Issues that shaped Nigeria’s energy sector in 2021

 

UGO AMADI

As the curtains draw closed for the year 2021, the energy sector witnessed a lot of activities and transformation with global energy transition and Petroleum industry act toping the agenda for the federal government.

Also,  It is expedient to note that Nigeria’s energy transition which is motivated by the need to reduce global greenhouse gas emissions and alleviate energy poverty by 2050, remains a top priority and critical point in global energy transition agenda.

Consequently, several technologies are being developed for production of renewable energy resources as well as natural gas, which are considered low- carbon emitting sources. New technology for extracting hydrogen from natural gas has been developed. These technologies are also becoming economically competitive with conventional energy sources (crude oil, coal, etc).

During the COP26 summit in Glasgow, Nigerian President Muhammadu Buhari pledged that Nigeria will cut its carbon emissions and reach net-zero by 2060, underlining the key role of gas in the country’s energy transition roadmap.

While nations such as the UK,  the United States, and the European Union have set targets to achieve net-zero by 2050, Nigeria has opted to join Saudi Arabia and Russia in vowing to reach net-zero by 2060. This target is lagging 10 years behind the recommended deadline, which the UN along with many climate scientists would like to achieve to stop global warming.

President Buhari explained that  Nigeria is aware of the danger presented by climate change: “I do not think anyone in Nigeria needs persuading of the need for urgent action on the environment. Desertification in the North, floods in the centre, pollution and erosion on the coast are enough evidence. For Nigeria, climate change is not about the perils of tomorrow but what is happening today. Nigeria is committed to net-zero by 2060.”

The Nigerian leader outlined arguments for the gas-based energy transition in Nigeria, stating: “Nigeria is actually more of a gas than an oil-producing country. Consequently, I am requesting financing of projects using transition fuels, such as gas. Nigeria has energy challenges for which, we believe, gas can be used to balance a renewable energy-based system, be it wind or sun. This would enable us to launch the long-term renewable energy infrastructure procurements and investments needed to have a sustainable energy supply.”

Many have argued that energy transition could lead to economic transformation across all sectors and Buhari seems to agree with this. However, the Nigerian leader strongly believes the transition would require infrastructure, which would need to be established and put in place to move forward with the transformation of the energy sector.

In the other hand , there has been mixed feelings, intrigue and drama which are  rare words that superlatively describes the energy sector in Nigeria in 2021. This is bearing in mind the lingering face-off between labour and government over the proposed increase in tariff and pump price of Premium Motor Spirit.

While the price of Liquefied Petroleum Gas held the masses by the joggler as Nigerians struggled with the high rise in prices of goods and services, the passage of the Petroleum Industry Act on the other hand served as good news in a sector filled with drama and suspense for an entire year.

2021 witnessed an unprecedented hike in the price of Liquefied Petroleum Gas (LPG), also known as cooking gas, across the country.

The increment forced some low income families to go back to firewood and stove, which was a setback to the government’s aspirations to deepen gas utilisation in the country.

As at January, the price of cooking gas ranged from N4,500 to N5,000 depending on the location, but few days to the end of the year in December, sold for between N8,500 and 10,000.

Marketers attribute the hike to global supply challenges, high international prices, limited availability of foreign exchange and high exchange rates.

Mr Bassey Essien, Executive Secretary, Nigerian Association of Liquefied Petroleum Gas Marketers ( NALPGAM) , also blamed the increment on the reintroduction of Value Added Tax on imported LPG.

Last year December, President Muhammadu Buhari launched an autogas scheme as part of measures to douse the uproar from organised labour unions over the skyrocketing price of Premium Motor Spirit and electricity tariff.

Hitherto, subsidy removal on petrol had steadily increased the pump price as Buhari had earlier defended the need to increase electricity tariff. Those increases had forced the government and the unions to the negotiating table as the masses struggled to cope with the impacts of the Covid-19 pandemic.

In September last year, President Muhammadu Buhari vigorously defended an increase in electricity tariff tagged Service-Based Tariff (SBT), stressing that it was the only gateway to improving power supply to the masses.

The stern rejection of the tariff and petrol price in the first quarter of the year halted the much-trumpeted deregulation of the downstream sector, bringing back the subsidy regime, which was budgeted for in the 2021 Appropriation Act.

Recall while the negotiations between labour and government were on in the first quarter, the Minister of State for Petroleum Resources, Timipre Sylva and Group Managing Director of NNPC Limited, Mele Kyari, said the pump price was no longer sustainable.

Kyari had said NNPC was importing at an actual market price of N234 per litre but selling at N165 per litre, adding that the government could no longer bear the burden of the difference between the actual market price and what Nigerians were paying for petrol.

President of the Nigeria Labour Congress (NLC), Ayuba Wabba, fired back, insisting that labour would ground the economy should the price be increased.

