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March 14, 2024

Nigeria enacts tax incentives to encourage development in oil and gas sector

  • Gas tax credits are now available for non-associated gas greenfield developments.
  • Gas utilization investment allowances are available for new and ongoing projects in the midstream sector.
  • Potential incentives also exist for deep water oil and gas projects.

Executive Summary

A new law introduces fiscal incentives geared toward strengthening developments within the Nigeria oil and gas sector. On 6 March 2024, President Bola Ahmed Tinubu signed into law the Oil and Gas Companies (Tax Incentives, Exemption, Remission, etc.) Order 2024 (the Order), with a commencement date of 28 February 2024.

This Alert summarizes the key fiscal incentives introduced by the Order.

Detailed discussion

Gas tax credits for non-associated gas greenfield developments

These credits will apply to non-associated gas (NAG) greenfield developments in onshore and shallow-water terrains with first gas production by 1 January 2029. The tax credit incentive will apply as follows:

  1. US$1.00 per thousand cubic feet or 30% of the fiscal gas price, whichever is lower, if the hydrocarbon liquids (HCL) content does not exceed 30 barrels per million standard cubic feet (SCF)
  2. US$0.50 per thousand cubic feet or 30% of the fiscal gas price, whichever is lower, if the HCL content exceeds 30 barrels per million SCF

For NAG greenfield projects with first commercial production after 1 January 2029, US$0.50 per thousand cubic feet or 30% of the fiscal gas price shall apply, whichever is lower, if the HCL content does not exceed 100 barrels per million SCF.

The gas tax credits are expected to apply for a maximum of 10 years, after which they will be transitioned to a gas tax allowance claimable at the respective rates.

Further, the gas tax credit accruable to a company in any year must not exceed its company income tax payable for that same year, and it must not be combined with the Associated Gas Framework Agreement (AGFA) incentives for the same NAG greenfield project. Any surplus tax credit not claimed in the respective year is to be carried forward to the subsequent year. The surplus carryforward is limited to a maximum of three years with the fiscal gas price for calculating the gas tax credit based on the price used for determining royalties under the Petroleum Industry Act, 2021.

Gas Utilization Investment Allowance

This allowance will apply to gas utilization companies for qualifying expenditures on plant and equipment for new and ongoing projects in the midstream oil and gas industry as of the Order's effective date. The rate is 25% and it will be applied on the actual expenditure incurred on such plant and equipment purchased.

Eligible companies will be allowed to deduct the allowance from the assessable profit, starting from the year of purchase of the relevant plant and equipment. Also, the gas utilization investment allowance will not be considered in determining the tax written-down value of the qualifying expenditure incurred on the plant and equipment.

Companies will only be granted eligibility upon the expiration of the tax-free period granted under section 39(1) of the Companies Income Tax Act which is usually a period of three to five years.

Companies will not be eligible to claim the investment allowance within five years from the purchase date if any of the following occurs:

  1. The company sells or transfers the equipment to a party that acquires it for a business unrelated to the seller's business or for scrap.
  2. The purchased plant or equipment is used for purposes other than gas utilization.
  3. The expenditure on equipment procurement is not a bona fide business transaction or it is considered artificial or fictitious.

Further, if a gas utilization allowance has been claimed for a specific plant or equipment, that item should not be eligible for another gas utilization investment allowance by the acquiring entity or any subsequent purchaser.

Incentives for deep water oil and gas projects

This group of incentives was introduced to ensure competitive internal rates of return for investment in deep water oil and gas projects. Pending the introduction of the fiscal incentives, the Ministry of Finance Incorporated and the Ministry of Petroleum Incorporated will be required to take steps to procure Nigerian National Petroleum Corporation Limited to consider and implement commercial enablers for new brownfield and greenfield investments in the deep-water terrain.

Next steps

The fiscal incentive directives represent encouraging developments in the Nigerian gas sector. The rising demand globally for cleaner energy resources presents a platform for Nigeria to harness its gas resources in developing the nation's economy, guided by the appeal of these incentives. It is expected that implementation guidelines will be released to stakeholders in view of positioning the country as a leading player in the global energy landscape and ultimately driving investment in this sector.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Nigeria, Lagos

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor