Debt crisis, energy security, and Nigeria’s slippery road to net-zero ambition
Nigeria, like many African countries, is at a crossroads. Although endowed with immense natural resources, energy access, and security remain primary concerns even as the debate for energy transition creates more worries. With a debt profile of N77 trillion, Nigeria is looking to finance an energy transition and renewable energy roadmap of $3.2 trillion while her wobbly fossil fuel-dependent economy faces a bleak outlook. KINGSLEY JEREMIAH in this report takes a look at the complexity of the situation.
The energy situation in Nigeria and other African countries creates concerns when global or regional leaders discuss sustainable development or green growth. The United Nations Development Programme (UNDP) said that about 97 per cent of Nigerian communities still use firewood for cooking and other activities.
The International Energy Agency (IEA) said that about 770 million people in Africa are without electricity. By implication, Africa, with a very fast-growing population is the worst in terms of energy access in the world.
Surprisingly, Nigeria, which currently generates about 5,000 megawatts (MW) of electricity and wheels less than 3, 500 to homes and industries, can generate nothing less than 427, 000 MW from renewable energy resources alone. To make matters worse, about 80 per cent of installed 13, 000MW of electricity in the country is coming from fossil fuels even as the transport sector, the economy in general and industrial activities rely on the oil and gas sector either for funds or as an energy source.
But the planet can no longer survive with fossil fuel as hydrocarbon, found in large quantities in Nigeria and other African countries remains a snag on the path of attempts to achieve net-zero ambitions. Across the world, countries are investing in sustainable and clean energy solutions that will make oil and gas almost useless.
The reason is that oil and gas are the dominant cause of climate change. The Intergovernmental Panel on Climate Change (IPCC) noted that emissions from fossil fuels accounted for about 89 per cent of global CO2 emissions as of 2018.
Most countries in Africa, especially Nigeria are signatories to the Paris Treaty and Sustainable Development Goals (SDG) as they vowed to commit to net-zero ambition plans. In Nigeria, part of such plans includes the Energy Transition Plans, expected to cost around $1.9 trillion, and Renewable Energy Roadmap which will cost $1.2 trillion.
For Nigeria, funding these projects with public funds is a mirage, not necessarily because it is bad to commit public funds to energy transition (as the case has been in many countries) but because, Nigeria’s economy is faced with serious challenges as money made from the sector has over the years been mismanaged, while the state is currently spending almost all its earnings from the oil sector in subsidsing Premium Motor Spirit (PMS) in the face of the energy crisis caused by the war in Ukraine.
The Fall Of Oil And Nigerian Economy
THE oil and gas sector accounts for over 80 per cent of the nation’s foreign exchange earnings, and oil price, as well as, production volume are major determinants of what becomes of the country’s yearly budget. For 66 years, oil production and exploration have spoon-fed the economy making the country an economy that depends dominantly on one commodity. Trillions of dollars have been made from the sector, but like other countries, Nigeria failed to save for the rainy days during the oil boom until the world started pushing from fossil fuel.
Currently, the country has about 37 billion barrels of oil reserves and about 209 trillion standard cubic feet (SCF) of associated gas. While its production had at some point remained the highest at above two million barrels per day (bpd) in around 2019, prevailing challenges, including poor fiscal, regulatory, and operating environment pushed a lot of companies to exit the country. As of last year, production fell below one million barrels leaving the economy in a fix.
With the energy transition, the mounting global advocacy aimed at halting all-new Final Investment Decisions (FIDs) for fossil fuels, especially oil, and gas could create serious hurdles for new fields development in Nigeria, as over $150 billion worth of projects risks getting stranded in the country.
Investments in new fossil fuel projects will need to stop immediately if the world is to limit global warming to 1.5 °C, the IEA said in what commentators have described as a stunning challenge by the historically pro-fossil fuel body.
The world’s leading energy body in a report had, for the first time, unveiled its roadmap for reaching the critical target of tackling climate change by achieving net-zero greenhouse gas emissions by mid-century. Among the climate milestones laid out by the Paris-based IEA are the demand to achieve zero emissions from electricity generation in rich countries by 2035, and the rest of the world by 2050.
Some of the keys to achieving this, the IEA said, would be an unparalleled investment in renewable and clean energy, an end to the sale of new internal combustion engine passenger cars by 2035, a four-fold increase in the deployment of solar and wind power by 2030, unprecedented levels of international cooperation between governments, the adoption of “no new oil and gas fields approved for development,” and “no new coal mines or mine extensions.”
Several countries, including the United States and the European Union, have pledged to achieve net-zero emissions. According to the IEA’s Executive Director, Fatih Birol, the transformation would create millions of new jobs and boost economic growth worldwide.
