Introduction
The petroleum sector remains the mainstay of the Nigeria economy, contributing significantly foreign exchange earnings, our GDP and revenue. Despite its strategic importance, the Nigeria's upstream petroleum operations has been plagued with significant challenges resulting in elevated unit operating costs (UOC) for decades. The UOC often ranging between $25 and $40 per barrel, depending on terrain and asset type. These figures starkly contrast with global averages, where many producers operate at sub-$20 levels. The roots of this inefficiency in Nigeria can be traced to:
- Prolonged contracting cycles and bureaucratic delays within the Nigeria's petroleum sector which exceeds global industry standard.
- Security challenges, including oil theft and pipeline vandalism.
- High infrastructure costs due to underdeveloped logistics and energy networks.
- Local content requirements, while well-intentioned, sometimes inflate costs due to limited domestic capacity.
As a result of the above, the country has become less competitive for potential investors. To address the unsustainable costs premium in Nigeria, the Nigerian President had issued two Presidential Directives to address the petroleum sector contracting cycles and local contents compliance requirements in Nigeria. Furthermore, as part of the broader reforms to stem the tide of cost premium in the Nigeria's upstream petroleum sector, the Nigerian President has now issued the Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025, to tackle one of the most persistent challenges in Nigeria's upstream oil and gas sector: unsustainably high operating costs
This article attempts to highlight some of the benefits of the CEI to the Nigeria's economy and potential pitfalls if the initiative is not properly implemented.
The CEI Framework: A New Dawn
The CEI framework presents a compelling opportunity for upstream operators to rethink their cost structures. It encourages the adoption of novel technologies, leaner operations, and strategic partnerships. It also aligns with broader reforms aimed at reducing contracting cycles and boosting local content.
The CEI framework is a performance-based incentive that rewards upstream operators—lessees, licensees, and contractors—who reduce their UOC below annual benchmarks set by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC). Qualifying companies receive a tax credit equal to 50% of the total cost savings, multiplied by the applicable Companies Income Tax (CIT) rate. These credits can offset tax liabilities on the relevant asset, subject to a cap of 20% of annual tax liability and a three-year utilization window.
Crucially, the framework is terrain-sensitive, recognizing the cost disparities between onshore, shallow water, and deep offshore operations. It also excludes cost savings derived from unethical practices involving contractors, employees, or host communities—ensuring that efficiency gains are genuine and sustainable.
Potential Economic Impacts: Unlocking Value Across the Board
Increased Government Revenue: Higher production margins from cost-efficient operations could lead to increased taxable profits even with tax credits applied. Further, a more competitive cost environment makes Nigeria more attractive relative to other oil-producing nations. The CEI could signal a broader commitment to regulatory reform, encouraging long-term investment, leading to more exploration and production activity, and ultimately, higher royalty and tax inflows.
Job Creation and Local Content Growth: Efficiency-driven projects often require new technologies and services, creating opportunities for local firms and skilled labor. As operators optimize supply chains, local service providers could see increased demand due to reduced cost budgets by the upstream companies.
Enhanced Energy Security: Lower costs and improved profitability could encourage domestic refining and gas utilization, reducing Nigeria's dependence on imported fuels.
Potential Risks: Navigating the Pitfalls
The Order looks good on paper as it promises to transform the oil sector in terms of how costs are managed and incurred. However, as good as this may appear on the paper, there are inherent risks associated with the initiatives if not properly implemented.
Inequitable Benchmarking: If cost benchmarks are not transparently and fairly set, operators in more challenging terrains may be unfairly disadvantaged, undermining the incentive's credibility. Furthermore, where the benchmarking is done without considering industry data and trends, there is a risk that the benchmark set is unattainable by the companies, thereby rendering the entire Order useless.
Uncontrollable Costs: The Upstream sector is one of the most regulated sectors in Nigeria with largest number of taxes/levies from all tiers of government. Majority of costs premium related to legal and regulatory requirements1. The Order does not specifically exempt the regulatory costs and other uncontrollable costs from the UOC benchmark. Thus, regardless of the cost optimization adopted by the companies, the regulatory costs may jeopardize most companies' efforts in realizing the cost reduction target. Thereby, resulting in an unsustainable cost target.
