Driving Efficiency and Investment: A Deep Dive into Nigeria’s Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025

Introduction 

Nigeria’s oil and gas sector, a cornerstone of its economy, has long grappled with the challenge of high operating costs, deterring investment and hindering its global competitiveness. The rising operating costs stem from a confluence of factors, including prolonged project execution timelines, inefficient procurement cycles, and specific local content requirements. Furthermore, deep structural and systemic issues such as pervasive insecurity in the Niger Delta, bad infrastructure, and bureaucratic hurdles significantly inflate production expenses. 

In a significant move to address this persistent issue, President Bola Ahmed Tinubu issued the Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025 (the “CEI Order”). This landmark executive order, effective from April 30, 2025, introduces a performance-based tax incentive framework for the upstream petroleum sector. This initiative marks a pivotal shift in Nigeria’s fiscal governance of upstream oil and gas operations. The Order is designed to enhance competitiveness and fiscal sustainability by incentivizing cost efficiency among upstream petroleum operators. 

Key Provisions of the CEI Order 

Essentially, the CEI Order is to establish a Cost Efficiency Incentive (CEI) framework aimed at improving efficiency and enhancing Nigeria’s global competitiveness in the oil and gas sector. The Order applies to lessees, licensees, and their contractors operating in the upstream petroleum sector. A central component of its implementation is the role of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC). The NUPRC is to establish appropriate and transparent cost benchmarks for upstream operational activities, assign specific Unit Operating Costs (UOC) reduction targets, and conduct annual performance reviews to assess compliance levels. 

Furthermore, the Order stipulates that cost reductions by operators must not involve harmful or unfair practices with contractors, employees, host communities, or any other person. Any reductions derived from such practices will be excluded from the assessment of cost reduction value. The incentives established under this Order are set to cease on May 31, 2035, unless extended by the President. 

The Tax Incentive Framework 

At the core of the CEI Order is its performance-based tax credit regime. This innovative approach “flips the traditional approach” to upstream taxation by encouraging operators to reduce expenditure to earn a tax credit, rather than potentially inflating costs to reduce tax liability. Companies that incur actual operating costs below the NUPRC’s set benchmarks become eligible to claim this tax credit. 

The tax credit, referred to as the Cost Efficiency Incentive (CEI), is calculated using the following formula: CEI = (CS) x RTR x 50% Where: 

  • CS (Cost Savings) = (Target Operating Cost – Actual Operating Costs) x Annual Fiscal Sales of Hydrocarbons. It is explicitly stated that CS must be a positive integer to qualify for the incentive.
  • RTR = Referenced Tax Rate. The 50% factor means that companies effectively receive half of the incremental government share resulting from their achieved cost reductions. This mechanism directly rewards companies for verifiable cost savings linked to their operating costs and production volume. 

However, the tax credit claimable in any given year shall not exceed 20% of the lessee or licensee’s tax liability for that year. This cap aims to balance rewarding efficiency with safeguarding government revenue. Tax credits granted are valid for offsetting applicable income tax liability in the year they occur and must be utilized within three years of issuance, after which any unutilized credits become invalid and unenforceable.

The validation process for these tax claims involves the Federal Inland Revenue Service (FIRS), which collaborates with the NUPRC. The FIRS is responsible for confirming that the UOC used by the NUPRC to determine eligibility aligns with the UOC used for computing the relevant portion of the company’s adjusted profits for tax purposes. Both FIRS and NUPRC are jointly responsible for issuing detailed operational guidelines, which must be approved by the Minister of Finance and released within 30 days of the Order’s effective date. These guidelines are expected to provide a transparent evaluation process, specify required data, and list qualifying companies annually.

Positive Impacts:

The CEI Order is anticipated to have some of the following positive impacts; 

  • Enhanced Competitiveness and Investment Attraction: By directly linking tax relief to verifiable cost savings, the Order aims to lower Nigeria’s net unit cost, thereby narrowing the gap with lower-cost rivals and making the country a more attractive investment destination. This is crucial for attracting both local and international investors.
  • Reduced Operating Costs and Improved Efficiency: The primary goal is to achieve significant reductions in operating costs, which is expected to progressively eliminate the “cost premium” in Nigeria’s oil and gas sector. This encourages operators to adopt more efficient practices and technologies.
  • Improved Project Economics and Returns: The incentive effectively allows operators to share half of any efficiency gain, which can meaningfully boost the internal rate of return (IRR) on a project, shorten payback periods, and improve net present value. Marginal projects that were previously uneconomic might become feasible if they can achieve industry-standard efficiencies. Companies gain a direct financial motive to innovate and optimize operations.

Potential Pitfalls and Challenges:

The implementation of the CEI Order may face certain challenges; 

  • Implementation Delays and Bureaucracy: Concerns have been raised about the speed of approvals and the potential for delays in processing tax credit claims due to the two-step verification process involving both NUPRC and FIRS. Some stakeholders have noted that despite promising reforms, implementation has been slow, leading to concerns about policy inconsistency and regulatory enforcement.
  • Deep-Seated Structural Issues: A significant challenge is that Nigeria’s high upstream petroleum costs are partly driven by deep structural and systemic issues that corporate willpower alone cannot easily resolve. These include dilapidated infrastructure, fuel shortages, and pervasive crude oil theft, which forces operators into more expensive “alternative crude evacuation” methods. Security issues in the Niger Delta, for example, directly factor into the cost of production.
  • Limited Incentive Scope: While beneficial, the 20% cap on tax credits means that very large cost savings beyond this threshold may not yield additional tax benefits, as the government retains most of such gains. Operators will perform a cost-benefit analysis, only pursuing cost reductions if the net benefit (tax credit plus operational efficiency gains) outweighs the cost of achieving those savings and the economic benefit of maintaining the existing cost structure. This could discourage participation from operators who believe they cannot realistically beat the Target Operating Cost (TOC), especially on difficult terrains.

Recommendations


To maximize the positive impact of the CEI Order and mitigate potential pitfalls, several recommendations emerge which includes; 

  • Minimizing red tape and bureaucratic delays for approvals and claims is paramount. Specifically, it has been suggested that FIRS validation should occur at the audit stage, rather than at the tax return stage, to reduce potential delays.
  • The government must demonstrate a stronger commitment to tackling underlying issues beyond the control of individual operators, such as pervasive insecurity in the Niger Delta and deteriorating infrastructure.
  • Strengthening the regulatory framework, enhancing the institutional capacity of agencies like NUPRC and FIRS, and promoting a culture of transparency and accountability are vital.  
  • Consider the introduction of optional Uplift Mechanisms to the current 50% ceiling for the CEI to further incentivize significant efficiency gains, especially in challenging terrains.

Conclusion

The Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025, represents a commendable and significant stride by the Nigerian government towards revitalizing its critical oil and gas sector. By explicitly linking tax incentives to measurable cost efficiencies, it aligns Nigeria with global trends of easing fiscal terms to attract investment, while uniquely quantifying and sharing efficiency gains with operators.

However, the ultimate success of this promising initiative hinges critically on robust and transparent implementation, effective inter-agency coordination, and the government’s unwavering commitment to addressing the deep-seated structural challenges that have long plagued the sector and impacted operating costs.