1. INTRODUCTION:
Nigeria, a nation blessed with abundant crude oil and natural gas reserves, paradoxically grapples with profound energy insecurity. Despite being Africa's largest oil producer and a significant global player, its citizens and industries frequently endure chronic power outages, fuel scarcity, and an over-reliance on traditional biomass for energy. This stark contrast between potential and reality underscores a complex web of challenges, ranging from dilapidated infrastructure and underinvestment to pervasive crude oil theft and pipeline vandalism.
The quest for sustainable energy security in Nigeria has been a long and demanding one, marked by various policy interventions and reforms. In a recent development aimed at revitalising its critical oil and gas sector, the Nigerian government introduced the Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025. Signed into law on April 30, 2025, this Order represents a strategic attempt to address the historically high operating costs that have plagued Nigeria's upstream petroleum operations, deterring investment and hindering optimal production. By offering performance-based tax incentives, the government seeks to foster greater efficiency, attract much-needed capital, and ultimately strengthen the nation's energy supply.
This blog article delves into Nigeria's energy security sector, examining the challenges that have historically undermined its potential. It then critically analyses the provisions of the Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025, exploring its intended benefits and potential impact on the country's energy security. While the Order signals a proactive step towards enhancing the competitiveness and productivity of the upstream sector, its ultimate success in addressing Nigeria's deep-seated energy woes will depend not only on effective implementation but also on a concerted effort to tackle the broader systemic issues that continue to impede sustainable energy development. Is this new Order a genuine turning point, or merely another piece of legislation in a long line of attempts to fix a complex problem? We explore these questions herein.
2. NIGERIA'S ENERGY SECURITY LANDSCAPE:
Nigeria's energy security challenges are deep-rooted and multifaceted, presenting a significant hurdle to its economic development and the well-being of its populace. At the core of these challenges is the persistent inadequacy of power supply. Despite being endowed with substantial natural gas reserves, a primary feedstock for power generation, Nigeria's electricity grid remains notoriously unreliable. Frequent system collapses, gas shortages to power plants, and dilapidated transmission and distribution infrastructure lead to widespread blackouts, crippling businesses and diminishing the quality of life for millions.1 The country's reliance on gas-fired power plants is often undermined by a lack of consistent gas supply, partly due to pipeline vandalism and insufficient infrastructure for gas gathering and transportation.
Beyond electricity, Nigeria's energy security is further complicated by its heavy dependence on crude oil, which accounts for the bulk of its foreign exchange earnings. This over-reliance exposes the nation to the volatile whims of global oil prices, impacting government revenues and economic stability. Domestically, despite being a major oil producer, Nigeria faces chronic fuel scarcity, necessitating the importation of refined petroleum products due to inadequate local refining capacity. This situation creates an ironic scenario where an oil-rich nation struggles to provide its citizens with readily available and affordable fuel, often leading to long queues at petrol stations and a thriving black market.2
Moreover, the energy sector is severely impacted by pervasive insecurity, particularly in the Niger Delta region. Crude oil theft, often referred to as 'bunkering,' and pipeline vandalism are rampant, leading to significant revenue losses for the government and environmental degradation. These illicit activities not only reduce the volume of oil available for export and domestic consumption but also disrupt gas supply to power plants, intensifying the electricity crisis.3 The constant threat of militancy and insurgency further deters investment in critical energy infrastructure, perpetuating a cycle of underdevelopment and instability. The cumulative effect of these challenges is a fragile energy system that consistently fails to meet the demands of a rapidly growing population and an aspiring industrial base.
3. THE UPSTREAM PETROLEUM OPERATION ORDER 2025
The Nigerian government, recognising the urgent need to address the persistent challenges within its oil and gas sector, particularly the high operating costs and dwindling investment, enacted the Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025. This executive order, signed by President Bola Ahmed Tinubu on April 30, 2025, is a strategic response to reposition Nigeria as a globally competitive investment destination in the upstream petroleum industry.4
The Order introduces a new Cost Efficiency Incentive (CEI) framework, designed to link tax relief directly to measurable performance in cost reduction. Its primary objective is to institutionalise cost discipline among stakeholders, improve operational performance, streamline contract cycles, and ultimately maximise economic value from the oil and gas sector. This is particularly crucial given Nigeria's historically high unit operating costs compared to global peers, often attributed to factors such as delayed project execution, inefficient procurement processes, and local content challenges.5
3.2. KEY PROVISIONS OF THE ORDER
Performance-Based Tax Credits: The cornerstone of the Order is the provision of performance-based tax credits for operators who achieve or surpass specific cost reduction targets. Companies that incur actual operating costs below the regulatory benchmark for a given year become eligible for these credits. The credit is calculated as 50% of the government's incremental revenue resulting from the reduced cost profile, effectively returning a portion of the government's gain from a company's efficiency back to the company.6
Scope of Application: The incentives apply broadly to licensees, lessees, and their contractors operating within Nigeria's upstream oil and gas sector. Crucially, the Order covers projects across all terrain types: onshore, shallow water, and deep offshore. This comprehensive coverage ensures that all segments of the upstream sector are incentivized to improve efficiency.