Risk of Superficial Cost-Cutting: In the rush to meet benchmarks, some operators may cut corners on safety, environmental compliance, or community engagement—leading to reputational and operational risks. Furthermore, in a bid to meet the benchmark set for the UOC, operators may classify normal operating costs as capital costs. Although the Order attempts to discourage this practice, there is a tendency that this may occur, especially where there is no proper monitoring/oversight to counter the practice.
Delayed Implementation: The Order specifies that the FIRS and the NURPC shall, with the approval of the Minister of Finance, collaboratively issue an implementation guideline within 30 days from the effective date of the Order. It is nearly 90 days, the implementation guideline is yet to be issued by the regulatory bodies. This delay as well as any other future delays e.g., bureaucratic delays in publishing benchmarks or processing tax credits, etc., in implementing the CEI could erode trust and reduce participation.
Security-Driven Cost Inflation: Insecurities in the oil producing areas necessitate significant spending on pipeline and asset protection, including private security spending contracts and surveillance systems contributing about 5%-8% to operating expenses. Also, sabotage and vandalism further drive repair costs and downtime2. Without parallel improvements in security, operators may struggle to reduce costs in high-risk areas, limiting the framework's effectiveness.
Risk of Regulatory Capture: Without strong oversight, there is a risk that larger or more influential operators, particularly government owned companies could shape benchmarks or interpretations in their favor, distorting competition.
Strategic Recommendations for Effective Implementation
The Federal Inland Revenue Service (FIRS) and Nigerian Upstream Petroleum Regulatory Commission (NUPRC) should urgently publish the guidelines. This will provide clarity on benchmark setting, tax credit calculations, and compliance expectations, restoring confidence among operators. Further, terrain-specific UOC benchmarks should be published well ahead of tax filing deadlines and engage industry stakeholders in setting realistic and data-driven benchmarks. The Federal Government should establish a multi-stakeholder committee including independent experts, industry representatives, and civil society to set and review UOC benchmarks. This would ensure fairness across terrains (onshore, shallow water, deep offshore) and prevents regulatory capture.
The Commission in collaboration with FIRS should deploy digital audit tools and third-party verification to monitor cost classifications and prevent misreporting (e.g., reclassifying operating costs as capital costs). This would enhance integrity and ensures that incentives reward genuine efficiency.
The Government should increase pipeline surveillance through public-private partnerships and technology and expand Host Community Development Trusts (HCDTs) to foster local cooperation. Perhaps, the Government may offer additional incentives to operators investing in security-enhancing infrastructure.
Encourage Innovation and Local Capacity: Promote digital oilfield technologies, automation, and predictive maintenance. Support local service providers through capacity-building programs. Create a CEI Innovation Fund to co-finance pilot projects that demonstrate cost-saving potential.
The Government, through the Ministry of Finance should mandate annual publication of CEI performance reports, including savings achieved, tax credits granted, and sector-wide impact. This would promote transparency, accountability, and continuous improvement.
Finally, as the uncontrollable statutory cost would form part of the cost reduction targets, it is important that the benchmark is robust enough to cater for the portion of the unit cost relating to the uncontrollable cost. Otherwise, it may disincentivize companies from taking advantage of the incentives as it may deemed unattainable due to the numerous statutory costs.
Conclusion: A Turning Point for Nigeria's Energy Future
The Upstream Petroleum Operations (Cost Efficiency Incentives) Order, 2025 is more than a fiscal tool—it is a strategic lever to reposition Nigeria as a cost-competitive, investor-friendly energy hub. By aligning incentives with performance, the CEI framework encourages a culture of innovation, discipline, and collaboration. However, the journey from policy to impact requires clarity, coordination, and commitment. If government and industry rise to the occasion, this reform could catalyze a new era of sustainable growth in Nigeria's upstream sector—one where efficiency is not just rewarded but embedded in the DNA of operations.
Footnotes
2. Rethinking Cost: A Systems-Based Approach to Upstream Petroleum Cost Transformation in Nigeria | by Chinyere Obi | Jun, 2025 | Medium
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
