On May 29, President Bola Tinubu issued a new executive order (EO), expected to attract investment and enhance revenues from the upstream petroleum sector.
Announcing the development in a statement, the office of the special adviser to the president on energy said the order, tagged the ‘Upstream Petroleum Operations Cost Efficiency Incentives Order (2025)’, also made provisions for tax incentives — specifically tax credits.
As a form of government incentive, a tax credit is the amount of money a company can subtract from the income tax it owes to the state.
The executive order adds to the chain of reforms implemented in Nigeria’s oil and gas industry and complements economic fiscal and monetary policies already in place by the federal government.
Tasked to spearhead its implementation, Olu Verheijen, Tinubu’s special adviser on energy, said the order is a strategy to position Nigeria’s upstream sector as globally competitive and fiscally resilient.
“With this reform, we are rewarding efficiency, strengthening investor confidence, and ultimately delivering greater value to the Nigerian people,” she said.
Here are some highlights of the executive order and its implications.
WHAT ARE THE OBJECTIVES OF THE ORDER?
According to the document, the order seeks to establish a cost efficiency incentive (CEI) framework designed to boost efficiency and strengthen Nigeria’s competitiveness in the global oil and gas industry.
To achieve this, the federal government plans to reduce “operating costs in the upstream petroleum operations through achievable cost reduction measures, as well as strategies and targets”.
The EO also intends to promote cost discipline among stakeholders in the upstream sector, enhance operational performance, and streamline contract cycles.
According to the gazette, the order aims to maximise economic value in the oil and gas sector while providing tax incentives to companies that meet or exceed cost reduction targets.
WHO BENEFITS FROM THE TAX CREDIT INCENTIVES?
According to the EO, any licence or lease involving petroleum production, where operations are efficiently managed and actual costs in a financial year fall below the cost targets set by the commission, the company will be eligible to claim a tax credit.
The document stated that tax credits will “represent a proportion of the incremental government share resulting from the reduced costs relative to the established targets”.
The federal government explained that the incentive will be applied to the overall tax liability of the lessee’s or licensee’s relevant asset, serving as a reward for cost reductions achieved without affecting the government’s existing revenue expectations.
“The incentives established pursuant to this Order shall cease to have effect on the 31st day of 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,” the gazette reads.
WHAT IS THE TAX CREDIT AMOUNT AND THE PROCESS FOR MAKING CLAIMS?
In setting cost reduction targets, the gazette noted that the EO seeks to progressively eliminate the cost premium in Nigeria’s oil and gas sector and establish targets that drive year-on-year improvements in cost efficiency.
“Notwithstanding any other provision of this Order, the tax credit claimable in any given year shall not exceed 20% of a lessee or licensee’s tax liability for that year,” the document reads.
Apart from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), the Federal Inland Revenue Service (FIRS) is expected to validate all claims for tax credits under the order.
According to the gazzette, the FIRS is expected to do this by confirming that the “unit operating costs used by the commission to determine the lessee’s or licensee’s eligibility for the CEI align with the unit operating costs used for computing the relevant portion of its adjusted profits for tax purposes”.
The gazzette mandated companies to ensure that cost reduction strategies do not involve harmful practices as defined by the commission from time to time.
Also, the federal government said when companies’ cost reduction achievements are being evaluated, the NUPRC must exclude any reductions resulting from unfair or prejudicial dealings or arrangements with contractors, employees, host communities, or other parties.
“The tax credit granted under this Order shall be valid for offsetting applicable income tax liability in the year they occur and utilised within three years of issuance,” the gazette reads.
HOW WILL THE COST BENCHMARKS BE DETERMINED?
According to the document, the NUPRC will conduct an annual assessment and benchmarking study to establish appropriate cost benchmarks for upstream operations, including unit operating costs across onshore, shallow water, and deep offshore terrains.
The agency will set cost benchmarks following guidelines issued under the Petroleum Industry Act (PIA), gazette said.
Before issuing the guidelines, the EO mandated the commission to consult with relevant stakeholders and publish the methodology used for the annual benchmarking.
Also, the order stated that the commission “shall conduct annual reviews within the tax return cycle of the lessee’s or licensee’s performance with the key assessment metric being the unit operating costs to determine adherence to set targets”.
“For the purpose of determining adherence to cost reduction targets, the commission shall verify production numbers during the annual review process; and reconcile the production and lifting volumes to prevent discrepancies arising from under-lift or over-lift circumstances,” the document reads.
“A lessee or licensee who achieves or surpasses its operating cost reduction targets shall be eligible for the cost efficiency incentives for the year in which the cost reduction target was achieved.
“The Commission shall forward the list of qualified companies eligible for the cost efficiency incentives to the Service for their information, and provide a copy to the minister, pending when the lessee or licensee makes a formal claim for the incentives.”
WHAT ARE THE IMPLICATIONS FOR THE UPSTREAM SECTOR?
Commenting on the new EO, Ayodele Oni, an energy lawyer and partner at Bloomfield Law Firm, said innovative approaches are essential to driving investment and ensuring the nation’s financial stability is not compromised.
Oni said policies allowing companies to retain more profit are appealing to investors as they enhance profitability.
“This scenario creates mutual benefits: investors are eager to invest with assured returns, fostering growth in the nation’s oil and gas industry,” he said.
“The order seemingly reflects careful consideration through its 20% cap, indicating a balance between fostering upstream activities and safeguarding the country’s financial health.”
Oni said the successful implementation, with minimal red tape, could significantly boost the much-needed investment in the sector.
Oyeyemi Oke, partner at AO2LAW, said the order is geared towards ensuring that Nigeria becomes a good hydrocarbons jurisdiction for crude extraction “from a cost of production perspective”.
He added that the country has not “been competitive as a market with regards to extraction in terms of cost of production”.
Speaking to Arise TV on Monday, Seun Eigbe, director at Economic and Social Commission for Asia and the Pacific (ESCAP) Management, said the order helps to reposition Nigeria as a cost-competitive environment for oil and gas producers.
“It is very important because as transformative as the PIA was, it did not take cognizance of the fact that Nigeria was not operating in a global competitive landscape,” he said.
ARE THERE POTENTIAL PITFALLS?
On his part, Jide Pratt, country manager of TradeGrid, noting the downsides of the order, said the time it takes for companies to get approvals for the tax credits may “just be the greatest bane”.
“In the gazette, the upstream regulator must publish a matrix, or a modus operandi to track and monitor achievements of stakeholders in the first 90 days of a year,” he said.
Pratt noted that the process is “three months slow”.
Similarly, Oke decried the “two-step verification” by the FIRS and NUPRC for tax claims.
“The potential downside of this two-step validation is just the possibility of delay in getting these claims,” he said
Oke said there should be little or no delay in getting the claims, adding that the FIRS validation should be “at the stage of audit, not at the stage of tax return”.
He said the government must ensure that security issues are fixed in the Niger Delta to reduce cost of production significantly.
“If an operator is spending more than what is required with regards to cost of security, it will definitely be factored into the cost of production,” Oke said.
“Security issues have led to instances where pipelines have been vandalised, which has also led to instances where operators do alternative crude evacuation (ACE), which means barging or trucking, which also increases the cost of production, compared to transportation of crude oil through pipelines.”
He asked the government to ensure a level-playing field for companies so that the EO would be attainable.
https://www.thecable.ng/explainer-what-tinubus-executive-order-means-for-upstream-sector-operators/
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