Oil giant, Shell Petroleum Development Company of Nigeria Ltd (SPDC), and all other big oil companies have divested their equity from some oil blocs in the Niger Delta region, remaining only in the deepwater. These development have also reduced the number of buyers queuing to buy Nigeria’s crude.
International Oil Companies (IOCs), including ExxonMobil, Chevron, BP, Total, Shell, and ConocoPhillips already sold assets worth $27.5 billion in a bid to invest in new regions, according to research by Rystad Energy.
Many projects initiated in Nigeria’s oil sector have remained at the planning stage, or have been bogged down by legal hurdles years after initiation. Some of the projects include Shell’s Bonga South West and Aparo, which is expected to add about 225, 000 bpd; Bonga North (100,000bpd); 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).
These projects are estimated to cost around $100 billion, with the capacity to boost the nation’s production by as high as 875, 000 bpd and revenue by about $1.5 billion.
Also mired in obscurity are the $20 billion Brass LNG project in Bayelsa State; the $9.8 billion Olokola LNG in Ogun; the 5000km Nigeria-Morocco offshore gas pipeline, which in the current market price would cost an estimated $20 billion.
For other African countries, most new oil discoveries in the world are in Africa. The African Energy Chamber had earlier on expressed fears over the development, even as about 35 African countries have made a commitment towards net-zero emission in the backdrop of the 2021 United Nations conference, in Glasgow, Scotland.
While PriceWaterhouseCoopers in a report said raising a $2.8 trillion energy transition fund to transit Africa to cleaner fuels to attain the climate goal may remain a mirage, the think-tank said the global plan to move from oil may cost the continent $6.7 trillion in fossil fuel resources.
$3.2t Energy Transition And Renewable Plan
LAST year, Nigeria launched its Energy Transition Plan aimed at achieving a net-zero plan a decade after the global target of 2050. Going by the plan, the country will from now till 2060 require about $1.9 trillion to transit to achieve net-zero targets.
Vice President Yemi Osinbajo while announcing the plan said it would tackle climate change and deliver Universal Energy Access (SDG7) by 2030 and net-zero by 2060.
Some of the objectives in the plan included lifting 100 million people out of poverty, driving economic growth, bringing modern energy services to all Nigerians, and managing the expected long-term job losses in the oil sector due to global decarbonisation.
In the short term, the plan is expected to facilitate the establishment of baseload energy capacity and address the nation’s clean cooking deficit in the form of Liquefied Petroleum Gas (LPG). Industries are expected to be powered by low-carbon, streets lined with electric vehicles, and livelihoods enabled by sufficient and clean energy.
Osinbajo said: “The plan has the potential to create about 340, 000 jobs by 2030 and 840, 000 by 2060. It also presents a unique opportunity to deliver a true low-carbon and rapid development model in Africa’s largest economy,” he said.
The vice president added: “We are currently implementing power sector initiatives and reforms focused on expanding our grid, increasing generation capacity, and deploying renewable energy to rural and underserved populations.”
The Nigerian Government and the International Renewable Energy Agency (IRENA) are targeting a reduction in fossil fuel dependency on electricity by 60 per cent in the next 27 years, through the launch of the Nigeria Renewable Energy Road Map (REmap).
The plan is to cost about $1.22 trillion and increase electricity generation by about 178, 000 MW, all from renewable sources. The Minister of Science, Technology, and Innovation, Dr. Adeleke Olorunimbe Mamora, represented at the programme by the Nigerian Ambassador to UAE, Mohammed Dansanta Rimi; Director General of IRENA, Francesco La Camera, and the Director General of Energy Commission of Nigeria (ECN), Eli Jidere Bala, were optimistic that the plan would be sufficient for the nation’s much-awaited energy needs. They were also hopeful that the plan would spur economic development, industrial development, job creation, and investment and provide leeway to net-zero and sustainable development.
Rising Debt, Increasing Cost Of Borrowing
NOT long ago, the United Nations Secretary-General António Guterres, said that energy transition investment must triple to $4 trillion a year despite the global energy crisis exacerbated by COVID-19 and the Russo-Ukraine war.
Across the world, the funding needed to transit to net-zero remains a major issue. This issue is, however, compounded in most African countries, where net-zero directly may create an obstruction to fossil fuel-dependent economies and where the countries are already burdened by high debt profiles.
How can African countries, especially Nigeria be pushed to borrow more money to finance energy transition amidst distressed economic indices and poverty, as well as romance for fossil fuels subsidy?
At the 13th Assembly of the International Renewable Energy Agency (IRENA), in Abu Dhabi, United Arab Emirates (UAE), the United Nations and Sustainable Energy for All (SEforALL) were specifically worried about the plight of Africa, as they find a balance between asking Africa to borrow money to transit to cleaner energy with the rest of the world or to continue to use their existing resources.
