Fiscal Incentives for Deepwater & Midstream Developments

Nigeria’s President recently announced a number of fiscal incentives and administrative changes aimed at improving the competitiveness of the oil and gas industry in Nigeria and making Nigeria a more attractive destination for global oil and gas investments relative to other countries in Africa.

The new fiscal and administrative incentives are contained in 3 presidential orders, namely

(a) The Oil and Gas Companies (Tax Incentives, Exemption, Remission, etc.) Order, 2024;

(b) Reduction of Petroleum Sector Contracting Costs and Timelines, 2024; and

(c) The Local Content Compliance Requirements, 2024.

How Significant are the Fiscal & Administrative Incentives?

1. Nigeria has historically had a dearth
of
investments in
non-­associated gas. Based on data from Nigeria’s oil and gas regulator, Nigeria
holds
more
of
non­-associated
gas
in
its
reserves
than associated
gas. However, associated gas
accounts
for
more
than
half
of
the
total
gas
produced
every
year in Nigeria. It is reported that associated
gas
accounts
for
about
 two third
(66%)
of
the
total
gas
produced
in
the
last
eighteen
years in Nigeria
with non-associated gas
making
 up
the
balance
of
34%.

2. Prior to now, contracting cycles in the Nigerian oil and gas industry were at least 3 years, and oil and gas projects experienced significant contracting and approval delays

3. As of 2019, production costs in Nigeria hovered around $93 a barrel, costing about 69% more than the global average.

Highlights of the Fiscal & Administrative Incentives

A. Tax Credits for Non-Associated Gas (Upstream)

For greenfield developments of non-associated gas in onshore and shallow-water terrains with first gas production by 1 January 2029, tax credits in the following amounts:

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 greenfield development of non-associated gas with first commercial production after 1 January 2029, tax credits in the following amounts:

• 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.

It is useful to note that:

1. The non-associated gas tax credit accruable to a company in any year must not exceed its company income tax payable for that same year.

2. The non-associated gas tax credit accruable to a company in any year must not be combined with the Associated Gas Framework Agreement (AGFA) incentives for the same greenfield project.

3. The non-associated 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.

4. Any surplus tax credit not claimed in the respective year is to be carried forward to the subsequent year, but 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.

B. 25% Gas Utilization Investment Allowance (Midstream)

Eligible gas utilization companies in the midstream sector can now claim up to 25% in tax incentives for qualifying expenditures on plant and equipment for new and ongoing projects. Qualifying expenditures are deductible from the allowance from the assessable profit, starting from the year of purchase of the relevant plant and equipment.

It is useful to note that:

1. Companies will only be eligible for the gas utilization investment allowance upon the expiration of the tax-free period granted under section 39(1) of the Companies Income Tax Act. This is usually a period of three to five years.

2. 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.

3. A company will not be eligible to claim the gas utilization investment allowance within five years from the date of purchase of the plant and equipment, if (a) 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; (b) The expenditure on equipment procurement is not a bona fide business transaction or it is considered artificial or fictitious; and (c) the purchased plant or equipment is used for purposes other than gas utilization.

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

C. Deemed Approvals & Improved Contract Lifecycle Management for Oil & Gas Companies

i. The approval threshold requiring the NNPCL’s approval for contracts and procurements in Joint Operating Agreements (“JOAs”) and Production Sharing Contracts (“PSCs”) has now been raised to a minimum of US$10,000,000[1] or the equivalent in Naira, as determined by the NAFEX FMDQ exchange rate or another platform designated by the Central Bank of Nigeria (“CBN”).

ii. The Nigerian Upstream Investment Management Services Limited (“NUIMS”) and Nigerian Content Development and Monitoring Board (“NCDMB”) are now mandated to: (a) simplify the contract approval processes and adopt a single level of approval at each contract stage;(b) reach a decision on any application for approvals or consents with respect to each contract stage within 15 days of submission[2], failing which, an approval shall be deemed given.

iii. The NCDMB must now review any Nigerian Content Plan (“NCP”) and communicate its decision within 10 days, failing which the relevant NCP shall be deemed approved.

iv. The duration of third-party contracts awarded pursuant to a PSC or JOA is now increased from 3 years to 5 years, with the option of renewal for an additional 2 years.

v. Where there is no provision for the timeline for approving an application for regulatory consent or approval, the NCDMB must now give approval within 15 days of receiving a request, failing which the NCDMB will be deemed to have approved any such application

D. Capacity of Nigerian Companies

The NCDMB must only approve NCPs with service providers that demonstrate the capacity to execute the contracted services. Accordingly, the NCDMB has been mandated to develop guidelines for assessing and verifying the capacity of Nigerian companies seeking to execute contracts within the oil and gas industry in Nigeria.

[1]This new approval threshold is to be adjusted annually based on the consumer inflation rate reported by the National Bureau of Statistics

[2] We expect that this timeline will be within 15 "business" days and not calendar days.

This publication is not intended to provide legal advice and is not prepared with a specific client in mind. Kindly seek professional advice specific to your situation. You may also reach out to your usual Balogun Harold contact or contact us via support@balogunharold.com for support.