Cost Efficiency Incentives Order, 2025
On May 15, 2025, Nigeria’s President issued the Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025, granting certain cost efficiency incentives (CEI) to lessees, licensees, and their contractors in the upstream petroleum sector who are able to operate below prescribed cost reduction benchmarks set by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC). The CEI is in the form of tax credits and is to be received based on the following formula and to be applied against the overall tax liability of the lessee’s or licensee’s relevant asset:
“CEI = (CS)* RTR * 50%
Where— CS = Cost Savings* = (TOC – AOC) *V
RTR = Referenced Tax Rate
AOC = Actual Operating Costs
TOC = Target Operating Cost
V = Annual Fiscal Sales of Hydrocarbons
50% = the ceiling for the CEI.
*CS must be a positive integer to qualify for the incentive.”
The NUPRC is required to conduct annual benchmarking of Unit Operating Costs (UOC) for onshore, shallow, and deep offshore terrains. Such benchmarks must be public, transparent, and stakeholder-informed, and specific UOC reduction targets are assigned yearly per terrain. Also, cost reductions by operators and or licenses must not involve harmful or unfair practices, e.g., wage suppression, underpayment to communities, or unethical contractor arrangements, and applicants must retain proper cost and production data.
Our Comments
The CEI Executive Order is a welcome development and demonstrates Nigeria’s commitment to promoting an internationally competitive market. It is particularly noteworthy that TOC is terrain-specific. We therefore expect that deep water, shallow offshore, and onshore would each have different cost benchmarks.
However, Nigeria’s high upstream petroleum costs are driven in part by deep structural and systemic issues that can hardly be resolved by corporate willpower.
Additionally, we expect that operators will ultimately conduct a cost–benefit analysis and will only consider the CEI where the net benefit (i.e., the tax credit plus any operational efficiency gains) exceeds both the cost of achieving those savings and the economic benefit of maintaining the existing cost structure. Absent a compelling economic incentive, why would an operator willingly reduce costs that are otherwise recoverable? Viewed from this perspective, cost recovery audits will remain essential and are likely to continue playing a central role in addressing cost overruns and ensuring fiscal discipline in the upstream sector.
It may also be useful to maintain the 50% as the base rule and to introduce optional uplift (e.g., up to 70%) based on criteria like the nature of the cost/efficiency reform introduced by an operator, the strategic nature of the relevant asset, as well as other ESG or decarbonization value attributable to an operator’s cost savings.
Lastly, it appears that the CEI only applies where actual costs are below the cost target, meaning that operators that achieve the cost target may not be entitled to the CEI. This may discourage participation from operators who believe they can’t realistically beat the TOC, especially in difficult terrains.
Balogun Harold's insights are shared for general informational purposes only and do not constitute legal advice. For tailored guidance, please contact our Energy & Infrastructure Lawyers at bhlegalsupport@balogunharold.com.
Olu A.
LL.B. (UNILAG), B.L. (Nigeria), LL.M. (UNILAG), LL.M. (Reading, U.K.)
Olu is a Partner in the Firm’s Transactions & Policy Practice. Admitted as a Barrister & Solicitor of the Supreme Court of Nigeria in 2009, he has spent over a decade advising clients on high-value transactions and policy matters at some of Nigeria’s leading law firms.
olu@balogunharold.com
Kunle A.
LL.B. (UNILAG), B.L. (Nigeria), LL.M. (UNILAG), Barrister & Solicitor (Manitoba)
Kunle is a Partner in the Firm’s Transactions & Policy Practice. Admitted as a Barrister & Solicitor of the Supreme Court of Nigeria in 2009, he has spent over a decade advising clients on high-value transactions and policy matters at some of Nigeria’s leading law firms.
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