INTRODUCTION
The Nigerian President recently issued the Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025 (the “Order”) which is aimed at driving operational efficiency and enhance Nigeria’s competitiveness in the global oil and gas industry. This briefing note outlines the potential impact of the Order on stakeholders in the industry.
WHO ARE THE CATEGORIES OF PERSONS ELIGIBLE FOR THE COST EFFICIENCY TAX CREDIT?
Paragraph 2 of the Order provides that the Order applies to lessees, licensees and their contractors operating in the Nigerian upstream petroleum sector who achieve or exceed cost reduction targets as determined by the Nigerian Upstream Petroleum Regulatory Commission (the “Commission”).
CAN THE TAX CREDIT ACCRUABLE UNDER THE ORDER BE APPLIED AGAINST BOTH HYDROCARBON TAX AND COMPANIES INCOME TAX?
Paragraph 4(2) of the Order provides that the tax credits shall be applied against the overall tax liability of the lessee’s or licensee’s relevant assets. The language of the Order does not create a dichotomy between the application of the tax credit to Hydrocarbon Tax or Companies Income Tax. The use of the word “overall tax liability” suggests that the tax credit can be used for both hydrocarbon tax and companies’ income tax. It is pertinent to highlight that the definition of “Reference Tax Rate” under the Order also supports this position by stating that computation of credits under the Order may be for the purposes of company income tax or other income taxes.
HOW DOES THE COST EFFICIENCY TAX CREDIT AFFECT OTHER TAX ASSETS SUCH AS LOSSES CARRIED FORWARD?
Companies that have been able to meet the relevant target operating costs (as prescribed by the Commission) but have nonetheless made losses, can carry forward the unutilised tax credit for a maximum period of three years from the year in which the tax credit accrued. Other tax assets such as losses and capital allowances are not affected by the utilization of the cost efficiency tax credit.
WHAT IS THE ROLE OF THE COMMISSION?
The Commission is expected to provide a detailed and transparent process, including the benchmarks, target, matrix and other criteria to be used for evaluating the unit costs, which shall be published on the website of the Commission within (ninety) 90 days of the start of each calendar year.
COMMISSION’S VALIDATION & FIRS VALIDATION: WILL THE PROPOSED 2FA AFFECT EASE OF DOING BUSINESS?
As mentioned above, the Commission is expected to conduct annual reviews within the tax return cycle to determine if a lessee or licensee has performed in accordance with the targeted unit operating costs. After the evaluation by the Commission, the Federal Inland Revenue Service (“FIRS”) is expected to validate all claims for tax credits by confirming that the unit operating costs used by the Commission to determine eligibility for the tax credit aligns with the unit operating costs used for computing the relevant portion of its adjusted profits for tax purposes. While the 2FA process is to ensure that incentive is not abused it may not support the ease of doing business aspirations of the Nigerian government. It is our considered view that an easier approach may be for the tax credit to be claimable immediately at the point of filing tax returns provided validation has been done by the Commission. Subsequent validation of unit operating cost by the FIRS can be addressed by way of desk review or tax audits.
IS THE COST EFFICIENCY TAX CREDIT CAPPED?
Yes. The tax credit claimable in any given year shall not exceed twenty percent (20%) of a lessee’s, licensee’s or contractor’s tax liability in any year. Furthermore, the incentives under the Order are expected to cease by 31May 2035 and any credit granted under the Order which is yet to be utilized shall become invalid and unenforceable.
COST EFFICIENCY V. SAFETY OF OPERATIONS
There are concerns with respect to ensuring that there is a balance between cost efficiency and safety bearing in mind the possibility of compromise of safety by operators to be “cost efficient”. The Order provides that “a lessee or licensee shall ensure that cost reduction strategies do not involve harmful practices as may be determined by the Commission from time to time, and in assessing the cost reduction value of any lessee or licensee, the Commission shall exclude cost reduction derived from, or connected with, or is as a result of any unfair or prejudicial dealing or arrangement with contractors, employees, host communities or any other person.”
It is our expectation that the Commission shall include safety as a significant aspect of its evaluation process when determining cost efficiency. This is necessary to preserve the integrity of the environment and for the protection of human lives.
HOW SOON WILL THE ORDER BE IMPLEMENTED?
The Commission is expected to issue implementation guidelines within 30 days of the effective Order i.e. 30 days from April 30, 2025. Therefore, the Commission is expected to release implementation guidelines any time from now.
CONCLUSION
If properly implemented and administered, the cost efficiency tax credit has the potential of increasing the revenue of government which it intends to share with operators through the tax credit. More importantly, the Order may reposition Nigeria as a jurisdiction of choice with respect to cost of production. That said, attainment of cost of efficiency is not only the responsibility of operators as certain social issues (such as security and crude oil theft) which may be well handled by the Nigerian Government also contribute to the cost of production which needs to be addressed.
Please do not treat the foregoing as legal advice as it only represents the public commentary views of the authors. All enquiries about this should please be directed at the key contacts
