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Nigeria: Will oil investors return despite uncertain policy and rise of electric vehicles?

By Ruth Olurounbi
Posted on Thursday, 15 July 2021 09:27

A gas flaring furnace is seen in Ughelli, Delta State, Nigeria 16 September 2020. REUTERS/Afolabi Sotunde

As countries around the world are ‘feverishly attempting to adapt to the rapidly changing dynamics in the energy industry’ to ease impact of climate change as per OPEC Secretary General Mohammad Sanusi Barkindo, there are concerns that the push for net-zero emissions could prove turbulent rather high-yielding for the global economy. This is especially worrisome in oil-dependent economies, such as Nigeria, that are contributing significantly less to global carbon dioxide emissions.

Global oil companies, including those operating in Nigeria, are dialling down their investments and developing more green-energy projects, following calls from the International Energy Agency (IEA) to stop investments in new oil and gas wells to hit ambitious climate goals by 2050. The target is net-zero carbon emissions.

In 2020, investments in oil and gas developments declined by 30% and if this were to continue, demand could exceed supply, according to OPEC. This could pose “a significant energy security risk to both producers and consumers [which] could result in knock-on effects for both the global economy and geopolitics,” says Barkindo.

The “hard push or energy transition” could be “preparing the ground for a sudden disconnect between demand and supply,” says Simbi Wabote, executive secretary at the Nigerian Content Development and Monitoring Board. “While global demand can become bullish within a few months, it takes years to complete oil and gas development projects.” According to him, oil scarcity could set the world up for an oil price of more than $100 a barrel.

Good for some, bad for others

Surging crude prices could become problematic for importing economies. “For oil consumers, high oil prices aren’t so good, especially in America where there’s a lot of driving. And now with slightly high inflation, there’s even less tolerance for those high oil prices,” says Joachim MacEbong, senior energy analyst at SBM Intelligence.

It is worrisome that, despite the obvious opportunities in the oil and gas sector and the fact that the Nigerian economy is dependent on this sector, there seems to be hesitation by foreign investors to direct their investments into this sector.

“For oil producers, high oil prices mean more money, especially for those countries in less than healthy financial positions, like Nigeria. For countries that employ more sensible fiscal management, high oil prices mean that more money goes into their respective sovereign wealth funds,” he says.

Uphill task

Achieving and sustaining the net-zero goals is seen as “an uphill task,” according to Ekpen Omonbude, who is the chair of Advisory Board of the UK-based Bargate Advisory Limited.

“The International Energy Agency recently produced a very detailed report looking at one of many pathways to achieve net zero globally by 2050, and one of the striking points in their analysis (as far as oil producing countries are concerned) was that the pathway would require no further investment in oil and gas exploration and development. It is difficult to see this happening, if considered in the context of oil-dependent developing countries,” he says.

Calls for discontinued investments in oil and gas could have a “dangerous” impact on OPEC member countries “who continue to rely primarily on revenue from their oil and gas assets to support their economic and social development,” Barkindo says.

For such economies like Nigeria that is seeing international oil companies increasingly divesting their interests and moving away from assets considered high risk or high cost to sustainability strategy, it could mean a significant stall to its ambitious plan to increase oil production to 3 million b/d by 2023.

Investment suffering

Foreign direct investment in the Nigerian oil and gas industry has been experiencing a steady decline, particularly in 2020, according to a KPMG newsletter on the country’s oil and gas sector. Total capital inflow received in the second quarter of last year stood at $6.55m compared to $10.09m received in the first quarter of the year, the lowest the industry has received since 2015.

According to the KPMG data, Nigeria received capital inflows of $216.2m in 2019, a 61% increase compared to $133.51m recorded in 2018, while 2017 and 2016 figures stood at $331.36m and $720.15m, respectively.

“It is worrisome that, despite the obvious opportunities in the oil and gas sector and the fact that the Nigerian economy is dependent on this sector, there seems to be hesitation by foreign investors to direct their investments into this sector,” KPMG said in the newsletter.

Reforms on the way

The audit firm predicted that the passage of the long-delayed Petroleum Industry Bill, which the government intends to use to reform its management of the sector, would herald a turning point for the outlook of foreign investment in the industry.

Still, oil players in Nigeria remain optimistic over the future of oil and gas developments, in the face of demands to stop investments in the development of new oil and gas wells, as the world moves to curb climate impacts driven by global CO2 emissions.

“Despite the increasing competition for capital investment, we remain optimistic about the future of the oil and gas industry in Nigeria,” Mike Sangster from TotalEnergies said during a panel discussion in Abuja.

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