-Professor Wumi Iledare
Energy transition refers to the switching from the fossil-fuel dominated energy supply mix to zero-carbon emission sources. This is one of the most widely debated topics across the globe. The rapidity of the switch with a set date is very fundamental to energy equity, security, and sustainability, christened as the energy trilemma dimensions. Setting the rapidity of energy transition with a predetermined date is very disconcerting. This is more so in the developing economies with abundant endowment of petroleum resources. According to EIA estimates, the share of fossil fuels in the global energy supply mix is to drop from the current 90 % to about 50% by 2050 to reach the 2-degrees centigrade global-warming target.
While the desire, determination, and diligence to switch are not conjectural, the implications of a homogeneous rapidity to and inefficaciousness of energy transition are unsettling. Disruption in the global economies, expansion of energy poverty, and enhanced energy predicament, especially in emerging petroleum economies are plausible. Nigeria for example, has abundant liquid petroleum resources, estimated at thirty-seven billion barrels. This is equivalent to about fifty reserve-life years at the current extraction capacity rate of about two million barrels per day. The dependability of the economy of Nigeria on petroleum, like other petroleum dependent economies, for economic growth, development and enhanced social wellbeing is significantly conspicuous. Additionally, natural gas, though initially considered not green enough, is in abundance in Nigeria.
In fact, Nigeria ranks among the top ten nations with estimated 209 TCF proved natural gas reserves. Experts, in fact, have opined that Nigeria is majorly a natural gas province with just pockets of liquid petroleum fields. Additionally, revenues from the development of petroleum resources, estimated at US$130 to US$170 billion a year, are in jeopardy with rapid transition to renewable energy without petroleum. The funding needed to develop infrastructure, enhance economic development, dampen energy poverty, and reduce youth unemployment.
Interestingly, the emerging petroleum economies in Africa in general are marginal contributors to global emissions. The estimated cumulative share of carbon emissions was less than 3% by 2040, according to IEA 2019. Thus, the speed at which the Nigeria “walk” the ongoing energy transition “talk” is overly critical and it has mixed implications for petroleum-dependent economies. Paradoxically, Nigeria has significantly low energy access and high energy costs and with low oil and gas production, may experience reduction in productivity and international trade competitiveness with rapid transition. Meanwhile, oil and gas production and export remain the economic linchpin and Nigeria latches dependently on the oil and gas industry as a fundamental part of its industrial strategy. There is a clear dichotomy between the external forces, vis-à-vis, the internal forces in petroleum dependent economies and Nigeria in particular. This begs for the following questions:
(1) “What strategic options are open to Nigeria, keeping in view the imperative of IEA on defunding petroleum assets as the optimal path to attaining zero carbon emissions in 2050?”
(2) “How would Nigeria and others like her secure the needed investment to expand energy access and attain the sustainable goal of affordable energy for all and not be conflicted on energy security?”
(3) “How do they enhance and utilize the petrodollars needed to mitigate the future negative externalities of climate change?”
This op-ed is the lecture delivered at the Inaugural Elemi Lecture in Igbara Oke, Ondo State on June 29, 2024. The op-ed offers a pedagogical assessment of the contemporaneous issues on and concerns for the future of the oil and gas Industry in Nigeria. The review of these contemporaneous issues and the proffered resolutions are within the context of the emerging energy landscape, energy transition trilemma, and the dawning of the Nigeria Petroleum Industry Act 2021. The issues and challenges are complex and multidimensional beyond illegal crude oil bunkering or thieving, insecurity of assets, increasing cost of petroleum production, declining production ability, and petroleum subsidy at the pump, which tend to dominate the news cycle in Nigeria.
The issues and constraints in managing optimally, the future of oil and gas in Nigeria are also complex, dynamic, and stochastic, with domestic and international dimensions. While not diminishing the impact of oil thieving and other issues mentioned earlier, the contemporaneous issues facing the future of Nigeria’s oil and gas are more complex and expansive than thieving and vandalism. Decades of delay in formulating a new petroleum policy framework caused dwindling major upstream investments, exceptionally low exploration and production activities, low reserves additions, after putting the future of petroleum development at risk. Additionally, the evolving energy landscape towards green energy affected the final PIA provisions to balance fiscal attractiveness and competitiveness across all terrains in Nigeria.
