• Friday, July 19, 2024
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We are upbeat about investment inflows into Nigeria’s energy sector in the coming months – Verheijen, SA to President Tinubu on Energy

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Olu Arowolo Verheijen is the Special Adviser on Energy to President Bola Tinubu. She is an African energy expert and renewable energy investor and has almost two decades of experience in the oil and gas, renewables, and power sectors across Sub-Saharan Africa. Her expertise spans commercial negotiations, business development, portfolio management, and venture capital in the energy sector.

She holds a Bachelor of Arts from Long Island University and a Masters in Public Policy, Finance, Markets Analysis, Business, and Government Policy from the Harvard Kennedy School. In this interview with BusinessDay’s Onyinye Nwachukwu and Cynthia Egboboh, Verheijen explains the government’s deliberate effort to revamp Nigeria’s energy sector to drive economic development. She further assures that the government will be more intentional about delivering electricity to Nigerians and foresees investment inflows, particularly in the oil and gas sector, in the coming months.

As the Special Adviser to the President on Energy, help us understand your role and progress so far since your appointment last year.

The President of Nigeria has been working to restore oil production and improve the country’s economy, despite facing declining production and security issues onshore. To achieve this, strategic interventions have been implemented to improve gas production at NLNG and domestic markets, focusing on outcome-based delivery, ensuring law and order, and ensuring investments in oil communities. Programmes are being developed to provide opportunities for people in the Niger Delta to take care of their families and benefit directly from the country’s resources.

The administration has been able to build production by 200,000 barrels a day since taking over, and NLNG’s availability from trains has increased from 50 percent to 70 percent since Q1 2024. Long-term strategic interventions are also being considered to keep the NLNG full, ensuring that host community funds are well-funded and that people in the Niger Delta have access to the resources produced by the country.

International Oil Companies (IOCs) are shifting their portfolios and moving from onshore to offshore, necessitating stand-alone economics for upstream assets. The government is considering appropriate fiscal incentives for investments and capital allocation to drive the country’s gas initiative and industrialise the region.

“The government is now considering appropriate fiscal incentives for investments and capital allocation to drive the country’s gas initiative and industrialise the region.”

Nigeria needs to reduce contracting time and redefine its position in the global market. A benchmarking exercise revealed Nigeria’s attractiveness for deep water and gas projects, but non-associated gas remains underutilised. Addressing onshore insecurity and NLNG’s increased commercial prices for upstream supply will require non-associated gas to improve reliability. Non-associated gas is a more reliable source of gas but more expensive to develop, especially offshore.

The government is now considering appropriate fiscal incentives for investments and capital allocation to drive the country’s gas initiative and industrialise the region. To compete with more intentional entities, the company needs to streamline its processes and align them with a six-month target. NCDMB and NNPC have been engaged to review their processes and increase the threshold for review and intervention. Focusing on higher-value items above $10 million would reduce processes, scope, and steps required, making NNPC more efficient.

The issue of local content in Nigeria has led to a cost premium of nearly 40 percent in some cases, resulting in increased costs for projects. This is partly due to security issues offshore and hindering the diversification of the economy. The third executive order aims to make Nigeria more competitive by encouraging Nigerians to build world-class capacity and weeding out others to reduce costs.

The three directives aim to enable the oil and gas sector to catalyse economic diversification. The government is open for business and listening to investors, with the president having experience in the sector. Most players, including the coordinating minister of the economy, chairman of the FIRS, CBN governor, and minister of power, have private sector experience and understand the need to balance national interests and attract private capital.

Can you speak to other tangible achievements so far in the industry as a result of those executive orders and directives?

Those directives came in February, and we are working through the implementation right now and using projects as blueprints to drive that. People don’t make billions of dollars in investments because you said something in a week. You have to earn that trust back. There were 10 years when they felt that you weren’t listening; they’re excited about you listening now, but we also have to be consistent to earn that trust back.

