Energy sector in-tray of Nigeria’s next president

Between mid-2014 and early 2016, the global economy faced one of the largest oil price declines in modern history. A 70 percent price drop due to a supply glut was one of the three biggest declines since World War II and the longest-lasting since the supply-driven collapse of 1986. Oil prices were literally on the floor but Nigeria failed to remove petrol subsidies, grant new oil leases or reform oil regulations.

Analysts of all shades counseled President Muhammadu Buhari’s government, barely a year in office, to remove subsidies on imported petrol. Even his then minister of state for petroleum, Ibe Kachikwu, struggled to explain away the illogicality of keeping subsidies at a time Nigeria’s production had fallen to 20-year lows on account of the militant activities.

Four years later, the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members including Russia failed to agree on export curbs to shore up prices and began pushing so much volume into the market, and they set off a price war, which eventually upended oil markets.

By March 2020, Saudi Arabia was doing ‘give-away’ slashing prices to $4 per barrel in the Asian market. Russia, in response, began pumping like oil was going to replace water. Negotiations between Saudi Arabia and Russia broke down. High-cost shale producers that profited from a boom in prices were in tears. Brent prices, which started at $45 a barrel in March, had crashed below $10 by April. Some shale producers were paying people to take the oil by the end of April.

Again, many analysts called on the Federal Government to seize the opportunity to remove subsidies, reform the sector and pass the Petroleum Industry Bill. The President, a former military general, with a tenuous grasp of economics and geopolitics, refused the counsel until it was too late to implement any serious reforms. Subsidies have become an albatross.

In the 2023 general elections, all the presidential candidates have pledged to remove subsidies but as Buhari was quick to find out in 2015, articulating policy is easier when you’re doing it on a campaign podium. The man who lampooned petrol subsidies ended up burning over N7 trillion on it.

The new president assumes office in an economy in tatters. Over N70 trillion worth of debt, mildly recovering oil production and investors scrambling for the hills will test the will of the new government. And removing subsidies in the midst of the present challenges will present new hurdles.

“The government must bite the bullet rather than the several postponements seen by the outgoing government for obvious political reasons,” Joshua Olorunmaiye, team lead/executive associate, energy and natural resources at Bloomfield LP, told BusinessDay.

Nigeria has declared a ‘Decade of Gas’ but little, apart from sloganeering, has been done to show serious intent. Gas producers have called for a liberal gas pricing regime.

Last August, the Manufacturers Association of Nigeria said industries that were operating at 60-70 percent capacity utilisation were operating at an average of 15 percent and energy was their biggest challenge.

“Gas supply to the commercial sector averages around 400 mmscf/d before the current supply challenges. Now supply is lower than 50 percent of previous capacity,” Ogagbano Adejo-Ogiri, executive secretary of the Association of Local Distributors of Gas Ltd, told BusinessDay in August.

Rising oil production, some manufacturers say, has improved supply but only modestly. They are watching the situation with bated breath.

Power supply still hovers around 4,000 megawatts daily despite reportedly improving revenues of the distribution companies (DisCos). Legacy gas plants are still billions of naira and the Federal Government is contemplating reneging on the terms with Azura Power, a development capable of shredding whatever remains of Nigeria’s credit ratings.

Metering reforms and service-based tariff plans have improved DisCos’ revenues and the test for a new government would be how it sustains these reforms. For the new administration in Nigeria, the urge to cancel and start afresh has the same addictive effect as opium fresh from Afghanistan.

The implementation of many provisions of the new Petroleum Industry Act (PIA) was suspended by the President, especially the reforms it recommended in the downstream sector. Analysts say the priority of the new president is to implement the law including the new fiscal and regulatory terms.

Buhari’s tenure as oil minister has seen the worst flight of investment capital, declining production and crude theft. The new president, analysts say, should focus on ‘being president’ while professionals run the sector. Oil leases remain unused because cronies rather than investors win bids; this cannot continue if the country yearns for recovery.

At the passage of the PIA in August 2021, it was advertised as the elixir for new investments into the sector, but investors are fleeing Nigeria due to industrial-scale crude theft, uncertainty, and the government’s inability to fully implement the Act, according to operators.

Read also: Renewable energy investments hit $1.3trn, a record high.

A recent report on investments into oil and gas exploration in Africa between 2020 and 2022 by the International Renewable Energy Agency found that Nigeria’s investment into exploration was $1.33 billion, compared with Algeria’s $3.256 billion, Egypt’s $1.744 billion, Namibia’s $1.124, and Angola’s $977 million.

Shell, ExxonMobil, Sunlink and TotalEnergies spent about $100 million on exploration activities in Nigeria.

Osagie Okunbor, managing director of Shell Petroleum Development Company of Nigeria Ltd and country chair of Shell Companies in Nigeria, at a recent conference in Abuja, said a lack of stability in fiscals, issues with the sanctity of contracts, security of investments, and the sheer impact of crude theft continued to scare away investors.

Ayodele Oni, partner, Energy Practice Group at Bloomfield LP, said efforts at reducing oil theft along the pipeline routes to the export terminals had been critical to increased production.

“The government needs to ensure that this trajectory is sustained,” he said. “The high oil prices have also been some form of encouragement to produce more.”

The Nigerian Upstream Petroleum Regulatory Commission revealed in its monthly oil production status report that Nigeria’s oil production rose by 34 percent from August 2022 to 1.26 million bpd in January 2023, the highest in 12 months, and the next president’s top job is to ensure it does not go down.