Tax Credit Cap and Utilization: To balance rewarding efficiency with protecting government revenue, the value of tax credits that may be claimed each year is capped at 20% of the company's tax liability for that year. Furthermore, any unused credits must be applied within three years, after which they lapse, encouraging timely utilization of the incentives.7
Role of Regulatory Bodies: The Order clearly delineates the responsibilities of key regulatory bodies:
Nigerian Upstream Petroleum Regulatory Commission (NUPRC): The NUPRC is tasked with establishing and managing the cost-efficiency benchmarking process. This involves conducting annual assessments to determine acceptable Unit Operating Cost (UOC) levels across various terrains. The NUPRC is expected to consult relevant stakeholders and disclose its methodology to ensure transparency and industry alignment, with a goal of gradually phasing out Nigeria's upstream cost premium.8
Federal Inland Revenue Service (FIRS): The FIRS is responsible for validating all tax credit claims under the Order, using the NUPRC's benchmarked UOCs as reference points. Both the FIRS and NUPRC are jointly mandated to develop and issue detailed operational guidelines within 30 days of the Order's effective date, covering evaluation processes, data requirements, and methodology for computing incentives.9
Focus on Gas and Deepwater Projects: While not explicitly stated as a separate provision, the Order, alongside other recent presidential directives, implicitly supports the development of gas and deepwater projects. This aligns with Nigeria's energy transition agenda, which positions natural gas as a crucial transition fuel, and seeks to attract investment into these capital-intensive segments.10
3.3. EXPECTED BENEFITS:
The Upstream Petroleum Operations Order 2025 is anticipated to yield several significant benefits for Nigeria's energy sector and broader economy:
Increased Investment and Production: By offering attractive tax incentives, the Order aims to stimulate new investments in the upstream sector, leading to increased exploration, development, and ultimately, higher oil and gas production volumes. This is vital for boosting export revenues and ensuring adequate supply for domestic consumption.
Reduced Operating Costs: The direct focus on cost efficiency is expected to drive down the notoriously high operating costs in Nigeria's upstream operations, making projects more profitable and the country more competitive on the global stage.
Improved Fiscal Sustainability: The performance-based nature of the incentives ensures that tax relief is granted only when tangible cost reductions are achieved, promoting fiscal prudence and potentially increasing net government revenue from the sector in the long run.
Enhanced Competitiveness: By addressing a key deterrent to investment (high operating costs), the Order seeks to improve Nigeria's attractiveness as an investment destination, enabling it to compete more effectively with other oil-producing nations.
4. POTENTIAL IMPACT OF ENERGY SECURITY:
The Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025 holds significant promise for enhancing Nigeria's energy security, primarily by addressing the supply side of the equation. By incentivizing cost efficiency and attracting investment, the Order aims to unlock greater production from the nation's vast oil and gas reserves, thereby increasing the availability of energy resources for both domestic consumption and export.
Firstly, an increase in crude oil production, driven by renewed investment and optimised operations, can directly translate into higher export revenues. While this primarily impacts the national treasury, it indirectly strengthens energy security by providing the government with more financial resources to invest in critical energy infrastructure, such as power plants, transmission lines, and even renewable energy projects. Furthermore, if domestic refining capacity were to improve, increased crude oil production could potentially lead to a more stable supply of refined petroleum products, alleviating the perennial issue of fuel scarcity that plagues the nation.
Secondly, the Order's implicit focus on gas and deepwater projects is particularly pertinent to Nigeria's energy security. Natural gas is a crucial feedstock for power generation, and increased gas production, coupled with improved gas gathering and transportation infrastructure, can significantly boost the country's electricity supply. This would help mitigate the frequent power outages and reduce the reliance on expensive and environmentally damaging alternative energy sources like diesel generators. The development of deepwater assets, often characterised by higher production volumes and lower operating costs once established, can also contribute to long-term energy supply stability.
