Five reasons Nigeria’s energy sector not better five years after

Six years on since the election of President Muhammadu Buhari of Nigeria, his pledge to reform the economy is yet to have the expected effect on Nigeria’s energy sector. His second-coming to the helm of government was meant to rescue the energy sector from challenges that plagued it. One of such difficulties was the ailing refineries he built when he was Minister of Petroleum in 1976.

A decline in oil exploration due to lack of investment has stymied a once active oil and gas sector, which accounted for a sizable chunk of the economy.

Though capital intensive, the economy chugged on petrodollars, the jobs it created and, until remittances from Nigerians abroad overtook it, and constituted the foreign exchange that went into government coffers.

Under Buhari’s administration, there have been few achievements such as first marginal bid rounds since 2003, attempts to remove petrol subsidy, the National Gas Expansion Programmes, a surge in modular refineries, investment in Nigeria’s biggest Liquefied Natural Gas project, popularly called Train 7, growth in renewable energy sector and the first Nigerian National Petroleum Corporation (NNPC) audited reports in over 40 years of existence.

However, his inability to push through 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.

For all the president’s talk of diversification away from oil and gas in his first term (2015-19), the sector accounts for more than 90 percent of foreign exchange earnings and almost half of the federal revenues.

Here are some challenges still plaguing the sector under Buhari’s watch

Power

In 2015, President Muhammadu Buhari described the nation’s power crisis as “an immediate concern” and promised to tackle it “head-on.” In 2021 Nigerians are still groaning under the weight of blackouts.

“Careful studies are underway during this transition to identify the quickest, safest and most cost-effective way to bring light and relief to Nigerians,” those were the words Buhari used while decrying the state of the nation’s power situation in his inaugural speech after his swearing-in.

Talking about unending and seemingly impossible fuel and power shortages, he said, “We are going to tackle them head-on. Nigerians will not regret that they have entrusted national responsibility to us. We must not succumb to hopelessness and defeatism. We can fix our problems.”

Six years after, Nigeria’s power sector is still far away from making the necessary impact needed to boost the economy while frustration and discontent spread among the populace who have already been negatively impacted by the adverse economic consequences of the COVID-19 pandemic.

Data from the Nigeria Electricity System Operator, an arm of the Transmission Company of Nigeria, show as of Sunday, January 17, 2021, that the peak generation for the nation’s power plants stood at 5,046.90mw.

Nigeria’s 5,000mw power output for a population of over 200 million is roughly what the city of Edinburgh provides for 500,000 residents and also less than South Africa’s 58,095mw, which has a similar-sized economy and a quarter of Nigeria’s population.

Refineries

In his 2015 campaign, President Buhari promised to “revive and reactivate Nigeria’s minimally performing refineries to optimal capacity.”

In 2021, Nigeria’s four state-owned refineries at Warri, Port Harcourt (where there are two) and Kaduna cannot work at a fraction of their overall capacity of 445,000 barrels per day, forcing the government to barter crude production for petrol refined elsewhere.

Despite the huge amount expended on the refineries, their woeful performances remained, as the NNPC stated that they posted trading deficits of N82.09 billion, N77.84 billion, N32.84 billion, N131.64 billion and N149.23 billion in 2015, 2016, 2017, 2018 and 2019, respectively, while in the first half of 2020, they posted trading deficits of N58.736 billion.

This means losing revenues that could be invested in health, education and infrastructure.

To compound matters, a price cap at the pump – a de facto subsidy on petrol – continues to drain public coffers and muddy the finances of the NNPC, the state oil company.

Dwindling oil production

Nigeria’s crude and condensate production slumped to around 1.79 million bpd last year from 2.04 million bpd in 2019, according to S&P Global Platts estimates.

This was the lowest output since 2016, when Niger Delta militants repeatedly attacked key oil infrastructure pushing the country’s production to as low as 1.4 million – 1.5 million bpd that year.

Also, data obtained from Baker Hughes Incorporated and OPEC show Nigeria’s oil rig, which depicts the level of oil production activities by operators, have declined by 41 percent from 29 rigs in 2015 to 17 rigs in 2019.

The reduction of rig counts exposes the sorry state of the industry, which is the main revenue earner of the country, an indication that Africa’s biggest oil-producing country is no longer a leading investment destination despite its huge potentials.

Nigeria’s crude reserves, which stood at 38 billion barrels in 2015 have steadily declined over the past five years due to a combination of factors, including lack of funds, security challenges in the main oil-producing Niger Delta region and uncertainty over government’s oil sector reform that has stifled investment in new exploration programmes, industry analysts say.

Absent plan for life after oil

2020 was a year when countries in Europe, Asia as well as major oil-producing nations took bold steps about renewable energy, either as a tool to meet ambitious decarbonisation goals or an opportunity aimed at export, but Nigeria is not moving fast enough to create policies that will drive investments into a low-carbon energy future.

“Nigeria needs to take more urgent steps to develop a productive and diversified economy, in 2030, without which we could be looking at the ruins of a failed state,” said Niyi Awodeyi, who runs Subterra Energy Resources Limited, an investment firm keen on the energy sector.

Also, some of the world’s major funds are also divesting from fossil fuels. The most recent is the New York State’s pension fund, one of the world’s largest and most influential investors with $226 billion in assets, which said it would drop many of its fossil fuel stocks in the next five years and sell its shares in other companies that contribute to global warming by 2040.

For example, Sweden has an ambitious goal to eliminate fossil fuels from electricity generation by 2040 and Costa Rica, which already produces 95 percent of its electricity from renewables, aims to be entirely carbon-neutral by 2021.

Energy giant BP says it will cut its fossil fuel production by 40 percent by 2030 while its refining output will decline about 30 percent. Three months ago, Royal Dutch Shell gutted 10 percent of its workforce, as part efforts towards low-carbon energy.

Nigeria risks a bleak future by not preparing for life after oil cash. By 2050, the country’s population would have doubled from current levels to 400 million but the government acts unaware of what is coming.

PIB

Nigeria has been on a perpetual voyage with Petroleum Industry Bill (PIB), a bill that addresses most of the challenges facing Nigeria’s oil and gas sector. The bill is one of the most important bills ever to be contemplated in its history in a journey that began over 16 years ago with lots of anticipation and promises.

“A competitive bill would help preserve the integrity of the existing projects and also encourage future growth of production and make Nigeria an investment destination of choice,” Lagos Chamber of Commerce and Industry (LCCI) director-general, Muda Yusuf, said.

This key legislation, which is meant to completely overhaul the Nigerian oil industry and provide new fiscal incentives to producers, has been in the works for more than a decade.

The country’s parliament has continued to stall in debating the oil-sector reform bill, while key projects including new licensing rounds for shallow offshore and deep offshore oil blocs remained on the drawing table.

Hopes were raised that the PIB would be passed by parliament in 2020, but it is now expected to be passed into law by Q1 2021, according to Nigeria’s oil minister, Timipre Sylva.

It may be too late in the day. But for the Buhari administration to reverse its negative performance profile, most experts say the government will have to dismantle its unwieldy structure and small worldview that have disenabled capacity-building for effective public sector governance.

“It also needs to expand the role of the local private sector in delivering capital projects,” DG of LCCI said.