Nigeria’s oil and gas sector, long regarded as the economic lifeblood of Africa’s most populous country, is undergoing its most transformative phase in decades. From a renewed push to attract capital through sweeping fiscal incentives to historic divestments by international oil majors, the landscape is shifting fast. For institutional and private investors alike, the sector offers high-reward opportunities, but not without complex risks.
A Giant Reawakens
Nigeria ranks as Africa’s largest oil producer and holds the continent’s largest natural gas reserves, with proven oil deposits estimated at 37.3 billion barrels and gas reserves at 210 trillion cubic feet. Yet, actual output has often lagged behind potential. Crude production averaged around 1.5 million barrels per day (mbpd) in recent years, about 93% of Nigeria’s OPEC quota, due largely to underinvestment, vandalism, and theft.
The sector spans three distinct segments: upstream (exploration and production), midstream (transportation and processing), and downstream (refining and marketing). Each presents its own blend of investment prospects, operational hurdles, and regulatory intricacies.
Upstream: Exploration Reopens, Locals Rise
Once dominated by multinationals, Nigeria’s upstream segment is witnessing a pivot. Major international oil companies (IOCs) like Shell, ExxonMobil, and Eni have divested large parts of their onshore and shallow-water portfolios, handing the reins to local firms and Nigerian independents such as Seplat Energy, Oando, Waltersmith, and NDWestern.
The 2021 Petroleum Industry Act (PIA) has catalyzed this shift, introducing clearer licensing rules and profit-sharing terms. New licensing rounds and a “Project One Million Barrels” initiative target a production surge to 2.5 mbpd by 2026. Marginal fields once deemed uneconomical are now drawing renewed interest under the PIA’s transparent fiscal terms.
Still, challenges persist. Niger Delta insecurity, oil theft, and pipeline sabotage continue to disrupt output. Meanwhile, environmental liabilities and community tensions remain ever-present risks.
Midstream: The Gas Imperative
As global markets pivot toward cleaner energy, Nigeria is doubling down on gas. Midstream infrastructure pipelines, LNG trains, and gas processing plants are expanding under the government’s “Decade of Gas” agenda.
The $2.8 billion Ajaokuta–Kaduna–Kano (AKK) pipeline aims to supply gas to northern markets. NLNG’s Train 7 expansion (adding 8–10 million tonnes per annum) is underway, while the Nigerian Gas Flare Commercialisation Programme (NGFCP) seeks to monetize stranded gas assets through private bidding.
Yet midstream faces chronic hurdles. Over 1,500 km of pipelines have been vandalized in recent years. Financing remains tricky, especially with the naira devaluation inflating the cost of imported equipment. Regulatory gaps also persist, with the Midstream & Downstream Petroleum Regulatory Authority (NMDPRA) still defining tariff structures and levy regimes.
Downstream: Refining Returns, Retail Reconfigures
Perhaps the most striking transformation is in the downstream. Nigeria, long dependent on fuel imports due to moribund state refineries, now hosts Africa’s largest private refining complex: the Dangote Refinery.
With a capacity of 650,000 bpd and integrated petrochemical and fertilizer operations, the Dangote plant began gasoline supply in 2024 and is projected to hit full throttle by 2025. Modular refineries and LPG/CNG expansion offer further upside, supported by VAT waivers and deregulated fuel pricing.
However, operating margins remain sensitive to global oil prices. The 2023 subsidy removal sent pump prices soaring from ₦185 to over ₦900/litre, triggering political backlash and shaking consumer demand. FX shortages and logistic challenges continue to stress marketers and importers.
Government Reforms and Fiscal Incentives
The Nigerian government has aggressively overhauled its oil and gas investment framework through the Petroleum Industry Act (PIA) and a suite of 2024–2025 fiscal reform orders, aimed at attracting capital, boosting production, and incentivizing gas utilization. Key reforms include:
| Policy/Order | Key Incentives |
|---|---|
| VAT Modification Order 2024 | Exempts key energy inputs—diesel, feed gas, LPG, CNG, LNG infrastructure, EVs, and clean cooking equipment—from VAT, significantly lowering project costs. |
| Oil & Gas Companies (Tax Incentives) Order 2024 | Offers enhanced tax holidays, capital allowances, and accelerated deductions for deep offshore oil and gas projects, improving project economics. |
| Upstream Cost Efficiency Incentive Order 2025 | Grants tax credits to upstream companies that reduce operating costs below regulatory benchmarks. Eligible firms can reclaim 50% of cost savings, capped at 20% of their annual tax liability. |
| Gas Infrastructure Incentives Order 2024 | Awards 25% investment allowance on plant and equipment used in qualifying midstream gas projects and provides a 15% tax credit for gas infrastructure (pipelines, processing plants, etc.). |
In addition to fiscal incentives, local content compliance remains mandatory. Under the NOGICD Act and Executive Order 41, investors must demonstrate clear Nigerian ownership or partnership, use of local goods and services, and employment of Nigerian personnel. The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) now requires local content plans as part of licensing.
The PIA’s unified fiscal regime also mandates transparent licensing, streamlined royalties, and clearer revenue-sharing terms. Most upstream and midstream ventures now require joint ventures or technical partnerships with NNPCL or qualified Nigerian operators.
Case Studies: Dangote, Seplat, Shell
- Dangote Refinery has invested over $15 billion in its integrated refinery-fertilizer complex. It now holds strategic supply and export capacity, supported by government crude allocation and tax waivers.
- Shell’s Exit from Onshore culminated in a $2.4 billion asset sale to Renaissance Group, a consortium of local operators. The process, delayed by regulatory review, was ultimately approved in December 2024.
- Seplat’s Acquisition of ExxonMobil Assets closed in late 2024 after clearing legal challenges. The $1.28 billion deal made Seplat the largest listed E&P firm in Nigeria by output.
Risk Landscape
Investing in Nigeria’s oil and gas is not for the faint-hearted. Risks include:
- Political & Regulatory: Policy changes, contract enforcement, and legislative delays
- Security: Vandalism, theft, and insurgency in the Niger Delta
- Macroeconomic: Naira volatility, inflation, and access to foreign exchange
- Operational: Infrastructure degradation, sabotage, community pushback
- Environmental & Legal: Cleanup liabilities, flaring fines, and host community disputes
Yet, returns remain attractive. Upstream projects can deliver 20–30% IRR with oil above $70/barrel. Gas projects benefit from guaranteed domestic offtake. Downstream spreads remain favorable in the absence of fuel subsidies.
Practical Advice for Investors
- Partner Locally: Build joint ventures with strong Nigerian firms or NNPC Ltd.
- Conduct Rigorous Due Diligence: Engage local legal and regulatory advisors.
- Manage Security Risks: Budget for protection and logistics in oil-producing zones.
- Hedge FX & Price Exposure: Use instruments to buffer naira swings and oil volatility.
- Leverage Incentives: Structure deals to qualify for tax credits and VAT exemptions.
- Engage Regulators: Stay involved in policy consultations and industry forums.
Strategic Outlook
Nigeria’s oil and gas sector stands at a crossroads. With abundant reserves, a dynamic local operator base, and a newly aligned regulatory regime, the fundamentals for investment are sound. But success requires savvy navigation of the political, security, and fiscal terrain. For those willing to invest with patience and prudence, Nigeria still offers one of the highest reward frontiers in global energy.
