Introduction

To promote effectiveness in upstream petroleum operations, the President of the Federal Republic of Nigeria issued the Upstream Petroleum Operations (Cost Efficiency Incentives) Order in April 2025 (the “Order”) to provide for, among others, tax incentives for companies operating in the upstream sector. Particularly, the Order is aimed at: (a) reducing operating costs in upstream operations through cost reduction strategies; (b) promoting cost discipline among stakeholders in upstream operations; (c) rewarding companies achieving cost reduction targets with tax incentives; (d) improving operational performance and streamline contract cycles; and (e) maximising economic value from the oil & gas sector.¹

Following the three (3) executive orders issued in March 2024, namely the: Oil and Gas Companies (Tax Incentives, Exemption, Remission etc.) Order, Presidential Directive on Local Content Compliance requirements, Presidential Directive on Reduction of Petroleum Sector Contracting Costs and Timelines, the Order aims to strengthen effective cost management for the overall improvement of upstream petroleum operations.

Applicability of the Order

The Order applies to lessees, licensees and contractors in the upstream petroleum sector.² This implies that holders of petroleum mining leases, petroleum prospecting licences and petroleum exploration licences, as well as oil service companies operating within the upstream sector may enjoy tax incentives where they achieve or exceed the cost reduction targets set by the Nigerian Upstream Petroleum Regulatory Commission (“NUPRC” or the “Commission”). A company will be disqualified from deriving incentives for cost reduction achieved as a result of any unfair or prejudicial dealings or arrangements with contractors, employees, host communities or any other person. ³

Supervisory Oversight

As the primary regulator of the upstream petroleum sector,⁴  the NUPRC is empowered to conduct an annual benchmarking study to establish appropriate cost benchmarks for operations in the onshore, shallow, deep offshore terrains.⁵ The NUPRC determines the cost benchmarks and consults with stakeholders to ascertain the methodology for annual benchmarking.⁶ Under the Order, the NUPRC is mandated to:

1. conduct yearly performance reviews, during the tax return period, to determine adherence to cost targets.
2. forward a list of companies eligible for the cost efficiency incentives to the Federal Inland Revenue Service pending submission of a formal claim for the incentives by the eligible company.

Cost-Efficiency Incentive

Where the actual costs incurred by licensees or lessees are below the cost targets set by the Commission, such licensee or lessee will be eligible to claim a tax credit, which is applied against its overall tax liability in a given year. The tax credit is based on the incremental share the government enjoys from the company's reduced cost⁷ and it is calculated in accordance with a designated formula.⁸

It is important to note that the tax credit claimable in each year shall not exceed 20% of the beneficiary’s tax liability.⁹ The tax credit shall be applied in the same year it is earned. However, where it is unused, it may be carried forward, but only for up to three (3) years from issuance.¹⁰
Role of the Federal Inland Revenue Service (“FIRS”)

The FIRS is responsible for validating all claims for tax credits arising under the Order. To ensure the integrity of claims, the FIRS will review to ensure the operating cost figures presented align with the figures utilised in calculating the company’s taxable profits. In effect, a claim for tax credit may be rejected where there is misalignment.¹¹

Timeline

The incentives established under the Order will cease to have effect on the 31 May 2035, unless extended or otherwise modified by the President, and any tax credit granted but not utilised by any lessee or licensee on the expiration date shall become invalid and unenforceable.¹²

Conclusion

This Order marks a significant policy shift towards promoting financial discipline and operational efficiency in Nigeria’s upstream petroleum sector. By tying tax incentives to measurable cost performance, the Order not only encourages transparency and accountability but also aligns private sector behaviour with national economic goals. If effectively implemented and monitored, this incentive framework could serve as a catalyst for long-term cost optimisation, investment confidence, and improved government revenue.¹³

1. Paragraph 1 of the Order.
2. Paragraph 2 of the Order.
3. Paragraph 6(4) of the Order.
4. Sections 4, 6 of the Petroleum Industry Act 2021.
5. Paragraph 3(1)(a) of the Order.
6. Paragraph 3(1)(b) of the Order.
7. In essence, the company is rewarded for cost reductions without compromising existing government revenue expectation.
8. Paragraph 5 of the Order.
9. Paragraph 6 (2) of the Order.
10. Paragraph 6 (5) of the Order.
11. Paragraph 6 (3) of the Order.
12. Paragraph 4 (3) of the Order.
13. We acknowledge the contribution of Jennifer Ortuanya to the publication of this article.