On October 2, 2024, the Minister of Finance and Coordinating Minister of the Economy unveiled the Notice of Tax Incentives on Deep Offshore Oil and Gas Production, 2024 (the Notice). The Notice comes on the heels of the Oil and Gas Companies (Tax Incentives, Exemption, Remission, etc) Order issued by President Bola Ahmed Tinubu to boost investment in Nigeria’s upstream Oil and Gas industry (the Industry).
The Notice offers production tax credits for gas from non-associated gas developments. It also adds incentives for deep offshore projects under production-sharing or profit-sharing contracts. These incentives should ensure competitive returns in Nigeria’s deep offshore basins and renew interest in the Industry.
In this newsletter on deep offshore tax incentives, we explore the key provisions of the Notice. We also examine their likely impact on investors, existing players and stakeholders.
Who qualifies for deep offshore tax incentives
The Notice covers two categories of deep offshore developments. Both sit within Oil Mining Leases (OMLs) and Petroleum Mining Leases (PMLs) that involve production sharing or profit-sharing contracts:
- Existing leases with an approved field development plan, where the lessee takes a Final Investment Decision (FID) between the Notice’s effective date and 1 January 2029; and
- Future leases awarded after the effective date, including those from existing and future prospecting licences.
The Notice takes effect from 28 February 2024. A holder that cannot reach FID in time because of force majeure may apply to the Commission for an extension. Holders of existing leases must also notify the Commission within 30 days of making FID.
Production tax credits for deep offshore oil
The incentives benefit parties to the production sharing contract who funded the development. For oil, the tax credit is:
- the lower of US$3.00 per barrel or 20% of the fiscal oil price, up to 150 million barrels, where producible reserves do not exceed 400 million barrels of oil equivalent; or
- the lower of US$4.50 per barrel or 20% of the fiscal oil price, up to 500 million barrels, where reserves exceed 400 million barrels of oil equivalent.
Future leases get an additional US$1 per barrel, up to 500 million barrels of cumulative production. However, if the crude oil price falls below US$50, the incentive applies at half the rate. A lessee without an approved field development plan and FID can still qualify, but also at half the rate.
Production tax credits for deep offshore non-associated gas
For gas sold from non-associated gas developments, the credit is the lower of US$1.00 per thousand standard cubic feet or 30% of the fiscal gas price, up to 5 trillion cubic feet. This rate applies where the field’s hydrocarbon content does not exceed 30 barrels per million standard cubic feet. Above that level, the credit falls to the lower of US$0.50 per thousand standard cubic feet or 30% of the fiscal gas price. The incentive does not apply where hydrocarbon liquid content exceeds 100 barrels per million standard cubic feet.
Key rules on claiming the credits
- No double dipping: operators cannot claim both the production allowance under the Sixth Schedule to the PIA and the production tax credit in the same year. They can elect between the two each year.
- Carry-forward: surplus credits can be carried forward for up to three years, after which they expire.
- Cost benchmark: if the unit technical cost exceeds the Commission’s benchmark, the credit falls by 10%.
- Apportionment: the credit is based on annual total production and shared according to each investor’s capital contribution.
- Guidelines: the FIRS must issue implementation guidelines.
What the deep offshore incentives mean for operators
Operators with approved field development plans must now decide whether to take FID within the window. The Notice fits the Decade of Gas Initiative, so we expect more investment in deep offshore fields and in non-associated gas. Because lower hydrocarbon liquid content earns a higher credit, it may also reshape exploration strategies.
Overall, the Notice could unlock Nigeria’s deep offshore potential. However, results will depend on whether the incentives make these assets profitable to develop, so stakeholders should keep engaging with the regulators.
For wider context, see our guide to the taxation of oil and gas companies in Nigeria and our Q3 2024 Nigeria tax updates. To read the full newsletter, use the download button below.