Particularly noteworthy are the PIA 2021 provisions on Institutions and governance, which seek to reverse the perpetual comatose and negative challenges bedeviling the Nigeria petroleum industry and its future. The provisions tried to create and strengthen institutions, which support industry governance with transparency, accountability, and value delivery. The principles of clear separation of roles focus keenly on transparency and good governance across the entire value chain. This is the main thrust of the provisions on governance and institution in the PIA 2021.
To achieve the goal of the separation of roles, the governance and institutional framework to drive the process hinges on the Office of the Minister, two regulatory Institutions (the Commission for the upstream and the Authority for the downstream), and one commercial nagging institution. These three PIA institutions are critical to effectively manage into the future of oil and gas in Nigeria as the global energy landscape evolves. The framework for creating a single commercial entity set up and limited by shares under the Companies and Allied Matters Act is one of the four key aims of the PIA 2021. There are innovative provisions in the PIA on Host Community development to foster sustainable prosperity in the host communities as well as enhance harmonious and peaceful coexistence among stakeholders with less disruption of operations.
Additionally, Nigeria, as a nation, has over the last few decades made attempts to reform its petroleum fiscal system to attract investors and create stability in the oil and gas sector. The fiscal aims, structure, and schemes follow global best practice in fiscal systems design in the PIA 2021, with managing into the future of the industry in focus. Thus, the combinations of the fiscal instruments and terms in the PIA 2021 are glaringly investor’s friendly to a fault, making the optimization of mutuality of interests in an aggregate sense conflicted. A valid question is whether the necessary interplay of the instruments and terms would have perfected mutuality of interests of all stakeholders across the three terrains defined in the PIA.
It is certainly commendable, however, that when it comes to natural gas development within the context of energy transition, the fiscal framework disavowed optimization of revenue extraction as the key aim of natural gas development. Using natural gas as the engine to propel the national economy, this decade, is a wise decision complementing the decade of gas mantra of the Federal Government. Of course, it reflects great determination to reduce carbon footprint in Nigeria. PIA 2021 certainly ended the petroleum industry reform journey in and out of the National Assembly, since 2008. However, the changing global energy landscapes, where traditional petroleum importer, the United States, has become exporter.
The emerging economies are looking frantically for where to get funding for oil and gas in the face of climate change phenomenon. This makes proper implementation of the PIA 2021 inevitable in managing into the future of oil and gas in Nigeria. Unfortunately, concomitant issues and challenges, which are germane to managing the future of oil and gas in Nigeria under the emerging energy landscape, are becoming worrisome in the PIA implementation process. Allow me to be categorical because it is better to hurt someone with truthfulness than to elevate such a person with falsehoods. In other words, it is better to save an institution with criticism than to praise such institution to ruin in the context of managing the future of the oil and gas industry in Nigeria.
The first observation is the misconception of the Upstream Petroleum Commission about its mandate from the scrapped DPR rear-view mirror. This needs to change and quickly too. Secondly, the Authority also seems quite comfortable as the old PPPRA incarnation with pronouncements not supported by any PIA provisions. I am glad to note that efforts are ongoing to put in check, the PPPRA mentality in the Petroleum Authority for posterity. It is even quite troubling when regulators begin to fashion regulations with revenue generating intentions and this is observably playing out publicly with territorial protectionism for rent seeking, putting the effective management of the industry and the future of the industry in peril.
NNPC Limited seems also to be unwilling or hesitant to let go of the agency role with the “alpha and omega” mentality in petroleum policy advocacy on behalf of the central government, like its predecessor, the old NNPC. It is also noticeable that the Commission and the Authority are too decorous to NNPC Limited, a big challenge indeed, for managing into the future of oil and gas in Nigeria. Of course, PWI is not in any way advocating for a combatant or confrontational relationship beyond putting an argument to abide by the role separation as entrenched in the PIA 2021.
