Executive summary

On 29 May 2025, the President of the Federal Republic of Nigeria, Bola Ahmed Tinubu (GCFR), signed the Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025 (the Order), published in Government Notice No. 25, Vol. 112 of the Federal Republic of Nigeria Official Gazette with a commencement date of 30 April 2025. This landmark executive order aims to enhance competitiveness and fiscal sustainability in Nigeria's upstream petroleum sector by introducing a performance-based tax incentive regime linked to operating cost efficiency.

This initiative reflects a renewed effort by the Nigerian government to manage operating costs in the upstream segment, a long-standing concern for policymakers and investors, and to reposition Nigeria as a globally competitive investment destination.

This Tax Alert summarizes the key incentives introduced by the order and their potential impact.

Detailed discussion

The order aims to institutionalize a Cost Efficiency Incentive (CEI) framework that links tax relief to measurable performance. It seeks to lower operating costs in upstream petroleum operations, promote cost discipline among stakeholders, improve operational performance, streamline contract cycles, maximize economic value from the oil and gas sector, and offer tax incentives to companies that achieve or surpass cost-reduction targets.

This is particularly relevant given Nigeria's historically high unit operating costs compared to global peers, often driven by delayed project execution, inefficient procurement cycles and local content challenges.

The incentive applies to:

• Licensees, lessees and their contractors in the upstream oil and gas sector
• Projects across all terrain types — onshore, shallow water and deep offshore
• All upstream companies that meet or exceed annual cost efficiency benchmarks set by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC)

Key incentive highlights

Tax credit for cost savings

Lessees or licensees that incur actual operating costs below the regulator's benchmark for the relevant year become eligible to claim a tax credit. Companies will receive tax credits for realized savings directly linked to their operating costs and production volume. The credit is calculated as a portion of the government's incremental revenue resulting from the reduced cost profile. As a result, 50% of the government's gain from a company's efficiency is essentially returned to the company through a tax credit.

Incentives restriction

The value of tax credits that may be claimed each year is capped at 20% of the company's tax liability for that year, providing a balance between rewarding efficiency and protecting government revenue.

Carryforward period

All unused credits must be applied within three years. Any tax credit not utilized within this timeframe lapses and becomes invalid.

The Executive Order places responsibility on the NUPRC to establish and manage the cost-efficiency benchmarking process. Each year, the NUPRC is expected to conduct a benchmarking assessment to determine acceptable Unit Operating Cost (UOC) levels across various terrains. These benchmarks will serve as reference points for assessing eligibility for the incentives.

To help ensure transparency and industry alignment, the NUPRC is expected to consult relevant stakeholders and disclose the methodology used in setting these benchmarks, reflecting terrain-specific realities, including project environment and production volume.

Licensees or lessees that meet or surpass the assigned reduction targets become eligible for the tax incentives.

The NUPRC is also expected to ensure that cost reduction targets align with international benchmarks and best practices. It is tasked with gradually phasing out Nigeria's upstream cost premium by setting clear, measurable cost-improvement goals annually.

To help maintain consistency and transparency, the Federal Inland Revenue Service (FIRS) will validate all tax credit claims under the Order. The NUPRC's benchmarked unit operating costs will serve as the reference point during these reviews.

The FIRS and NUPRC will be jointly responsible for developing and issuing detailed operational guidelines, which must be approved by the Minister and released within 30 days from the effective date of the Order. The guidelines are expected to cover:

• A transparent evaluation process, including specific unit cost benchmarks and assessment matrices, published annually on the NUPRC's website within 90 days of the start of each calendar year
• Required data and documentation that companies must submit for cost efficiency evaluations
• A published list of qualifying companies for each year prior to the deadline for filing tax returns
• A clear methodology for computing the actual value of claimable incentives

Next steps

This Order represents a significant endeavor by the government to tackle the persistent challenge of high operating costs in Nigeria's upstream sector. By linking tax incentives to cost-reduction achievements, the Order implements a performance-based framework that creates incentives for efficiency and cost management. Implementation of this strategic approach is expected to foster a more competitive and sustainable operational environment, aligning with international standards and practices, and to position the country as a leading participant in the global energy landscape.