By May this year, Nigeria’s debt is projected to hit N77 trillion ($171.2 billion). Reportedly, public debt has doubled in Africa since 2010, standing at 65 per cent of the Gross Domestic Product in 2022. It was only 32.7 per cent in 2010.
This is coming at a time when the cost of borrowing is rapidly increasing as rising interest foists more complications as most African countries are unable to issue Eurobond while refinancing costs have doubled with an average increase of 600 basis points, and up to 1800 basis points in other.
The Overseas Development Institute also noted that $140 billion of Eurobonds and an average maturity of 10 years, meant that refinancing cost of 600 bases or six per cent would see interest costs amount to $8.4 billion yearly or $84 billion in total over the life of the bonds. This represents 0.3 per cent of Africa’s yearly GDP, and given that Eurobonds average 30 per cent of total debt, the overall cost of increased debt servicing will be a painful one per cent of GDP each year, the think tank noted.
While the International Monetary Fund (IMF) had said the Nigerian government may spend nearly 100 per cent of its revenue on debt servicing alone by 2026, Nigeria is pitching an Energy Transition Plan of $1.9 trillion and a Renewable Energy Road Map of 1.22 trillion. At the same time, the country is spending about $15.7 billion on subsidies for PMS.
Borrowing More To Finance Energy Transition
FOR the Administrator of the United Nation Development Programme, Achim Steiner, there is a problem if Africa is being asked to borrow expensively to finance the energy transition.
Steiner said if the world deals with the problem of slow transition, especially in Africa the question of finance would have to be critically considered.
Worried that Africa is heavily indebted, he said: “Asking Africa to borrow more to finance climate change is a futile exercise.” He, therefore, suggested a private sector-focused investment policy that will allow domestic and international investors to drive climate change financing.
When admitting that a phased reduction in petrol subsidy could be adopted to assuage the impacts of outright removal on the economy and the people, Steiner described Nigeria’s subsidy regime as irrational.
For the Chairman of Ghana National Petroleum Corporation (GNPC) Professor Wunmi Iledare, borrowing to transit “is a no-go area,” adding, however, that energy transition would happen, and continue to gain traction.
Iledare, who commended Nigeria for working around its options for energy transition, is also in support of Nigeria’s continuous search for crude oil, claiming that energy transition is not absolute zero emissions, but a net-zero target.
“There is also a global understanding that 2050 is a moving target because the transition speed differs across the globe. For Nigeria, since transportation fuel is the biggest source of carbon emissions, petroleum subsidies must be removed as part of plans to reduce consumption. Additionally borrowing money to transit is not advisable as a lot of money has been borrowed to subsidise petroleum.
“Debt is unjustifiable unless it is for infrastructure development; for sustainable development. The mother of entitlement is expectation without effort. I am glad that there is a transition plan, but sadly there is even a thought process to borrow money for transit. It is a no-go area more so when the current level of emissions in Nigeria is minuscule,” he said.
A former President of the Society of Petroleum Engineers, and Partner at Zera Advisory and Consulting, Joseph Nwakwue, insisted that while borrowing may remain an option for Nigeria, borrowing to finance energy transition would be a misplaced priority.
According to him, the country has a huge infrastructure deficit that is more compelling to finance to help Nigeria’s competitive position as an oil producer or any other economy.
Unless the development projects are transition-related, Nwakwue said: “We will not specifically borrow for energy transition at this point. We have a lot more to do than transit from fossil fuel.”
Nigeria’s economy relies mainly on fossil fuels. As other countries, especially crude oil buyers in Europe, Asia, and America turn to renewables, billions of barrels of oil could remain in the ground. Although, there is an aggressive push towards local refining capacity as the Nigerian National Petroleum Company Limited projected a 1.1 million bpd of refining capacity in mid-2023, challenges may persists as there has been more talk than action on refining capacity in the country.
A former President of the Chartered Institute of Bankers of Nigeria (CIBN), and a professor of economics at Babcock University, Segun Ajibola said since the world of energy is changing with a strategic shift from hydrocarbons to other energy sources, especially solar and gas-powered options, the country’s energy transition should therefore shift paradigms in favour of global trends.
“Even if the country is borrowing, it must be to finance energy sources that will not lose their potency in a short while. Again, borrowing is not out of order, but such debts must be dedicated to the purpose, prudently suspended, effectively managed, monitored, and properly accounted for,” Ajibola said.
Senior Officer, Nigeria Programme, Natural Resource Governance Institute, Tengi George-Ikoli said as the energy transition looms and continues to gather steam, Nigeria’s actions must align with its stated ambitions to attract investment.
“Nigeria’s expenditure on fossil fuel subsidies is in direct conflict with that ambition, as well as earlier commitments made to lenders (World Bank, etc) to deregulate its downstream petroleum sector and to eliminate subsidy payments,” she stated.