Further, the fact that the key actors in the global oil and gas industry have changed significantly is not conjectural. It is a constraint that might affect managing into the future of the oil and gas industry in Nigeria. To the extent that OPEC is now more of an incremental producer of the last resort for the stability of crude oil market dynamics than the OPEC we knew at its high point in the 1970s, 1980s and 1990s. Then, OPEC stabilized the price of crude oil by simply influencing the supply side of the market as it wished, because the market dynamics were supply determined. Thus, experts, excluding, PWI, have started to legitimately ask questions on the relevance of Nigeria’s membership of OPEC in the PIA 2021 era. PWI believes membership of OPEC that includes Nigeria is good for OPEC, the World, and of course, Nigeria.
Thus, a major challenge to address is how managing the oil and gas future in Nigeria may influence by other oil producers apart from OPEC. Let me, however, throw an important warning even as experts debate the relevance of Nigeria’s membership in OPEC. It is important to acknowledge, that OPEC has given Nigeria a cover over the years. There are other constraints that may affect the oil and gas future within the context of energy transition. They include the global desire for environmental sustainability. This is driving the evolving energy landscape from liquid petroleum and coal resources to natural gas and zero-emission energy sources. The dilemma of enabling the best business environment through local content and the unintended consequences of globalization–such as debt servicing, forex instability, crude oil market price volatility, market failures, and trade deficits exist as well.
As I have instructively alluded to in forums, the oil and gas sector cannot run in isolation. Its macroeconomic impact on the society’s economic welfare when any of the four macroeconomic markets – goods market, money market, labor market, and resources market -, are in disequilibrium is consequential. The consequences include social welfare losses, intractable misery index—high inflation, high unemployment, negative economic growth, and criminality. Interestingly, however, in a petroleum dependent economy, like Nigeria, inappropriate government interventions in resources market, the crude oil market to be specific, energize the wheel that propels the four markets to disequilibrium.
Another constraint that may affect the future of oil and gas is the changing structure and conduct of the domestic oil and gas business in Nigeria. From a significantly high barrier to entry structure, dominated by international oil companies, there is now lower barrier to entry due to the NOGIC Act 2010 and the precipitous divestments of onshore and shallow water assets by the International Oil Companies (IOCs). The PIA fiscal framework looks less favorable to the unlocking of the stranded onshore and shallow offshore reserves. The emerging indigenous operators in partnership, most often with NNPC Limited, investing in the onshore and the outer continental shelf terrains obtained less rewards than IOC rewards per unit of risked investment.
The high propensity of NNPC Limited to joint venturing is also an issue of concern with respect to managing into the future of oil and gas in Nigeria. Notwithstanding the fact that joint venturing allows for the spread of upstream risk and improve the level of participation by small firms, the propensity to have a stake in every upstream project in Nigeria increases the likelihood of investment failure for NNPC Limited. I hasten to say again that the Board of Directors of NNPC Limited as envisioned in the intentional crafting of PIA provisions is not for maximizing institutional captures. Neither is it for personal enrichment and economic rent looking for and rent sharing for passing the loyalty test, the Board exists to limit NNPC Limited vulnerability because of agency theory.
Though the Board is non-executive and non-advisory, the essence of the Board is to approve portfolio of investments through independent assessments and review, to promote the commerciality aims of NNPC Limited, and enhance the stakeholder value. The role of the Federal Executive Council within the context of NNPC Limited joint venturing project approval is also not conjectural in the PIA. These are big issues delimited for managing optimally into the future of oil and gas by the PIA 2021. Indeed, the Petroleum Industry Act (PIA) 2021 wants to enlarge the posterity blessings of oil and gas for best and sustainable national development. The implementation of the Act must be intentional to conduct the aims in the Act, subject to contemporaneous issues, constraints and challenges discussed in this lecture.
Let me conclude this lecture with an established mantra that energy is life, domestic energy consumption drives prosperity and sustainable development. Nigeria must pursue a robust energy mix strategy driven majorly by economics, technology, public policy, and good governance. Through strategic thinking, which disavows political expediency, the government needs energy transition framework that balances energy security, equity, and sustainability in an efficient, effective, and ethical manner with a transformational leadership mindset. The essential steps to finding the best transition pathway rest on government because energy transition is a policy issue.