We’re going through that process, and we believe that over the next 18 months, you’ll start to see investment announcements. You would have noticed that Exxon’s transaction had entered into a settlement agreement with NNPC, and we can now move forward with their divestment. We’ve been working to ensure that a series of those types of announcements for those tangible outcomes occur. You don’t sign an executive order, and then all of a sudden somebody comes; they have to go back to their global boards and decide on what investments to commit, having seen that truly things have changed. We believe that over the next couple of months, you will start to see those tangible outcomes.

But are there projections driving this set of reforms?

Yes, those series of engagements showed that if we did some of the things that the investors highlighted, which the executive orders set out to achieve, they could start to make investments. We looked through their portfolio, and they showed us opportunities worth over $50 billion and said it is not a lack of opportunities; it’s the environment, and if you address these issues that help improve the investment climate, then we will start to make those investments. Over the next 18 months, there will be over $10 billion worth of projects that could be FDI. There are many enablers, and we’ve done our part to ensure that when you sit in a boardroom, Nigeria is close to the top of the list of opportunities. But at the end of the day, they need to advise us on how much capital they have. We’ll see what actually gets sanctioned over the next 18 months, but there’s potential for $13 billion. There’s also potential for up to $55 billion if you go all the way up to 2030.

Is it a concern that IOCs are divesting from the country?

The oil and gas industry in Nigeria is a mature province with a history of over 70–80 years of production. Onshore companies, such as Total and Shell, have spent significant capital to de-risk and produce in this region. However, insecurity has accelerated their exit from the country, leading to international companies moving to newer frontiers with competitive advantages.

Offshore companies, on the other hand, are focusing on higher-emission businesses due to crude theft issues. They buy, de-risk, recover funds, and move on to new frontiers. This is a global trend, with companies like Total and Shell also doing it. However, they have had to make this decision faster due to crude theft issues onshore.

Total and Shell are among the largest offshore producers, but only Equinor has a complete country exit. This narrative has been perpetuated by those who want bad news. The focus is on recycling capital into offshore businesses with competitive advantages.

Overall, the oil and gas industry in Nigeria is a complex and competitive landscape that requires careful planning and strategic decision-making.

The author emphasises the importance of consulting with International Organisations of Commerce (IOCs) to verify capital allocation decisions, which are often made over the last decade due to the significant investments made. The author cites the 20-year delay in passing Nigeria’s law for PIA, which led to money going elsewhere. The author has decided to accelerate reforms within the laws, using presidential directives to expedite these changes and reforms, ensuring investor retention and competitiveness in capital allocation.

The reallocation of capital should be affecting us in some way.

Over the last 10 years? Yes. It concerns us, and that’s why we’ve had the conversation. I started off by saying that we inherited declining investments and decided to prioritise and reverse that with this directive. So it’s of concern, and we’ve addressed it. And soon enough, you’ll see the outcomes of those actions that we’ve taken. We came in and saw that we needed to restore our production because people haven’t been investing over the last 10 years. That’s the first thing that we’ve actually addressed with these three directives.

Nigeria has consistently appealed to developed nations for a right balance between fossil fuels and green energy in the race for energy transition. Are they listening to us?

Let me say something about our global energy mix. Sometimes you’re asking for permission wrongly. The global energy mix today is 80 percent fossil fuels.

The largest gas producers in the United States are monetizing their gas and recognising the importance of energy security and transition. Transitioning to green energy, or renewable energy, is not about energy displacement but rather focusing on reducing one source of energy. Green energy has grown significantly over the last decade, but it still makes up less than 10 percent of the global energy mix. Data-driven policies recognise this, and discussions with activists and energy producers help identify investment plans.

Nigeria’s job is to make the country attractive to investors, as climate change is a significant issue. Gas plays a crucial role in the energy transition field, and Europe and Germany have started investing in cleaner gas sources like Ukraine and Russia. As long as Nigeria remains attractive, investors will make investments.

The energy transition has always been and will always be, and gas has a role to play. While their roles may diminish over the next 20–30 years, they continue to play a significant role. The focus is on attracting investors during this period to ensure the country remains competitive in the energy market.

What are the real plans of the government to resolve the myriad issues in the power sector?

