Nigeria: How realistic is the energy transition plan launched by Osinbajo?

Kelvin Ayebaefie Emmanuel
By Kelvin Ayebaefie Emmanuel

Co-Founder, CEO at Dairy Hills

Posted on Tuesday, 6 September 2022 13:16

Nigeria's Vice President Yemi Osinbajo speaks during a meeting with Vice President Kamala Harris in Harris' ceremonial office on the White House complex in Washington, Friday, Sept. 2, 2022. (AP Photo/Susan Walsh)

Last week, Nigeria's Vice President Yemi Osinbajo launched an energy transition plan that attracted the accolades of prominent figures like Michael Bloomberg (former three-time mayor of the City of New York, founder and majority shareholder of Bloomberg), who also happens to be a clean energy advocate.

Much of the developed world believes that the most existential threat we face as human beings is the threat of climate change, even though much of Western Europe, mainland China, and North America was built on fossil fuels and coal.

As a matter of fact, the most daring and ambitious goals for the clean energy transition, where President Buhari also made very daring commitments, was at COP22 – just a few months before Russia decided to invade Ukraine. This event triggered so many disastrous consequences, chief of which has led to a complete embargo of oil from Russia, and an almost-embargo on Russian gas, a move that has in turn led to inflation in Europe – at levels not seen since 1984.

Nigeria vs oil

Despite being the 13th highest producer of oil in the world, Nigeria has failed to partake in the largesse that comes from the price being above $100 per barrel for nearly six months now because of self-inflicted issues, such as:

  • Organised crude oil theft;
  • Inability to negotiate for higher quotas at OPEC (an organisation set up at a conference in Baghdad in 1961, which has mostly favoured US-Saudi Arabia’s diplomatic ploy to keep oil prices low in an oil for security deal); and
  • Lack of clarity in energy policy from decades of refusal to pass a comprehensive petroleum industry bill that only became law months ago, and stifled new investments by international oil companies in new rigs that will raise production output from its deep offshore inland basin (DOIP-Basin) as expressed in the Joint Venture Production Sharing Contracts.

Nigeria vs natural gas

This West African nation has the ninth largest proven reserves of natural gas with stated reserves at 206tn cubic feet. However, it has failed to take advantage of the surge in the rise in gas prices in Europe that has seen prices rise up to $34 per mm standard cubic feet, as compared to a capped price of $7 per mm standard cubic feet in Nigeria.

This is because of the failure of the NNPC, which controls the Nigeria Gas Management Company (NMGC), to deregulate the pricing on natural gas in the country. The debacle is much to the chagrin of investors who form the Gas Association in Nigeria, which has disincentivised companies from building infrastructure for compression of dried filtered gas into CNG, or pipeline infrastructure for distribution across states within Nigeria.

The vice president’s plan is thus to create 340,000 jobs by 2030 and 840,000 jobs by 2060. However, the attraction of $10bn in investments per year remains wishful thinking if the following fundamental issues are not addressed:

  • Allow gas prices in Nigeria to follow the bent formula that tracks the prices of diesel by 40%

This means that since the calculation of prices at $7 per mm standard cubic feet for gas will yield N105 ($0.25) per standard cubic metre, the price for gas that is 0.97 equivalent for diesel should naturally follow the 300% increase over the last seven months to N315 per standard cubic metre. Doing this will attract a flow of non-speculative foreign direct investments (FDI) into building pipes, compression stations, regasification plants, and CNG trucks necessary to increase the utilisation for gas as a cheaper and more sustainable means of energy as well as reduce the carbon footprint in Nigeria.

  • Convergence of rates

There are currently six different exchange rates in Nigeria. Take the example of Emirates Airline decision to stop flight operations in Nigeria by 1 September, and the decision by British Airways to close inventory on sales of tickets from Nigeria. It shows how impossible it is for the treasury of a multinational corporation (MNC) or institutional investor to bring in long term non-speculative investment into the country without guarantees provided by a forward market managed at the NAFEX.

This is because the market makers lack the forward guidance to provide liquidity in counterparty risk to companies placing a premium to lock-in price, so as to prevent a negative yield in the curve of exchange rate risk from being higher than the internal rate of return at the time of profit repatriation.

Companies will not take government incentives like tax breaks expressed in pioneer status according to the National Tax Industrial Relief Act (as amended in 2014), or the Import Duty Exemption Certificate (IDEC) over the yield curve on risk pricing for revenue and profit repatriation. The single solution there’s consensus on, based on working models like the Egyptian pounds that switched back in November 2016, is a floating exchange rate model (that eliminates government subsidy on rates).

  • Ensuring that NNPC backwardly integrates 100% the supply of LPG 

Within the last seven years, the consumption of LPG has moved by 260% from 400k to 1.04m metric tonnes, while the price of a kg of cooking gas has moved from N200 to N800 because of a depreciation in the naira over the intervening period.

The vice president talks about migrating the rural dwellers from using charcoal (gotten from cutting down trees) or Dual-Purpose Kerosene (DPK gotten from refining crude oil) yet the government has failed in its primary responsibility of ensuring that NNPC backwardly integrates 100% the supply of LPG and not import from Equatorial Guinea and the US.

  • Having the right frameworks to attract investing companies

For emphasis, Nigeria has these minerals and natural resources, so the issue is having the right frameworks to attract the different layers of investing companies to explore it and do import substitution. Importing it, even as Completely Knocked Down (CKD) parts from China or Germany, and granting the companies who do so exemptions will not change the fact that there’s an exchange rate risk that will be passed on to consumers.

Bottom line

One of the best decisions the vice president can make to help the economy is to ask for a review of Nigeria’s supply chain so he can see how unrealistic his energy transition plan is in reality, even if it might look very good on paper. A prominent global figure has endorsed the plan, but it begs the question: Have you shown Michael Bloomberg the factsheet of Nigeria’s supply chain?

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