Can Nigeria survive era of peak oil?

Nigeria’s dependence on oil has been brought into cross-examination for the umpteenth time to such a degree that some economists are questioning whether the country can survive the coming era of peak oil.

The timing of peak demand has big repercussions for the planet and future of oil producers, most especially countries like Nigeria who are in a precarious situation because oil exports account for more than half of their government revenue and 90 percent of foreign-exchange earnings.

Rystad Energy, an independent research firm in Norway, predicts that oil demand will now peak at 102 million barrels per day in 2028, two years earlier than they predicted before the virus struck with previous estimates of 106 million bpd peak in 2030.

Another Saudi Aramco Initial Public Offering (IPO) prospectus seen by BusinessDay revealed Nigeria may be less than 10 years before demand for its most prized oil export begins to drop as a result of technological innovation and development of alternative sources.

As a result of the above development, oil projects are facing threats from pandemic-driven demand destruction, a relentless call for climate-conscious and ethical investing as most multinationals, especially oil executives are resigning themselves to the uncomfortable fact that a significant amount of their vast oil and gas reserves will end up totally worthless.

According to Canada-based Anadolu Energy, over 1,110 institutions such as sovereign wealth funds, banks, global asset managers and insurance companies, cities, pension funds, health care organisations, and universities have now committed policies towards blacklisting investments towards coal or oil and gas projects.

For instance, the European Investment Bank (EIB), the EU’s financing department, has announced plans to bar funding for most fossil fuel projects before 2030.

Under the new policy, energy projects applying for EIB funding will need to show they can produce a one-kilowatt hour of energy while emitting less than 250 grams of carbon dioxide, a move which excludes traditional gas-burning power plants.

Also, the World Bank Group has previously announced it will cease to finance upstream oil projects from 2020 claiming its decision would “align its support to countries to meet their Paris goals.”

Other institutions who have expressed interest to divest include Norway’s sovereign wealth fund, the Catholic Bishops’ Conference of the Philippines, the Rockefeller Brothers Fund, the British Medical Association, Amundi Asset Management, Caisse des Depots, New York City, the City of Cape Town, KfW Group, Stockholm University, the Tate museums in the UK, Allianz Insurance, and St Mary’s Episcopal Cathedral, Edinburgh – the first cathedral in the world to divest.

The present development put Nigeria, Africa’s largest economy, in a precarious situation. Oil exports account for more than half of its government revenue and 90 percent of its foreign-exchange earnings.

An unprepared life beyond crude oil could be catastrophic for Nigeria where more than 80 million people already live on less than $1 a day, most especially because the government is struggling to use its crude oil wealth to improve the value or living standards of its people, with a growing population of over 200 million.

Modest gains such as the removal of petrol subsidy, policy reforms for gas monetisation or flare out and conducting of marginal bid round are still being eroded by old perennial problems such as non-passage of Petroleum Industry Bill (PIB), non-privatisation of state-owned Nigerian National Petroleum Corporation (NNPC) and loss-making refineries.

The government has also made many efforts in the push for Local content after the enactment of the law in 2010, as several indigenous operators such as Atlas Petroleum International, Oranto Petroleum, Shoreline, Aiteo Group, Eroton Exploration Production Company and Seplat Petroleum Development Company, among others, have made substantial contributions to the country’s hydrocarbon output.

Pre-COVID-19, independent firms produced 400,000 barrels per day (bpd), accounting for about one-fifth of the country’s crude oil production. By 2020, independents were aiming to add 250,000bpd of additional output, after Nigeria’s largest independent oil producer, Aiteo Eastern E&P announced plans to invest $5 billion over the next five years to drill new oil wells and re-open existing ones, in a bid to boost its oil and natural gas production.

With dark clouds of an imminent economic recession gathering and not many visible silver linings, the recent drop in oil prices will hit Nigeria hard, making a big dent in government revenues and threatening the viability of upstream projects, thanks to the non-domestication of the value chain in the oil and gas sector.

For most experts, value addition in Nigeria’s petroleum sector could be the value created in by-products in the course of processing exclusive of the cost of crude, packaging or overhead.

“With value addition the total money revenue, or price, for which a by-product will sell sometimes quadruples,” Luqmon Agboola, head of energy and infrastructure at Sofidam Capital said.

Other experts claim refining makes an integral part of the oil and gas value chain that delivers products to consumers as refineries produce value-added products from crude oil.

Investing in downstream petroleum products can create an industrial base that adds value to our petroleum output as part of Nigeria’s strategy to diversify the economy and drive growth which is why countries without oil such as France, Germany, Italy, Japan, Netherlands, South Korea, Spain and Turkey referred to as non-producing consumer nations invest massively in refineries.

The previous time oil prices plummeted, in 2015, the country sank into a recession from which it has only recently, and barely, recovered. Economists said the downturn was both exacerbated and prolonged by policy errors, including the central bank’s resistance to what was an inevitable naira devaluation.

Nigerian legislators are promising the passage of long-awaited reforms to overhaul the entire sector.

The Petroleum Industries Bill has been floating around Abuja for the best part of two decades, holding back investment into an industry vital to Nigeria’s success.

The bill is meant to make the opaque national oil company, the NNPC, an epicentre of corruption, more transparent by breaking it up, establishing an independent regulator and stripping the oil minister of the ability to award, renew or revoke licence.