• Tuesday, January 21, 2025
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Five traps Nigeria’s energy sector must avoid

Five traps Nigeria’s energy sector must avoid

Nigeria’s oil and gas sector is at a crossroads in 2025. As the country navigates global shifts in energy demand, domestic economic challenges, and rising geopolitical tensions, industry experts warn that avoiding certain ‘messy traps’ will be crucial for maintaining the sector’s stability and growth.

Oil exports make up 80 percent of Nigeria’s revenue, with current production at 1.8 million barrels per day (bpd) placing the country among the world’s largest producers.

This oil and gas sector, which constitutes a significant portion of Nigeria’s gross domestic product (GDP) and government revenue, faces several risks this year.

Below are the key pitfalls that the sector must avoid to ensure a more secure and sustainable future.

Read also: Oil hits four-month high in boost for budget

Oil theft

One of the most persistent problems facing Nigeria’s oil and gas sector is the widespread theft of crude oil and the vandalisation of pipelines.

Criminal syndicates, often aided by local communities, regularly tap into pipelines and steal crude oil, resulting in significant environmental damage, destruction of infrastructure, and loss of government revenue.

“We understand that this is a recurring challenge that has plagued the oil and gas industry. This challenge, if not addressed, will affect crude oil production in 2025,” Ayodele Oni, partner at Bloomfield Law Practice, said in a note.

The Niger Delta, where most of the country’s oil is extracted, has long been a hotspot for illegal refineries and theft, costing Nigeria millions each month.

“The issue of theft would have been far more successfully tackled decades ago, had so many people not been profiting from it,” said Jon Marks, editorial director of energy consultancy and news service, African Energy.

He told Radio France Internationale that criminality has become embedded in Nigeria’s regional and national politics, as well as its business world.

“Oil theft has become institutionalised, with gangs tapping into pipes and often exporting via small ships that offload to bigger ships. This has been achieved by local gangs becoming very powerful, but even more so by the connivance of local politicians and the military – who, in turn, have become very rich.”

He believes that nothing much has changed since a 2013 report by think tank Chatham House, carried out under Goodluck Jonathan’s presidency, which concluded that no concerted action against illegal oil operations could be expected soon.

“The big potential change under Tinubu – who desperately needs more formal revenue for an ailing economy – comes with changes within the army. He has appointed new top brass, more in tune with his thinking and factional alliances,” added Marks.

In June 2023, following a meeting with Tinubu, Asari Dokubo, Ijaw leader of the Niger Delta People’s Volunteer Force, declared that: “The military is at the centre of oil theft in Nigeria.”

To avoid this trap, experts say Nigeria must strengthen its security infrastructure around key oil-producing regions.

Read also: Nigeria, Angola lead Africa oil production in 2025 Report

Economic & currency instability

Economic instability, including fluctuating oil prices and ongoing currency devaluation, remains a significant concern for Nigeria’s oil and gas industry.

“Another recurring challenge that may affect the optimistic outlook of 2025 is the current exchange rate volatility due to the dollarisation of operations in the oil and gas industry,” said Oni at Bloomfield Law Practice.

In tackling this threat, he recommended the sale of locally refined petroleum products in Naira, arguing that this would reduce the demand for the US dollar and by so doing reduce the pressure on the Naira.

“We therefore expect that the Naira-for-crude initiative will be successfully implemented,” Oni said.

Uncertainty in government policies, legal framework

One of the biggest deterrents to investment in Nigeria’s oil and gas sector is the uncertainty around government policies and the lack of a consistent legal framework.

A report at Bloomfield admitted that since the passing of the Petroleum Industry Act (PIA), there has been a level of certainty in the legal framework regulating the oil and gas industry.

“However, since the implementation of the law, there are emerging regulatory gaps and policy inconsistencies and these need to be addressed, as uncertainties may discourage investments in the oil and gas industry,” analysts at Bloomfield said.

They added, “We hope that additional regulations will be issued in 2025 to address the emerging regulatory/policy gaps.”

Bureaucracy in regulatory operations

Nigeria’s vast oil reserves, estimated at 37 billion barrels, the largest in sub-Saharan Africa, should be a magnet for investors in the oil and gas sector.

However, a web of bureaucracy, with up to 20 federal agencies involved in the approval process, is stifling operators and pushing investment to other smaller oil-producing countries, according to findings by BusinessDay.

Experts say the overlapping responsibilities and conflicts between regulatory agencies are hindering fresh investments into Nigeria’s oil and gas sector, the lifeblood of Africa’s biggest economy, where investments have been too few and far between.

This regulatory morass is pushing potential investments towards smaller oil-producing nations, according to findings by BusinessDay.

A senior oil executive who pleaded anonymity said most of the agencies in Nigeria’s oil and gas sector are personality-driven rather than institutionally-focused.

“The problem with Nigeria is the rent-sharing and rent-seeking mentality when it comes to the oil and gas sector because most of the agencies know there is money in the sector and they want to be partakers,” Dapo Akinosun, senior partner at SimmonsCooper Partners, said.

To change the narrative in Nigeria, Akinosun said the role of executive orders in streamlining bureaucracy within Nigeria’s oil and gas industry cannot be overstated.

“These directives have the potential to significantly enhance efficiency, promote transparency, and foster investment by simplifying regulatory processes and enforcing accountability,” he noted.

Read also: Tougher U.S. sanctions on Russian to force China, India to buy more African oil

Technological gaps, underinvestment in infrastructure

Experts argue that Nigeria’s oil and gas sector has long struggled with underinvestment in critical infrastructure and technology.

“A lack of modernisation and innovation in oil extraction, refining, and transportation has prevented the sector from maximising its potential,” said Dolapo Ayeni, an energy analyst with a Lagos-based investment bank.

He added, “In 2025, the sector must prioritise technological advancement, investing in state-of-the-art systems for exploration, production, and refining. This will help reduce costs, increase output, and improve the competitiveness of Nigerian oil on the international market.”

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