While the presidency later reacted by saying the pump would not be increased, the result meant that the country gave up on downstream deregulation and paid over N1 trillion to balance the difference between the actual price and the pegged price.

The development led to a crisis, which resulted in the failure to meet remittances to the Federation Government- thanks to the signature bonuses that came from the marginal bid round.

While the marginal bid round was a key highlight of the development in the oil sector in the year, the commercialisation of flare sites did not fly as it was marred by crisis five years after being introduced.

In May, the Federal Government said it would in June, award licences under the Nigerian Gas Flare Commercialisation Programme (NGFCP) to qualified bidders as part of efforts to end gas flaring in the country and expand her gas footprint.

Sylva, who had blamed the delay of the scheme on the marginal bid round, had said that with the licensing round off the table, the government would focus on the NGFCP and see to its completion before the end of June. But he never kept the promise till this end of 2021.

While the programme drags, Nigerians became victims of increased LPG price as economic indexes – increase at the global market, foreign exchange scarcity and lack of local development of the nation’s 206 trillion cubic feet of gas compel the masses to depend on importation.

By mid-year, the new price of cooking has already indicated 73.1 percent increase. The increase continued as a kilogram now sells for almost N1, 000.

While the Central Bank of Nigeria is funding the gas value-chain with a loan of N250 billion, imports of the commodity were coming from smaller African countries like Algeria and Equatorial Guinea.

 

While the country struggled with gas, revenue from crude oil, which had rebalanced from an average of $20 per barrel in 2020 to nearly $80 in 2021 did not translate to much gain for Nigeria as subsidy payment eroded gains and affected the improvement of the excess crude account.

 

However, the progress could be better than 2020, when NNPC said the country’s oil revenue target declined by N1.06 trillion due to COVID-19 and low crude oil price

 

Similarly, while a few projects progressed, especially in petrochemical and gas, the demand to halt funding of hydrocarbons affected investment inflow into the country.

However, the passage of the PIA towards the end of the third quarter remained an elixir for most stakeholders, who expected the development to drastically improve investment in the country.

Amidst the PIA passage, however, conversation on divestment continued as some oil companies, especially Shell, are bent on moving from the onshore into the deep water.

It would be noted that under the year in review the Nigerian National Petroleum Corporation (NNPC) announced a first net profit in the 44-year history of the organization with a first-ever profit of N287 billion.

Also,“Deep Offshore and Inland Basin (Production Sharing Contracts) Act, 2019, amended for the first time since 1993.“More than six billion dollars of inherited cash call arrears now being cleared by the Buhari administration, since 2016.“More than three billion dollars of the arrears (payments due to International Oil Companies) have since been paid,“

Also, “The last NLNG Train project (Train 6) was completed in 2008. President Buhari has successfully flagged off Train 7 construction. Also,“The long-awaited Ogoni Clean-Up kicked off under the Buhari Administration,’’

Undoubtedly one of the greatest landmark achievements oil and gas sector in 2021, and indeed in the past several decades was the passage and signing into law of the Petroleum Industry Act (PIA) .Many have described it as the most profound event in the Nigerian oil and gas space in the last 20 years. The PIA is envisaged to foster investment in the industry and delineate responsibilities to the various institutions. Its key objectives are:-  to establish a commercialized National Oil Company (NNPC Ltd.),  to entrench accountability and good governance,  to promote the exploration and exploitation of the petroleum resources in Nigeria for the benefit of all Nigerians as well as foster the sustainable development of the host communities.

Overall, the PIA serves to ensure the efficient and effective technical and operational regulation of the upstream, midstream and downstream sectors of the oil industry through the formation of the Nigerian Upstream Regulatory Commission and the Nigerian Midstream and Downstream Regulatory Authority, among others.

Also worthy of note is the transformation of the Nigerian National Petroleum Corporation (NNPC). The nation’s national oil entity has witnessed many changes and transformation through the decades. From its take-off on 1st April 1977 as a merger of the

Nigerian National Oil Corporation (NNOC) and the Federal Ministry of Petroleum and Energy

Resources, the NNPC – now re-christened NNPC Limited – has been undergoing the kind of transformation designed to re-invent the entity for greater efficiency and value creation. Yet, the changes and the unprecedented deluge of reformations in 2021 eclipse previous attempts to restructure the oil company.

The tempo created with the passage and eventual presidential assent of the PIA was sustained with the quick activation of Part V of the new law which requires the incorporation of a commercial and profit-focused National Oil Company (NOC) within six (6) months of the passage into law. Thus, the NNPC Management – on behalf of the Federal Government – incorporated the Nigerian National Petroleum Corporation (NNPC) Limited under the Companies and Allied Matters Act. Under the new arrangement, NNPC Ltd will, on behalf of the Federation, take over assets, interests and liabilities of the Nigerian National Petroleum Corporation (NNPC).