Moreover, by creating a more attractive investment climate, the Order is expected to draw in more foreign direct investment (FDI) into the energy sector. This influx of capital can facilitate the deployment of advanced technologies, enhance operational expertise, and foster the development of local content, all of which are vital for building a robust and resilient energy sector. A more competitive and efficient upstream sector can also lead to the unlocking of marginal fields and the exploration of new frontiers, further expanding Nigeria's energy resource base.
However, it is crucial to acknowledge that the Order, while a positive step, is not a panacea for Nigeria's complex energy security challenges. Its ultimate impact will be contingent on several critical factors and the government's ability to address broader systemic issues. For instance, the effectiveness of the Order hinges on transparent and efficient implementation by the NUPRC and FIRS. Any bureaucratic bottlenecks, lack of clarity in guidelines, or perceived inconsistencies could undermine investor confidence and negate the intended benefits.
Furthermore, the Order does not directly tackle the pervasive issues of crude oil theft, pipeline vandalism, and insecurity in the Niger Delta. These challenges continue to disrupt production, inflate operating costs, and deter investment, regardless of tax incentives. Without a concerted and effective strategy to combat these illicit activities, the gains from the Order might be significantly curtailed. Similarly, global oil market dynamics, including price volatility and the accelerating global energy transition towards renewables, will continue to influence investment decisions and the long-term viability of fossil fuel projects in Nigeria. Finally, while the Order aims to boost upstream production, Nigeria's chronic lack of domestic refining capacity means that the country will likely remain dependent on imported refined products, even with increased crude output. A holistic approach that integrates upstream reforms with downstream development and a robust energy transition plan is essential for achieving true energy security.
5. CONCLUSION:
The Upstream Petroleum Operations (Cost Efficiency Incentives) Order 2025 represents a commendable effort by the Nigerian government to inject much-needed vitality into its critical oil and gas sector. By introducing performance-based tax incentives, the Order directly confronts the long-standing issue of high operating costs, aiming to foster greater efficiency, attract investment, and ultimately boost crude oil and gas production. This initiative, if effectively implemented, has the potential to significantly enhance Nigeria's energy supply, contribute to fiscal sustainability, and improve the nation's competitiveness in the global energy landscape.
However, it is imperative to view this Order not as a standalone solution, but as one crucial component within a broader, more comprehensive strategy for achieving sustainable energy security in Nigeria. While the Order addresses key economic aspects of the upstream sector, it does not directly resolve the deep-seated challenges of insecurity, crude oil theft, pipeline vandalism, and the critical lack of domestic refining capacity. The success of this new policy will therefore hinge on transparent and efficient implementation by regulatory bodies, coupled with intensified efforts to combat illicit activities that undermine production and revenue.
Footnotes
1. A.A. Abdallah, 'Energy Security in Nigeria: Challenges and Prospects' (2023) Journal of African Economies, 12(9), 10.
2. C. Magazzino, 'Evidence of supply security and sustainability challenges in Nigeria's energy sector' (2023) ScienceDirect, 23(000887), 16.
3. D.O. Akabuiro, 'Energy Security And Energy Related Offences In Nigeria' (2020) African Journal of Law and Human Rights, 1026, 5.
4. KPMG, 'Nigeria: New cost efficiency incentive framework for upstream oil and gas sector' (16 June 2025) https://kpmg.com/us/en/taxnewsflash/news/2025/06/tnf-nigeria-new-cost-efficiency-incentive-framework-for-upstream-oil-and-gas-sector.html accessed 17 June 2025.
5. EY Global Tax News, 'Nigeria enacts cost efficiency tax incentives for oil and gas upstream petroleum sector' (3 June 2025) https://globaltaxnews.ey.com/news/2025-1185-nigeria-enacts-cost-efficiency-tax-incentives-for-oil-and-gas-upstream-petroleum-sector accessed 17 June 2025.
6. Ibid
7. Ibid
8. Ibid
9. Ibid
10. Energy News Pro, 'Nigeria ties tax incentives to performance to revive upstream oil sector' (4 June 2025) https://energynews.pro/en/nigeria-ties-tax-incentives-to-performance-to-revive-upstream-oil-sector/ accessed 17 June 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
