PREAMBLE
Nigeria has abundant liquid petroleum resources, estimated at thirty-seven billion barrels. This is equivalent to about fifty reserves-life years at the current extraction capacity rate of about two million barrels per day. The dependability of the economy of Nigeria on petroleum for economic growth, development and enhanced social well-being is significantly conspicuous. Additionally, natural gas resources are in abundance. Nigeria ranks among the top ten nations with an estimated 209 TCF-proof natural gas reserves at the beginning of 2024. Experts, in fact, have opined that Nigeria is majorly a natural gas province with just pockets of liquid petroleum fields. This op-ed aims to review matters arising in 2024 with inferences to facilitate their resolutions. These issues and implications affecting the petroleum, energy and economy nexus in Nigeria include but are not limited to – petroleum assets divestment, oil and gas sector governance, presidential executive orders, Dangote refinery and wholesale market conduct, the. evolving energy landscape and global oil and gas dominance and navigating the energy transition trilemma.
DIVESTMENT OF PETROLEUM ASSETS BY THE INTERNATIONAL OIL COMPANIES (IOCS)
Divestments are deliberate business decisions, majorly, for restructuring business operations to maximize value for all stakeholders. Of course, a forced assets divestment can also occur because of regulations or bankruptcy. Thus, it is amazing, the way people look at ongoing oil and gas divestment processes in Nigeria. Quite often people seem oblivious to the capital risk and uncertainty inherent in the upstream business in terms of cost, price, and rewards. Stakeholders outside the petroleum sector and transfer payment recipients from petroleum revenue seem not able to comprehend the complexity of the market structure driving investments for petroleum resources development.
Divesting from less profitable assets and reorganizing portfolios for business longevity is a prerogative adopted worldwide in the oil and gas business; it is a global best practice usually adopted to maximize corporate value. It is an established long-term business strategy. Thus, the recent divestment decisions by Shell, Mobil, Agip and Total, are purely business decisions, and a good one for that matter for Nigeria, in terms of maximizing government access to revenue from those assets. Usually, identifying laudable buyers is very crucial in asset divesting to minimize opportunity cost, such that any foregone value relative to the divested asset aggregate value received are, at least equilibrated. Of course, government access to revenue from these assets must not be compromised and operating these assets with minimal environmental hazards is important as well.
The Conglomerates approved by the Federal Government of Nigeria to purchase the shares of the IOCs in these JV assets have the requisite skill sets and professional acumen to operate them. The technical, managerial, and financial competency of these conglomerates are not in doubt to operate these assets for maximum economic and social value. Thus, lessons from asset divestments in the US offer a gutsy optimism that the sales of these assets to indigenous investors could add significant value to the economy of Nigeria and enhance energy security in the evolving global energy landscape. These possibilities are evident, so far, in the contributions from the emerging indigenous players in the Nigeria oil and gas industry to date.
However, there are legitimate concerns and apprehensions with respect to these transactions. First, there is a wishful desire for NNPCL to reduce its majority share in these JV assets to minority ownership, using the NLNG Model. Fortunately, with the approval of the Federal Government and the endorsement of the National Economic Council, NNPC Limited can sell shares held by the Government. Luckily the Government needs a lot of money and selling its share in NNPCL is preferred to borrowing with a high capital cost and foregone future earnings in my opinion.
Secondly, there is the prospect of diminishing government access to petroleum revenue from these divested IOC assets. The sensibility of this apprehension may not necessarily be premised on business failure on the part of the Consortia purchasing these assets but on the PIA fiscal terms of onshore and shallow water assets. There is empirical evidence to suggest that the PIA royalty schemes, the hydrocarbon resource tax, and other instruments in the PIA 2021 may limit capacity expansion thereby significantly reducing government access to revenue. Perhaps, Schedule Seven of the PIA and the royalty regulations fashioned by the Petroleum Commission can be amended to enhance the profitability of onshore and shallow assets development. As mentioned in several discussions, the fiscal terms in the PIA 2021 are relatively skewed and understandably in favour of deep offshore assets compared to shallow or onshore assets.