Next, Nigeria must develop helpful petroleum barrels with emphasis on economic efficiency as against political expediency under the emerging circumstances. In the future, only the best projects that deliver economic efficiency are likely to attract upstream capital investments in the energy transition era. NNPC Limited in the interim needs to adopt petroleum assets system management to curb spreading itself too thin with not much to show for its risked investment.
Furthermore, under the evolving energy landscape with geopolitical sensory system, Nigeria must encourage and support upstream investment. It must not run the risk of accelerated production decline faster than necessary chancing energy supply vulnerability and economic crisis. Fortunately, there is now a global acceptance of natural gas as the global transition fuel even though experts have argued that natural gas is more of the fuel of the future due to its abundance globally than just being transitional. Thus, natural gas to power is a promising way to decarbonize the upstream oil and gas sector in Nigeria. Thus, it offers the best solutions to energy transition trilemma.
Additionally, regional cooperation is pivotal to easing cross-border energy trade and investment flows to the petroleum and a wider energy sector. Empirical evidence supports the mantra that energy transition is not static but dynamic. It takes about 50 to 60 years to transit from one energy source to the other, using the key example of the unending transition from coal to crude oil. Thus, it is more likely than not that oil will not disappear overnight, it will take decades. The displacement of a dominant energy source does not automatically cut that energy source from the energy supply mix with the displacement happening only through a smooth demand decline.
Finally, there needs to be a proper recognition of the existence of an overarching and emerging backstop fuel, characterized as green energy. This is in direct competition with petroleum as a dominant primary energy source worldwide. Certainly, the global longing to switch from fossil fuels to renewable energy sources presents a great challenge for the future of oil and gas in Nigeria with significant implications on all petroleum dependent economies in an overall sense.
Nigeria certainly needs proper strategic planning to use its oil and gas as a crucial part of its industrialization strategy. The implementation of the Petroleum Industry Act 2021 must focus on conducting this much. Managing, optimally, the future of oil and gas in Nigeria is critical to minimize the unintended consequences of the glamor, worldwide, for a rapid decarbonization of energy sources in the quest to minimize the global warming effects of carbon emissions. The three anchor-institutions of the PIA—policy, regulatory, and commercial, need an effective workforce. This is critically mandatory if PIA is to meet its expectations for the oil and gas exploitation in the future. Government needs to also ensure the presence of at least one erudite academia with not just the knowledge but deep understanding of the oil and gas in all the PIA Institution Boards of Directors for governance efficacy.
In conclusion, the evolving energy landscape may not necessarily be a trilemma in an actual sense of it but an opportunity to expand the global energy resource base. The word transition is an abnormality in the characterization of the emerging energy evolutionary process. It is an era that comes with challenges and opportunities, hence if high-cost petroleum producers can manage a reduction in cost of production then, they can receive help from the evolution and extend the oil market era in an environmentally sustainable manner using advances in technology. Empirical evidence supports the assertion that the displacement of a dominant energy source does not automatically cut that energy source from the energy supply mix.
Empirical evidence also suggests that the world is not running out of crude oil, and it seems, less likely than not, that the world will run crude oil out of the global energy supply mix without daring macroeconomic consequences and energy sustainability complexities, especially in Africa and Nigeria in particular! It is plausible to say that I do not see a best energy transition plan for Nigeria without petroleum over the next five decades. Fasten your seat belt; petroleum is not going away in the evolving energy landscape. Indeed, the world is not running out of petroleum, neither can the evolving world energy landscape be effective without petroleum. Nigeria must fasten its seat belt for the ride on this long journey. Transparency, accountability, and good governance remain the triad to manage into the future of oil and gas in Nigeria as demanded in the PIA 2021.
By Omowunmi Iledare, Ph.D., Snr. Fellow USAEE, Fellow NAEE, Fellow EI, Fellow NIPetE, Professor Emeritus in Petroleum Economics and Executive Director, Emmanuel Egbogah Foundation, Abuja, Nigeria.
Source: The ValueChain
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