Four significant things happened two days ago and they are all capable of shaking the very foundations of the Nigerian economy far beyond the life of our generation.
Firstly, the Anglo-dutch energy giant Shell announced it was moving ahead with its seismic energy transition agenda which means a major divestment from its oil dominant oil assets holdings in Nigeria.
The Nigerian government promptly confirmed Shell’s posture even if it seems the statement by the Nigerian minister of state for petroleum seems to suggest this was a mere change of ownership of oil wells from Shell to Nigerian buyers. Thirdly, the International Energy Agency, IEA said whether governments in countries like Nigeria understood it or not, the global energy space was being transformed in earth shaking proportions and it would never be the same again as a result of the now accelerating transition away from dependence on fossil fuels. Finally, major banks in Europe and the United States made it clear they too were pivoting away from funding fossil fuel asset acquisition at a faster pace than before. The major impetus for all this can be located in the stance taken by the new US president Joe Biden and backed by increasing scientific evidence of the deepening changes in the climate.
So, what is Shell saying it plans to do and how does this affect Nigeria?
Not too long ago, Shell was responsible for nearly 50% of Nigeria’s daily crude oil output (down to about a third today) and its highly successful Bonga facility was meant to further cement Shell’s dominance in Africa’s number exporter. On May 18, Shell’s global CEO Ben van Beurden admitted that the operations of his Nigerian subsidiary are no longer compatible with the company’s energy transition strategy, explaining, “the balance of risks and rewards associated with our onshore portfolio is no longer compatible with our strategic ambitions.”
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Shell is not the only global energy company pivoting away from the so-called traditional energy but the urgency of the changes the firm seeks to implement in Nigeria says a lot more about its past than about where it is headed.
According to the global CEO, “we cannot solve community problems in the Nigeria Delta and the company has started discussions with the government on now to move forward.”
Years of stifling pollution associated by critics to Shell’s operations in the oil rich Niger Delta, the many court cases relating to this and the steady decline in profitability of the crude oil business globally means that Shell has had enough, and it wants out, speedily.
Analysts say Shell and its executives may now seek to focus their minds on ensuring the company can guarantee gas deliveries to Nigeria’s highly successful liquefied natural gas company where the company has a significant interest. Without Shell Nigeria’s oil industry will be shaped with huge repercussions. Even then analysts also say, what is happening to Shell in Nigeria today will happen to other major oil companies frequently called IOCS simply because the agenda is now being set by global political leaders and shareholders who have become increasingly joined with environmental campaigners. They all want to see an acceleration of the energy transition. And this is why the weak response by the government in Nigeria is more than worrying.
According to one former senior oil industry executive, “there are several Nigerians holding very senior positions in oil companies today and who are already very familiar with the gigantic shift underway in the industry and how this shift can impact economies around the world, but it would seem the government is incapable of calling them together to help chart Nigeria’s own energy transition strategy for our sake and that of unborn Nigerians.”
Nigerian government response to Shell’s announcement contained only options for who will take over the assets once Shell puts them on the market. This is trite and unimaginative. The government failed to understand that the appetite for funding fossil fuel asset acquisition is declining rapidly, and the government does not need to go far to know how the world of oil financing is shifting. Many of those who recently worn marginal oil fields in Nigeria are having a tough time finding financing partners for the acquisition of the fields they have won.
According to the global consulting firm Wood Mckinsey & Co, “Denmark has cancelled all upcoming North Sea licensing rounds in anticipation of ending oil and gas production in the North Sea by 2050.”
Shell like all other major energy firms have set net-zero emissions targets says Mckinsey & Co which adds that “given these dynamics, this is a moment for oil and gas companies to make thoughtful choices: both to improve their economic and reputational resilience, and to consider whether and low to reposition themselves to take advantage of the accelerating low-carbon winds of change.”
Beyond the global campaign against fossil fuel as a result of environmental concerns, MCKinsey & Co reports that “over the past 15 years, the annual total returns to shareholders (TRS) for the average oil and gas company has lagged S&P 500 by seven percentage points. This suggests the sector’s traditional business model has been under stress for some time now.” It added that “our research shows that over the same period, global capital investment by the sector has amounted to more than $10 trillion in real terms. In practice, cyclical sector overinvestment has made it harder to earn a productive return than was previously the case.”
One ray of hope coming out of Nigeria is that private oil and gas firms including some with indigenous ownership are already setting a ten-year horizon within which to drive down cost, develop gas assets for sale into the regional market or pool and then be able to move away from crude oil completely. Because of the changes, 2023 will be a cardinal year in Nigeria’s oil industry, Businessday has learnt.
According to an oil industry chief, “For oil, the horse has bolted from the stable, but we are still waiting to see clear signs suggesting that the government in Nigeria is thinking about the right things. For years now Saudi Arabia has been acquiring significant holdings in international refineries with the hope to find a place for its oil in the years ahead and it is also putting huge cash into developing an array of renewable energy assets, but we are not seeing such forward thinking from Nigeria.”
Often, people are tempted to think that the preoccupation of the government in Nigeria is only about its own survival rather than the health and survival of 200 million people.
At a time when oil exporting countries are seeking to produce more before the curtain will close, Nigeria is faced with worrying production declines in the midst of rapidly falling investment by the majors. Whenever the Nigerian government wakes up to the real world, it will learn that the issues facing oil today are those of declining demand driven by the global energy transition; capital shortage which will continue to slow down investment and then sharp falls in oil price in the face of falling profitability. It is not about who own the oil wells!
Austin Avuru, the immediate past CEO of SEPLAT says what the government should be doing now is to establish an energy transition committee with the sole mandate of developing and implementing a 10- year blue print to take Nigeria away from over reliance on oil rent to dependence on taxation from the business which government now has the duty to enable. He insists that it will be suicidal for government to be contemplating the take-over of Shell’s assets by NNPC or its operating arm NDDC because of its poor track record in managing assets like OPML 30 and 42 which were handed over to it in the past.
According to him, “in the context of where we are today, the Nigerian government should be concerned how to address the worsening revenue shortfall as a result of the decline in the contribution of oil and gas to state revenues.” Oil’s contribution to government revenues has come down by more than a third to around 45%. “The question should be how to fill this huge revenue gap as we cannot continue to borrow relentlessly” Avuru said.
‘‘ For oil, the horse has bolted from the stable, but we are still waiting to see clear signs suggesting that the government in Nigeria is thinking about the right things