PRESIDENTIAL EXECUTIVE ORDER 2024 ON NAG
The Presidential Executive Order (PEO) 2024 to incentivize non-associated gas (NAG) Greenfield Development has received great acclamation among industry stakeholders and energy analysts. The oil and gas companies operating in the shallow-water and onshore terrains in Nigeria are majorly thrilled at the ease at which the NAG order came to pass. The PEO 2024 aims to make investments in NAG projects competitive and attractive to investors. Interestingly, Nigeria has done laudable things in the past to spur gas development within the context of investment attractiveness and competitiveness. But not much empirical evidence is there to suggest such incentives for gas development have contributed meaningfully to the national economy in terms of the total value of goods produced and services provided in Nigeria. Excellent examples of past incentives include NLNG fiscal incentives, the Associated Gas Flaring Act incentives, the Gas-to-Liquid incentives, and the many incentives in the PIA targeted at natural gas development.
Fiscal incentives to expand the development of non-associated gas have intergenerational implications implying it should not be about investment attractiveness and competitiveness alone. Understanding the dynamism of mutuality interests among the stakeholders—investors, government, and the society–competing for the huge economic rent from petroleum resources development is critical. The desire to grow and sustain economic development using oil and gas wealth optimally must always be part of the objectives in the long run. Interestingly, Nigeria has done laudable things in the past to spur gas development within the context of investment attractiveness and competitiveness. But not much empirical evidence is there to support that such incentives for gas development have contributed meaningfully to the national economy in terms of the total value of goods produced and services provided in Nigeria. It is quite understandable to identify with the public affirmation and acclamation PBAT received for issuing PEO 2024. Honestly speaking, however, and even if I am the only Jeremiah in town, targeting NAG with PEO 2024 instead of amending the PIA 2021 is, perhaps, ill-advised judging from the state of the economy of the Federation.
THE EVOLVING ENERGY LANDSCAPE AND OIL AND GAS GOVERNANCE IN NIGERIA
The evolving energy from fossil-fuels-dominated energy supply mix to zero-carbon emission sources 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 the energy evolution with a predetermined date is very disconcerting. This is more so in developing economies, like Nigeria, with an 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. Paradoxically, Nigeria has significantly low energy access and high energy costs with low oil and gas production despite abundant petroleum resources (liquids and gaseous). Thus, Nigeria may experience a 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.
Regarding oil and gas governance, it is noteworthy that the PIA 2021 has provisions on institutions and governance, which seek to reverse the perpetual comatose and negative challenges bedevilling the Nigerian 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 practices in fiscal systems design in the PIA 2021, with the future of the industry in focus. Thus, the combinations of the fiscal instruments and terms in the PIA 2021 are glaringly investor-friendly to a fault, making the optimization of mutuality of interests in an aggregate sense conflicted. Remarkably, there are emerging rewarding results from the delayed reform efforts. The five-billion-dollar investment by Shell and allies is laudable, and the approvals granted to local indigenous consortia to buy divested IOC assets in onshore and shallow water terrains suggest that the PIA fiscal incentives based on performance are effectual, despite the apparent inefficacy in the system. The hydrocarbon bidding round efforts, the first since 2007 have rekindled the optimism of Nigeria as an enviable oil and gas bride, the destination of choice in the Gulf of Guinea in 2024.
It is certainly very commendable 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 a great determination to reduce the carbon footprint in Nigeria. PIA 2021 certainly ended the petroleum industry reform journey in and out of the National Assembly, since 2008.
As I have instructively alluded to in many fora, 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, labour market, and resources market – is 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 the resources market, the crude oil market to be specific, energize the wheel that propels the four macroeconomic markets into disequilibrium.
PETROLEUM PRODUCTS AND ELECTRICITY MARKETS
The petroleum products market structure in Nigeria is an amalgamation, a mixture of oligopolistic competition at the retail end for PMS and diesel with high concentration ratios for the top four firms and top eight firms. It is oligopolistic because the top four sellers/firms in the market exert considerable influence over the market behaviour in that segment of the petroleum value chain. However, in the retail diesel product market for end-users, pricing is also oligopolistic with interdependency. Whereas in the PMS wholesale market, the dominant firms before until Dangote Refinery became operational, the NNPC Limited, tended to influence the market pricing dynamic as the principal importer of PMS.
The influence of NNPC Limited, as the dominant firm in the PMS market, occurs because of its near absolute monopoly market power in the PMS wholesale market even as Dangote Refinery is competing for a larger wholesale PMS market share. It is the sole importer of PMS, even if there is room for disagreement, which made it enjoy a pseudo-monopoly market power. Dangote refinery is, however, diminishing the market power of NNPCL.