This could, according to George-Ikoli, mean that Nigeria’s sincerity of purpose is questionable, stating further that the huge investments that are being made in green frontier fields as fossil fuel investments, diminish the likelihood of those green investments that are yielding expected returns to infrastructure lock-ins and stranded assets.
“Halting funding of petroleum consumption subsidies, and diverting to production subsidies that unlock financing and access to cleaner energy resources to electrify homes and businesses of 43 per cent of its un-electrified population would be more reflective of the ambitions stated in Nigeria’s energy transition plan.
“As a result, the cost of borrowing and interest for Nigeria will become even more stringent unless Nigeria creates an enabling environment that allows lenders to trust Nigeria’s commitments and that Nigeria’s actions will follow its ambitions and unlock/de-risk financing. This does not currently appear to be the case,” George-Ikoli added.
Just Transition, Energy Access, And Unique Roadmap For Africa
AS the net-zero campaign intensifies, the question of a just transition is gaining traction. The concept of just transition is about fairness. For instance, Africa’s contribution to global warming is just about two per cent, yet the continent remains the most vulnerable. From drought to rising sea levels, joblessness to loss of livelihoods and even dominant revenue and total lack of energy access, net-zero creates a serious concern for populations already living in poverty.
The International Labour Organisation (ILO) explains just transition thus: “Greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind.”
Many Africans are without energy access, and the question that some stakeholders are asking is, “what will they transit to?” These people are yet to choose an energy source and may likely even adopt cleaner energy without needing to transit.
These situations informed why some experts have advocated a unique energy transition plan for Africa. To most of these experts, energy security comes first and Africa must be allowed to use its existing resources while gradually transiting instead of joining the 2050 race.
The Executive Secretary of the African Refiners & Distributors Association (ARDA), Anibor Kragha said: “Africa needs its own unique energy transition roadmap. Along with cleaner fuels, we also need to look at what can be done in the near term to reduce carbon emissions.”
Kragha’s ARDA and the African Union are already looking at the roadmap as they push for investments to increase refining capacity, and expand pipelines and other storage and distribution infrastructure that link the continent together.
The Director of SEforAll, Damilola Ogunbiyi, noted that the unique situation of countries, especially in Africa must be put in context, arguing that the countries are still facing energy access and could mean that they could start from clean energy options instead of transiting.
“You can’t ask people to transition to nothing. We have the opportunity to make sure that the energy they are getting is clean from the start. We don’t need to talk about the transition because we are starting from the base,” Ogunbiyi said.
Ending Fossil Fuel Subsidies, Dedicating 1% Of Oil Profit To Clean Energy
BETWEEN 2022 and the first half of 2023, Nigeria would have spent N10 trillion ($21 billion) on subsidising only premium motor spirit. While this situation is in direct contrast to the Paris Agreement, and the environmental goals of the SDGs, the development has created more troubles for the economy, leading to more borrowing and deterring investment in the downstream petroleum sector.
Meanwhile, the Director General of the Energy Commission of Nigeria (ECN), Eli Bala, said that the Federal Government has been approached to dedicate one per cent of the earnings from oil and gas to the development of clean energy.
According to him, a bill on the development is already in the pipeline and would become a step towards a clean energy economy for Nigeria if passed into law.
Bala, who expressed worries over subsidies for fossil fuel said that the government would be investing sustainably if such funding is diverted to renewable energy.
Tapping Into Hydrogen
WITH the German government already urging Nigeria to develop her hydrogen resources, global players in the industry have described Africa as a potential net exporter of hydrogen energy. This could potentially provide funding for countries like Nigeria while providing cleaner energy.
About 120 million tonnes of hydrogen are produced yearly in the world, 95 per cent of it comes from natural gas, which Nigeria has in abundance. This development creates an optimistic outlook for hydrogen in Nigeria.
Egypt, Kenya, Mauritania, Morocco, Namibia, and South Africa are already in the race towards what some stakeholders believe could sustainably industrialise Africa and boost Gross Domestic Product by 12 per cent.
Also, IRENA sees the potential of hydrogen in Africa as a game changer. The Director-General for Climate Diplomacy, Economic Affairs, and Technology, German Federal Foreign Office, Oliver Rentschler had, at the programme noted that the partnership would go beyond a dialogue into realities that would ensure the expansion of renewable energies between Nigeria and Germany.
Speaking at the 13th Assembly of IRENA, the agency’s Director of Knowledge Policy and Finance (KPFC), Rabia Ferroukhi said green hydrogen remains a key pathway to energy transition in Africa.
Ferroukhi said thinking through the bankability of the projects and ensuring viable fiscal and regulatory outlooks to unlock the potentials are critical for the continent.
While high production cost, infrastructure, energy loss, sustainability, and other challenges are critical to the development of hydrogen across the world, Ferroukhi believes that getting the policy and business right in Africa could be the only leeway to investment either within Africa or outside Africa.