Nigeria Tops List of Vulnerable PetroStates as Energy Transition Threatens to Wipe Out $8tn Revenues by 2040

Emmanuel Addeh in Abuja

Nigeria’s over-dependence on revenues from oil and gas production could critically cripple government operations by 2040, wiping out an income of $8 trillion from the revenues of 28 ‘petrostates’, a new report by Carbon Tracker, an energy financing, environment and climate change Think Thank, has indicated.

According to the document themed: “Petrostates of Decline: Oil and Gas Producers Face Growing Fiscal Risks as Energy Transition Unfolds,” the risks for petrostates like Nigeria are now higher than ever.

A petrostate is a country which heavily relies on the export of oil and natural gas, and whose economies are almost entirely dependent on oil, meaning that any fluctuations in oil prices will cause significant economic shockwaves.

Although the contribution of Nigeria’s oil sector to Gross Domestic Product (GDP) has fallen from almost 10 per cent in 2019 to 5.34 per cent in Q2, 2023, due to massive underperformance, the country still earns over 90 per cent of its foreign exchange from the sector.

The report found that petrostates are facing substantial risks from the energy transition, as falling oil and gas demand is set to put downward pressure on commodity prices and place future government revenues in jeopardy.

While a handful of countries have reduced their vulnerability, overall, 28 of the 40 petrostates analysed by Carbon Tracker, including Nigeria still remain too exposed to revenues from hydrocarbons and therefore still highly at risk.

“Petrostates face major shortfalls in future revenue streams. Twenty eight of the 40 petrostates would lose more than half of expected revenue under a moderate-paced transition in line with governments’ current climate pledges

“(Also), $8 trillion worth of expected revenue would be wiped out between now and 2040, with different petrostates affected in significantly different ways.

“We categorise countries’ vulnerability into five tiers, reflecting the combination of their revenue shortfall and the dependence of government budgets on oil and gas revenues…African petrostates – including Nigeria, Angola and Chad – make up the majority of the ‘highest tier’ countries,” the report said.

In November 2021, the then President, Muhammadu Buhari committed Nigeria to a net zero scenario for carbon emissions on behalf of Nigeria, pledging that the country will hit the mark by 2060. It’s unclear how Nigeria will achieve it as the country continues to shop for new investments in fossil fuels.

But the report described Africa’s case as particularly concerning, given the continent’s rapidly growing populations and existing development challenges, exacerbated by rising climate impacts.

“While some petrostates appear low-risk according to our two key metrics, they may still be vulnerable in a wider economic context, as indicated by high fiscal breakeven prices,” Carbon Tracker stated.

It stated that the highest-cost producers face the largest revenue losses per barrel, but that the lowest-cost producers – such as those in the Middle East – would also lose significant revenue under the moderate-paced transition scenario compared to any expectations under a slow transition.

“Peaking oil and gas demand should make petrostates think twice about new investments,” the report added.

The increasing economic competitiveness of clean technologies, it said, has given governments the confidence to announce future bans on the sale of new petrol and diesel vehicles and gas boilers, wiping out a substantial proportion of fossil fuel demand permanently.

With many countries, particularly the G7 and European Union, accelerating efforts to cut dependence on fossil fuel imports, the report stated that the move further threatens Petrostates’ customer base in the coming decades.

It also warned of the risks faced by countries that are only now beginning to kick-start their oil and gas industries.

“Another trend we note is of increasing national indebtedness among the 40 petrostates and an attendant worsening of creditworthiness, with several countries.

“Poorer credit ratings undermine petrostates’ borrowing ability, both for day-to-day spending and to support new industries, further trapping them in fossil fuel dependency.

“This adds to the picture we set out in our original report, which highlighted the petrostates’ near-doubling average debt since 2010, compounding their vulnerability to a reduction in national income from fossil fuel exports,” the report added.

In the face of these risks, petrostates, the report said, must consider a series of measures that would reduce their vulnerability to the energy transition.

“These include economic diversification, fossil fuel subsidy reform, the creation of sovereign wealth funds, and the establishment of new taxes (e.g. on fuel and VAT).

“The adoption of forward-looking policy approaches, which address the transition and can mitigate its negative impacts, is increasingly urgent,” it added.

It stressed that fossil fuel demand is facing “irreversible decline”, as a revolution in technology is driving the energy transition and will likely be accelerated by further policy action.

“Oil and gas exporting nations are particularly vulnerable to the transition as hydrocarbon revenues weaken. Those countries with highest fiscal dependence and higher cost project options are most at risk,” it said.

The London-based research group identified and updated its analysis of 40 petrostates, which rely on oil and gas revenue to balance fiscal budgets. Of these, 17 petrostates, it said, derive over 40 per cent of total government income from the sale of oil and gas.

“We identify nine highly vulnerable petrostates with over 60 per cent of total fiscal budget at risk under a moderate transition, including African countries Nigeria, Congo and Gabon.

“Even the lowest cost producers will not be shielded from heavy revenue losses in a moderate transition, despite the Organisation of Petroleum Exporting Countries (OPEC) gaining an increased overall market share.

“Petrostates must urgently seek to diversify their economies – particularly those identified to be most vulnerable. We outline a number of options for policymakers, including subsidy reform, sovereign wealth funds, and alternative taxes.

“Support from the international community will be needed. Transition finance could play an important role in future-proofing hydrocarbon-dependent economies, taking inspiration from recent efforts to assist coal-reliant countries.

“OPEC+ is already at significant spare capacity, suggesting a weakening market; recent supply restraint from member states questions the industry narrative around persistent high demand for oil and gas.

“Indebtedness among petrostates is increasing, with two of the nine most vulnerable petrostates facing debt to GDP ratios above 80 per cent, a level at which economic growth becomes increasingly difficult,” the report warned.