Regarding the role of Government, the PIA 2021 provides three anchor institutions to improve competitiveness in the petroleum market in terms of structure, conduct and performance. Unfortunately, the obsolete Petroleum Act of 1969, the Petroleum Pricing Regulatory Agency Act of 2003, and the NNPC Act of 1977 remain imminent and looming larger than life in the contemporary petroleum products market governance and regulatory dynamics. No wonder, every feature of market failures, such as illegal markets, PMS shortages, subsidies, long queues at retail stations, and social welfare losses existing before PIA 2021, still characterize the petroleum products market, two years later. However, things are changing fast as two dominant firms in the wholesale market are competing among themselves for processes. There is the audacity of hope that the Petroleum Authority will be a trusted watchdog in the battle for dominance in the PMS wholesale market between Dangote Refinery and NNPCL.
The power market also has three segments—generation, transmission, and distribution. Each segment is a standalone business in Nigeria. The Electricity Act 2023 has the enormous potential to rekindle the electric power industry. The decentralization of the governance of the electricity supply industry with state participation is laudable, commendable, and incredible. Of course, there is an apprehension that state governments may create government-owned power companies, and this is plausible. However, it is so amazing to read from media sources the willingness of NERC to surrender regulatory functions to agencies in the constituent states in the Federation to regulate the power market in the state. Indeed, the dawn of a new era in the power sector in Nigeria. Perhaps taxation, policing, education, banking and other sectors of the economy that are currently centralized may become decentralized during this administration as well.
The segment of the power value chain with the direct link to end-users and suboptimal business performance is the power distributing companies. This segment of the power industry value chain has implications for the entire value chain. The market structure in this segment of the power value chain is not a natural monopoly in the real sense but a territorial monopoly. Unfortunately, too, the territory assigned to each Disco is quite heterogeneous in terms of market features—income, social structure and culture, and status and fundamentals—access to the national grid, affordability, and adaptability. The suboptimality of this segment explains the overall delimited access to power in Nigeria at an affordable price. This is clear when you compare the 4000-5000 MW electron transmission capacity to 10,000 – 15,000 MW generating capacity. It becomes obvious that the availability aspect of the energy supply security is unachievable. There is a clamour to revisit the sales agreement with Discos in Nigeria to reevaluate the sale agreements and revoke the licenses of all nonperforming Discos. This is really a promising idea in addition to the ongoing decentralization of the power regulatory functions to constituent units.
The new electricity tariff embraces a price discrimination mechanism, and it is not a new phenomenon in the power sector worldwide. The precision of the band A tariff started recently is, however, conjectural because of supply uncertainty and the assumptions and facts within the context of the pricing model applied. As more facts become available and assumptions reevaluated for real, the pricing model can then be recalibrated in a self-adjusting manner. Also, there must be a way to protect the consumer surplus of customers affected because of affordability and metering issues because of this new tariff. Assuming the reports published in the print media are correct, then the ongoing price discrimination application is based on daily supply hours for selected users. Such a mechanism is not unusual in the power market, the airline industry does the same thing.
CONCLUDING REMARKS
The nexus between petroleum, energy and the economy in Nigeria is not conjectural. Empirical evidence since the 1970s shows that the structure of Nigeria has been significantly altered because of economic rent extraction from petroleum resources development. There seems to be limited understanding that domestic energy production for export does not create the type of multiplier effects domestic energy conversion processes and consumption have in a petroleum-producing economy. It is therefore not surprising that access to affordable secondary energy sources—electricity, cooking gas, motor fuels, jet fuels, etc., are very prominent among the other issues, and has been quite consequential in terms of the relatively high misery index, which is a combination of high inflation, high unemployment and low economic growth.
Under the circumstances, the evolving energy landscape may not necessarily be a trilemma in the actual sense of it but an opportunity for Nigeria to expand its 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. Thus, as the global energy systems attempt to evolve from fossil fuel dominance, Nigeria is at a critical juncture. A good understanding of the imperative of good governance, transparency and accountability in the energy sector, especially, in the petroleum value chain remains the necessary condition to maximize social and economic value for Nigeria.
OMOWUMI O. ILEDARE, PhD, Sr.
Fellow USAEE, Fellow NIPetE, Fellow
EI, Professor Emeritus, Louisiana
State University, Baton Rouge, USA
& Executive Director, Emmanuel Egbogah Foundation, Abuja, Nigeria