Nigeria’s energy resource richness is a tragedy, with per capita electricity consumption being one of the lowest in the world. This has been due to various reasons, including privatisation and the need for capital attraction. The privatisation process left critical assets at the distribution end of the business without the financial and technical capabilities to make necessary investments and increase cash flows. Cash flows have not grown well enough within the different segments of the value chain, including transmission, generation, and the actual source of fuel.

The focus of this administration is to ensure that the financial and technical capacity of operators is strong enough to deliver on production growth. The government needs NERC to be a stronger regulator to hold distribution companies accountable and transition to cost-reflective tariffs to improve liquidity. If it costs 200 Naira to deliver power to a customer, only allowing people to charge 60 Naira means the government has to cover the difference between 60 and 200. This has already caused financial stress for the government and the Discos.

To reduce financial stress, the government has decided to remove subsidies for customers paying more than 200 naira and hold them accountable for the level of service they provide. If they are allowed to charge a cost-reflective tariff, they must deliver at that level of 20 hours a day averagely through the week and month. The regulator is spending more time ensuring that service-level agreements are being adhered to and issuing penalties.

Another issue is that most customers are on estimated billing, which means they don’t know how much electricity they consume, how much they’re paying for, or the tax income that needs to be collected from it. This level of unpredictability stresses the government and other stakeholders waiting for the money. To address this, the government has decided to intervene with a presidential metering initiative to close the metering gap.

As soon as these metres are deployed and more people are connected to the grid, there will be more visibility with improved technology. This helps shore up and improve the financial and commercial viability of the sector. The government hopes to see incremental cash flows coming into the system, which will enable discos to collect more capital, invest in more distribution capacity and infrastructure, and be better placed to evacuate more of the power available on the transmission side.

Another strategy is to continue to bolster investor confidence by ensuring that whatever the government owes, whether it’s gas sector debts or generation company debts, is paid. The government has paid close to $300 million to different players in the sector, whether they’re gas suppliers or generation companies that have been owed for a while. They will continue to work towards offsetting more of those debts so that investors are more confident that when they bring their capital, the government is taking the necessary actions around tariffs to charge for electricity costs.

In a nutshell, more cash comes into this system through metering, we are paying less in terms of subsidies, and we can focus more on just ensuring that the poor and vulnerable continue to get government support and that the people who have the capacity to pay get more reliable electricity and pay fair value for it.

How will the metering initiative run? Will the metres be free? Will they be imported or manufactured locally?

The government is evaluating various options to close the gap in electricity supply in Nigeria. These include local imports of components, direct procurements, and purchasing metres to ensure only paying for what is consumed. However, there is a need for more deliberate and thoughtful delivery of electricity to Nigerians, avoiding short-term pressure to show progress.

The capacity in the transmission sector is poor, with the Transmission Commission (TCN) often unable to deliver power generated by Gencos. To address this issue, the government is focusing on efficiency at the distribution end, which is also the last mile. This involves growing the capacity of distribution companies to take advantage of the installed capacity of the transmission.

The increased ability of distribution companies to invest in infrastructure that delivers more electricity to homes and businesses will impact Nigerians. By solving this problem, the government can unlock 10 gigawatts that are not making it to customers and ensure that these 14 gigawatts can be evacuated by the transmission company. This will also help the distribution company grow its capacity to distribute the currently installed 14 gigawatts.

Offgrid energy solutions are also being considered. While extending electricity to certain parts of the country may not make economic sense due to the cost and consumption, technology has allowed for distributed energy solutions. Most energy is generated from homes and offices, so the government is hoping to migrate people to the grid where it makes sense. In areas where the grid is not feasible, the government is leveraging the capacity around distributed energy, such as micro and mini grids, renewable energy, and diversifying energy sources.

The Electricity Act allows for customisation of energy solutions, particularly for off-grid areas. As demand grows once it becomes available and reliable, the government is confident that by the time distributed energy solutions are implemented, demand will start to grow as farmers process their food and seek storage.

Are there things happening already?

Absolutely. The Rural Electrification Agency has spent quite a bit of time doing this renewable energy with a lot of development finance and institutional support to drive off-grid. That’s one of the key success areas of the power sector.