in Nigeria’s evolving oil and gas landscape will depend not just on acquiring assets, but on the ability to responsibly manage their full lifecycle from acquisition to eventual decommissioning.

Please do not treat the foregoing as legal advice, as it only represents the public commentary views of the authors. All enquiries on this should be directed to the key contacts.