• Friday, March 29, 2024
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Nigeria’s high political risk puts energy sector on life-support

Nigeria’s high political risk puts energy sector on life-support

From kidnappings and jihadist rebellion by Boko Haram to homicide by notorious “unknown gunmen,” the growing rate of insecurities and increasing political risk under the administration of President Muhammadu Buhari is causing more uncertainties in Nigeria’s energy sector, the economic heartbeat plagued with teething challenges.

An active oil and gas sector draws investments and acts as an economic enabler, creating jobs and improving the standard of living, but when oil exploration declines due to a lack of investment, economic growth is stymied.

While most investors agree good governance is the ultimate secret to securing Nigeria’s corporate existence, the country’s present political risk appears to be worsening, a situation marring the country’s investment climate similar to oil-producing countries such as Libya and Mozambique.

In Nigeria, analysts say the suspension of Twitter in Africa’s most populous country, two days after the social media platform deleted a tweet from President Muhammadu Buhari’s account for violating its rules, is not among a million and one respectable ways a government can react.

“Political risks and instabilities are real headaches for investors in the oil and gas sector. As such, prior to investing there, investors undertake extensive due diligence to ensure that such risks are adequately addressed or mitigated,” Caleb Adebayo, energy and environmental lawyer at New York University School of Law, says.

He notes that any factor that affects foreign investment will disproportionately hit the oil and gas sector, affecting players across the value chain and causing the country to lose out on potentially large energy deals.

Nigeria’s increasing political risk is also coming at a time there is mounting global advocacy aimed at halting all-new Final Investment Decisions (FIDs) for fossil fuels, especially oil and gas, a scenario that may create serious hurdles for new fields development as over $150 billion worth of projects risk getting stranded in Nigeria.

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Mired in obscurity are the $20 billion Brass LNG project in Bayelsa State; the $9.8 billion Olokola LNG in Ogun State; the 5000km Nigeria-Morocco offshore gas pipeline, which in the current market price would cost an estimated $20 billion.

Other projects that have remained at the planning stage include Shell’s Bonga North, which is expected to add about 100,000 barrel per day (bpd); Eni’s Zabazaba-Etan (120,000bpd); Chevron’s Nsiko (100,000bpd); ExxonMobil’s Bosi (140,000bpd); Satellite Field Development Phase Two (80,000bpd) and Ude (110,000bpd).

“So, if there’s no fresh capital for either brownfield or greenfield investment, we cannot grow production; if we don’t grow the production, the consequence is that we’re building a short supply for tomorrow,” NNPC’s group general manager for National Petroleum Investment Management Services, Bala Wunti, said at this year’s Nigeria International Petroleum Summit (NIPS).

Over the years, increasing political risk and insecurity has exposed the sorry state of Nigeria’s energy sector, the main revenue earner of the country, and worsened the growth prospects of an economy wallowing in its second recession in five years, where 40 percent of the people live below the poverty line.

Richard Laing, the chairman and managing director for ExxonMobile Nigeria, says marketing the Nigeria brand to global investors will be a lot easier if the country remains competitive in terms of attracting the right investments.

“It takes longer to executive contract in Nigeria than in other countries,” Laing states at NIPS.

According to Laing, Nigeria needs to fix issues concerning security, the sanctity of contract and making sure there are no surprises during contract obligations.

Under Buhari’s administration, years of economic malaise and security forces that do little to enforce the law have driven up crime rates while the country’s investment climate nosedived, leaving many of Nigeria’s 200 million citizens vulnerable.

Yet, security is just one among this administration’s many deficiencies. Buhari has failed to reduce the country’s political risk, diversify the country’s dependency on oil, follow through on regulatory and fiscal reforms and take on deeply entrenched interests that have long profited from the status quo remains a major stumbling block in the sector.

A one-year review of the Federation Accounts Allocation Committee (FAAC) by Nigerian National Petroleum Corporation (NNPC) shows that disruption in crude oil production reached 36.3 million (36,262,664) barrels last year, out of which 3.6 million (3,636,400) were lost to alleged attacks by members of host communities over issues ranging from political instabilities, environment, and appointments.

The loss means Nigeria threw away a big opportunity of injecting about N74.6 billion into its ailing economy, using the average price of the international Brent crude, the benchmark for Nigerian crude oil, which sold for an average price of $50 in 2020.

“Political instability is a disincentive to oil and gas investment because it hampers the future of business operations, while infrastructure decay increases the cost of production, affects competition, and erodes companies’ profitability,” Luqman Agboola, head of energy and infrastructure at Sofidam Capital, said.

According to Agboola, Nigeria has not only suffered a colossal loss in terms of infrastructure, properties, and viable human lives but also economic sabotage, which leads to the displacement of FDI.

Since 2015, Nigeria has had to manage Foreign Direct Investment inflows of around $1 billion, a third of what smaller African peer Ghana attracted in the same period.