Author
-
Energy Team
Introduction
On 30 April 2025, the President of the Federal Republic of Nigeria issued the Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025 (the “Order”). This instrument marks a pivotal shift in Nigeria’s fiscal governance of upstream oil and gas operations, introducing targeted tax incentives to reward cost discipline and operational efficiency among licensees and lessees.
Nigeria’s upstream oil and gas sector has, for years, been plagued by high operating costs driven by protracted contracting timelines, complex regulatory layers, and stringent local content requirements. These inefficiencies have eroded investors’ confidence, delayed project timelines, and increased break-even thresholds, particularly in deep offshore projects.
The Order is a fiscal response to this challenge. It seeks to link cost reduction performance with tax-based rewards, thereby aligning the interests of government and operators around a shared goal: operational excellence.
Understanding the Framework
The Order establishes a framework under which companies that achieve or surpass annual operating cost reduction targets, as determined by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), will become eligible for tax credits. The tax credit is premised on the formula that the actual costs incurred by the lessee or licensee are below the cost targets set by the Nigerian Upstream Petroleum Regulatory Commission (“NUPRC” or “Commission”). The tax credit is applied against the overall tax liability of the lessee’s or licensee’s relevant asset.
In addition to the above, other key highlights include the following:
- Annual Benchmarking: The Commission will set terrain-specific Unit Operating Cost (UOC) targets—onshore, shallow water, and deep offshore—based on global standards.
- Objective Assessment: Only cost reductions not derived from unfair labour or community practices will qualify.
- Tax Credit Formula: Incentives are computed as 50% of the product of cost savings, referenced tax rate, and fiscal hydrocarbon sales.
- Cap on Claims: Tax credits are capped at 20% of the licensee’s annual tax liability and must be utilised within three years.
Importantly, the Order has a sunset clause, meaning that it will cease to have effect on 31 May 2035 (the “Expiration Date”) unless extended. Where any tax credit is unutilised as of the Expiration Date, it will become invalid and unenforceable.
Legal and Commercial Implications
- Incentivised Compliance and Operational Transparency: The regime places a premium on accurate cost reporting and operational transparency. Lessees and licensees will now have added motivation to streamline contract cycles, adopt digital cost-monitoring tools, and eliminate inefficiencies.
- Data Integrity and Tax Scrutiny: The involvement of the Federal Inland Revenue Service (FIRS) in validating Cost Efficiency Incentives (CEI) claims adds a layer of scrutiny. Operators must ensure that their internal cost accounting aligns with tax filings and Commission records.
- Contracting Strategy Adjustments: E&P companies may need to renegotiate service agreements, revise procurement models, and reconsider local content trade-offs to meet efficiency benchmarks without violating community and employment obligations.
- Dispute Risks and Legal Interpretation: Given the technical nature of cost allocation and incentive calculation, disputes may arise over eligibility, methodology, or exclusions. The lack of appeal mechanisms within the Order underscores the need for robust contractual protections and possible recourse to judicial or arbitral forums.
Opportunities for the Industry
This Order introduces an era of performance-based incentives, a departure from Nigeria’s historically rigid and rule-based fiscal regime. If properly implemented, it could drive leaner and faster project execution, improved returns on investment, increased attractiveness of Nigerian assets in global capital allocation and renewed culture of cost consciousness within Nigerian National Petroleum Company (NNPC) and International Oil Companies (IOCs) alike.
Conclusion
The Order, 2025, may well be one of the most consequential fiscal innovations under the Petroleum Industry Act (PIA) era. It signals a shift toward incentive-led regulation, tying rewards to measurable performance, a welcome evolution for a sector long burdened by inefficiency.
As legal advisers to upstream stakeholders, we must now collaborate with clients to not only interpret the Order’s technical provisions but to design internal systems and contractual frameworks that unlock its full benefit without running afoul of compliance, tax, or community obligations.
If implemented in good faith and with transparency, the Order could very well be a turning point in Nigeria’s upstream reform story.