Another major achievement in the sector is the posting of a N287 billion profit, after tax, by the NNPC. It was the first time in 44 years that the Corporation has recorded such profit, which the NNPC attributed to aggressive cost cutting measures, cost savings through renegotiation of contracts by up to 30%, improved efficiency through business automation, emphasis on commercially-focused investment and non-interference in the management of the corporation’s affairs, among other factors. The construction/rehabilitation of 21 Roads under the

Federal Government’s Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme is also a major achievement.

Recall, that the Federal Executive Council (FEC) approved N621.2 billion for the NNPC to take over the reconstruction of 21 federal roads across the six geopolitical zones of the country. The construction and rehabilitation of the selected roads are meant as strategic intervention under theFederal Government Road Infrastructure and Refreshment Tax Credit Scheme.

Proposed removal of fuel subsidy

In November, the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, announced that the government would remove subsidy on Premium Motor Spirit from 2022.

The minister said the government plans to replace it with a monthly N5,000 transport grant to about 40 million poor Nigerians.

Mr Isiyaku Abdullahi, Managing Director, Petroleum Products Marketing Company (PPMC) said the full deregulation of the downstream sector would save Nigeria N12 trillion in four years.

He said: “At $80 crude oil, 60 million litres daily consumption and N411 to a dollar foreign exchange, PMS under recovery (petrol subsidy) per litre will be N138 per litre.“Daily PMS under recovery will be  N8.3 billion. Annual PMS under recovery will escalate to N3 million.”

Abdullahi said the savings made from the removal of subsidy on petrol could be channelled to other critical areas such as infrastructure, health care and education among others.

He noted that removal of subsidy would make the price of petroleum products in Nigeria at par with its African neighbours which would discourage smuggling.

Mr Tunji Oyebanji, immediate-past President, MOMAN, said continued subsidising of petrol was not sustainable in light of current economic realities.

He said the 2022 deadline was realistic and its impact might be mitigated with the coming on stream of the 650,000BPD Dangote Refinery, Bua Group Refinery, Waltersmith Refinery and other modular refineries.

However, Dr Obinna Ogbonna, National Auditor, Trade Union Congress (TUC) said labour unions had given the government certain conditions that should be fulfilled before the removal of subsidy.

He said, “what we are saying is that for there to be full deregulation, government should provide palliatives to the masses and should ensure that there are no job losses in the implementation of the reforms in the sector”.

2022 Projection for the industry

In their projections for the future, experts believe that the PIA has created opportunities for growth in oil and gas infrastructure development.

 

Mr Bala Wunti, Group General Manager, National Petroleum Investment Management Services, expressed optimism that Final Investment Decisions would be taken on some critical projects by 2022.

 

Wunti said some of the projects which were being executed by the IOCs and the NNPC were suspended for years due to uncertainty in the oil and gas sector.

 

He said the enactment of the PIA had restored investors’ confidence in the industry and repositioned Nigeria to optimise its hydrocarbon resources.

 

Mr Simbi Wabote, Executive Secretary, NCDMB said the projects attracted by the PIA would create a lot of opportunities for local content in

Way forward for Nigeria’s energy sector

Reviewing the current state of energy, oil and gas sector in the country 2021, stakeholders and energy experts have declared that the challenges confronting the sector would lead to its total collapse if left unattended to.

According to them, uncertainties over crude oil prices, recent global pandemic Covid19, pipeline vandalism, scarcity of foreign exchange, change in leadership, power sector reforms challenges, issues around the regulatory environment, security as well as the appraisal of capital investment and how it impacts revenues and operational effectiveness have remained a big nut to be crack in the sector.

The huge oil and gas resource base, which currently stands at about 38 billion barrels of proven oil reserves and 197 trillion cubic feet of gas, has positioned the country as one of the key players in the global energy supply.  Yet Nigeria scores 42 of 100 points and ranks 55 among 89 assessments in the 2017 Resource Governance Index (RGI).

Unfortunately, Nigeria currently maintains an economically unstable negative net energy trade balance in which the nation exports virtually all the crude oil produced and imports a substantial part of its refined petroleum products needs while under-utilizing other energy sources such as bitumen, coal, lignite, and shale oil, thereby leading to a mono commodity economy that is largely dependent on crude oil export.

It is against the backdrop of low oil price, dwindling oil revenue, that there have been strident calls for the nation to diversify her economy from the monolithic economy and absolute dependence on oil into other areas to sustain the nation in terms of revenue generation.

International Monetary Fund (IMF) said that Nigeria’s oil and gas exports will dwindle by at least $26.5 billion as result of the coronavirus pandemic battering crude oil prices worldwide.

IMF report indicates that a diversified economy based on several sources of income is more resilient and able to recover faster from different shocks as any weakness in any particular sector can be mitigated through the strong performance in other sectors.