Tackling Nigeria’s Lingering Energy Insecurity

Postscript by Waziri Adio

The last few weeks have brought to the fore again Nigeria’s lingering energy paradox. With the level of our endowments in oil, gas, hydro and other sources of energy, Nigeria should be an energy-abundant country. In addition, we should be able to leverage our ample energy resources to improve the standards of living of our citizens, to drive business and industrial growth, and to boost government’s capacity to deliver public goods and meet its other obligations. Could have, should have, but haven’t. The inverse relationship between our natural endowments and our real capabilities remains confounding. Nigeria seems eternally afflicted with the paradox of plenty.

By all accounts, Nigeria’s oil sector is in grave decline. Oil production has not only stagnated but also shrunk to nearly half of the level reached about two decades ago. We import almost all of the refined petroleum products we consume. We are hardly tapping into the potential of our enormous gas reserves for growth and revenues. The current record-high prices of crude oil and natural gas which should have been a boon to us are now a major source of anxiety. As stated earlier, the war in Ukraine and the sanctions on Russia may actually further complicate the dire state of our public finance.

To further complicate matters, electricity generation and distribution dipped and power supply became more erratic. At the best of times, the electricity we generate, transmit and distribute fall grossly short of our potential and needs. In the last few weeks, we went from grossly inadequate to near comatose. Blackouts became more regular. The national grid collapsed twice within two days. As the country got blanketed with heat and darkness, and the persistent hum of generators took over homes, offices and factories, the operators of the electricity value-chain traded blame, generating more heat than light. In the midst of this, the price of diesel more than doubled, with additional burden on households and businesses. Aviation fuel was hit by both scarcity and price hike. And the petrol queue that started with the importation of inappropriate fuel a few weeks ago has refused to go away. It is indeed a perfect storm.

It is tempting to attempt to address these challenges separately. But that will be another opportunity lost. One thing we should take away from the unfortunate coming together of different things in the energy space is how energy-poor and insecure we are as a country and why we urgently need to devise holistic, coordinated, multi-sectoral strategies for addressing this paradox in the context of energy transition. Today, I will touch on just three broad areas that I think deserve serious attention.

Prioritise Gas Optimisation: With 209.5 trillion cubic feet of proven gas reserves, Nigeria has more than 30% of the proven gas reserves in Africa and has the 9^th largest gas reserves in the world. In real terms, Nigeria actually has more gas than oil. This is why Nigeria is usually described as a gas zone with some oil. But gas utilisation has been abysmally low, with gas extracted in two decades put roughly at 1% of reserves and more emphasis on associated than on non-associated gas, which constitutes the bulk of our proven reserves. As the world moves away from crude oil and coal, gas offers the best opportunity for fair and equitable energy transition for Nigeria. It is a cleaner form of fossil fuel.

Besides, gas is more versatile: it offers tremendous opportunities for domestic and industrial use and for electricity, petrochemicals and government revenues. Inadequate gas supply is implicated in the current electricity challenge, as more than 60% of our electricity is generated from thermal plants. As at 15^th March, the price of natural gas is $4.46/MMBtu, which is 65% higher than the price a year ago. With Europe desperate to reduce its 40% dependence on Russian gas, having a fully optimised gas sector would have been a major boost for Nigeria in terms of government revenues, foreign exchange and external reserves. Unfortunately, we have not developed our gas sector enough to seize this opening.  

To be fair, a lot has been done or is being done to tackle some of the binding constraints to gas optimisation in the country. The Petroleum Industry Act (PIA) has improved the pricing of gas for thermal plants and other gas-based industries. There are other plans and policies like the national gas policy, the gas monetisation plan and the declaration of 2020 to 2030 as ‘the Decade of Gas’, which combined should incentivise gas production and uptake. Gas flare has reduced from 30% to about 10%. There is also increased investment in gas infrastructure, especially the Obiafu-Obrikom-Oben (OB3) gas pipeline, the Ajaokuta-Kaduna-Kano (AKK) gas pipeline and the Train 7 of the Nigerian Liquified Natural Gas (NLNG). It is important to see these projects through as well as to fully deregulate domestic gas pricing and, as recently espoused by Mr. Babs Omotowa, highly regarded former head of the Nigerian Liquefied Natural Gas Limited, to start discussions on Train 8 and Train 9 of our LNG.

A paper by PWC in 2020 estimated that harnessing Nigeria’s recoverable proven gas reserves for domestic utilisation could create 6.5 million full-time jobs annually and could generate a gross value addition of $18.3 billion yearly (broken down as $10.53 billion in direct value, $3.4 billion in indirect value, and $4.4 billion in induced value.) Given the current proven reserves and price of natural gas, it is clear not only that these figures will change but also that Nigeria has been leaving hefty opportunities untapped. For sundry reasons, gas optimisation remains a ready and viable option for diversification within the petroleum sector for Nigeria, an option we should aggressively pursue despite the design by some clean energy advocates to put all fossil fuels in the same basket.

Undertake Comprehensive Review of the Electricity Sector: Even before the current meltdown, Nigeria has a dismal electricity sector, which places a limit on standard of living, business growth and national development. According to a 2021 report by the World Bank, 85 million Nigerians (or 43% of the population) are not connected to the electricity grid. This makes Nigeria the country with the largest energy access deficit in the world. The Bank estimated the annual economic loss from inadequate electricity supply and limited access at $26.2 billion or N10.1 trillion annually.

Also, a lot has been done and is being done to improve electricity generation, transmission and distribution in the country. Among others, these include: the Electric Power Sector Reform (EPSR) Act of 2005, the National Integrated Power Projects (NIPP), the privatisation of six generating companies and 11 distribution companies in 2013, the World Bank support to electricity distribution companies for improved metering and efficiency, the building of hydro power stations like Mambilla and Zungeru that could add 3, 050MW and 700MW respectively to the grid and the engagement with Siemens AG to improve transmission infrastructure and other aspects of the value chain.

Blames have been apportioned all round for the current blackouts and recent collapse of the grid, ranging from low water level, N1.6 trillion supposedly owed the generating companies (GENCOs), inadequate gas/vandalism of gas pipelines which impacted the thermal plants, and scheduled maintenance of power plants. The Transmission Company of Nigeria (TCN) and the electricity distribution companies (DISCOs) have not escaped scrutiny. Same as the 2013 privatisation of the GENCOs and the DISCOs, which some people feel should be revisited.

The emotion driving the blame game is understandable. But we need to go beyond looking for scapegoats. The electricity sector has been below par and has been a major drag on national development, despite increased investments and attention since 1999. The electricity landscape is littered with problems, from having capacity to generate 12, 500 MW (when we should be generating ten times that to meet our needs and aspirations) to being able to wheel and distribute only about 36% of installed generating capacity through our grid to the funny games that GENCOs, DISCOs and even consumers play.

Cancelling the privatisation of GENCOs and DISCOs, removing electricity subsidy or continuing to expand generating capacity or improving the grid alone will not address these endemic and systemic problems. Nigerian households and businesses are not really interested in such metrics as the megawatts of electricity generated or distributed. They are simply interested in having light, and they know when they have more or less of it.

Beyond restoring light to the previous normal (which itself is grossly inadequate), we need to take a serious pause and undertake an end-to-end review of the sector, a review that is expansive enough to include the state of the laws/regulations/policies governing the sector, the capacity of the operators (including the regulators), the nature of the incentives, the mix of energy sources/options, the sustainability of the pricing regime for gas and for electricity, the level of emergency preparedness, the state and security of the infrastructure, and most importantly what needs to be done. We can surmount the ‘demons’ holding the sector back, but we need to proceed more strategically and holistically.

Return to Deregulation: With how the spike in the price of crude oil has more than doubled the prices of diesel and aviation fuel, it is a difficult time to argue for deregulation of petrol. But the prices of the deregulated products will not stay high forever. Once the price of crude falls or stabilises, same will happen to the prices of its deregulated derivatives. We have seen this with diesel prices over time, which move in sync with crude oil prices. Deregulation of the diesel market also introduced competition which in turn positively impacted prices and customer service.

Deregulation offers four main advantages: one, it will provide incentives for local refining, which is good for self-sufficiency, pricing and energy security. Ordinarily, Nigeria should be the refining hub of at least West Africa but there is little incentive to tie down investment in a regulated market.

Two, it will free the national oil company of precious time so that it can focus more on more cerebral work, rather than being weighed down with the mundane responsibility for making fuel available and senior executives spending quality time inspecting depots and filling stations. In a deregulated market, others can import petrol or even choose to set up refineries here. It also removes the yoke of petrol availability from the neck of government and restores petrol as a normal good, not a political one.

Three, it will take away the unending controversies around consumption figures and the incentives for smuggling and collusion. Whether it is 30 million or 60 million litres per day, the only reason why we are bothered about consumption figures is because of the amount paid by the Federation on the difference between landing/exit-gate cost and the retail price of petrol.

And lastly, deregulation will lead to savings of the amount spent on subsiding petrol, most of which are cornered by the elite and not the poor. Without subsidy, we shouldn’t be worrying about how high crude oil prices will increase the subsidy for the year or about how the potential gains from the war in Ukraine will be wiped out by petrol subsidy or about how we may need to go a-borrowing to pay for subsidy. Deregulation doesn’t mean that government will disappear totally from the scene. It will be there not to fix prices or determine quantity but to ensure consumer protection, prevent collusion, and regulate quality (which sadly it didn’t do well with the high-sulphur fuel imported recently).

Given that deregulation will always be resisted, it will be important to develop a robust implementation and engagement strategy and have a credible plan for alleviating the impact of the immediate and future shocks on the masses. The moment crude prices start tracking downward, deregulation needs to be back on the table. It should be one of the major pillars of our energy security strategy.

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