Nigeria and the New Climate Deal

Postscript by Waziri Adio

In extra time, and against the run of play, a crucial goal was scored at the recently-concluded UN climate summit. More than 200 countries, after intense negotiations, agreed to a deal for the world to transition away from fossil fuels. This has been hailed as the most significant step towards limiting the adverse effects of climate change in the last three decades of holding these global talks.

Fossil fuels—mainly oil, gas and coal—have long been implicated as the major culprits for our increasingly warming earth and the resultant detrimental and increasingly common weather events. But this is the first time a consensus will be reached to name-check these clearly dirty sources of energy and to expressly agree to moving away from them, and interestingly this happened at a summit hosted by UAE, a petrostate.  

Other key takeaways from COP28 include the commitment by countries to triple renewable energy supplies by 2030, double energy efficiency, set new national action plans by 2025 and a recommitment to achieve zero carbon emissions by 2050, as well as the pledging of $700 million to a loss and damage fund designed to aid poor countries that are disproportionately affected by climate change. But by a planet mile, the landmark breakthrough of COP28 was the surprise deal on fossil fuels.

As with most compromise deals, there is enough to pick issues with in the ‘UAE Consensus.’ While the deal has been hailed as historic and bold, it has also been denounced as vague and inadequate by vulnerable, small island states and climate activists. The deal lacks a binding force and the wording is loose enough to accommodate loopholes. For example, the call for the transition to happen “in a just, orderly and equitable manner” is clearly a get-away clause, even if anchored on practical grounds.

But one thing should be clear, especially to an oil-dependent country like Nigeria: the ground has shifted. The end of the oil era is nigh. For the incurable optimists, it is meet here to recall the quote famously attributed to Ahmed Zaki Yamani, former oil minister of Saudi Arabia: “The Stone Age did end because the world ran out of stones, and the Oil Age will not end because we run out of oil.”

It is difficult to say exactly when the end of oil will come—as it may be quicker or slower than apparent—and the journey to the end may even be punctuated by the highs of one or two oil booms. However, the bottoming out of the oil era is now both irreversible and inevitable. The earlier we assume the worst and come to terms with this as a country and urgently prepare ourselves for the inevitable morning after oil, the better for us.

With the consensus to transition away from fossil fuels, new investments in oil and gas projects are likely to start drying up. It is a capital-intensive sector, and the banks and other financiers are likely to bow to pressure from their increasingly environmentally-conscious shareholders and steer clear of what will probably be seen as stranded assets. This is likely to strengthen the hands of ESG advocates in the financing space.

Some developed countries, some petrostates and some rich oil companies may have the muscle and the appetite to bring new oil and gas projects on stream, but our country and our national oil company don’t fall in this category. The demand for oil and gas products will start to shrink as countries rebalance their energy mix and consumers begin to shift towards cleaner and more affordable energy. Despite the existence of cartels like OPEC, the market for commodities in general is a buyer’s, not a seller’s, market. The interaction of dwindling investments, shrinking demand and shifting consciousness will eventually bring the oil era to a well-foretold end. It may not happen tomorrow. But it is almost here, quickened by that last-gasp deal struck in Dubai.

The new climate deal will impact Nigeria through two main channels: government revenue and exports; and energy security. Both channels are consequential, and a clear-headed, appropriate and proactive strategy is urgently needed to ensure that the energy transition does not catch us napping and further drag us down the development ladder.

With proven oil reserves of 37 billion barrels and proven gas reserves of 208 trillion cubic feet, Nigeria has one of the highest oil and gas endowments in the world. The oil and gas sector accounts for more than 80% of Nigeria’s exports and is thus a major source of foreign exchange earnings. Because oil and gas are about the only thing we sell to the world, foreign exchange inflows from this sector determine the size of our external reserves and the value of our currency.

In good times, Nigeria was producing an average of two million barrels of crude oil per day, even with oil theft occurring at near industrial scale. Our daily production has hovered between 1.1mbpd and 1.4mbpd lately. This is still significant. Earnings from the sale of oil and gas and taxes from the sector have accounted, at different times, for between 40% and 80% of government’s revenue. According to the 2024 budget proposal, the Federal Government hopes to raise 42% of its projected evenue from the oil and gas sector. It is a significant plunge, but 42% is still a considerable exposure.

When the demand for oil plummets or disappears, as it surely will when the oil era inevitably ends, Nigeria’s public finances, already in dire straits, will take a massive hit. The same fate will befall export earnings, forex inflow from the sector, our external reserves, and by extension the value of the Naira. If you think things are bad now, breathe in, then think of how considerably worse things could become, and speedily too.  

For a long time, Nigerian government officials have been waxing poetic about their determination to diversify the pool of our exports and the sources of government’s revenue. There has been some progress on this front. But much more needs to be done, and quickly too.

The second channel through which Nigeria will be impacted by the energy transition will be our capacity to generate adequate electricity for domestic and industrial use. According to the World Bank, more than 85 million Nigerians lack access to electricity despite Nigeria’s rich energy endowments. Relatedly, Nigeria’s average electricity consumption per person is about 140Kwh, significantly lower than the African average. Nigeria cannot develop or lift the mass of people out of poverty without radically improving the supply of and access to electricity.

At the moment, more than 70% of Nigeria’s on-grid electricity is generated from gas-fired plants. The transition away from oil and gas will likely affect the currently inadequate electricity supply in Nigeria. Even if we are allowed to use gas as a transition fuel on account of “just, equitable and orderly” transition, a conceivable reduction in investments in gas will massively constrain our capacity to continue to generate electricity through thermal plants. This will have serious implications for quality of life, job creation, industrialisation, national productivity and economic growth and development in Nigeria except we are able to quickly switch to, and scale up adoption of, renewable energy to meet our electricity needs.

Based on the probable substantial impacts of the transition on Nigeria through these two channels alone, policy makers in Abuja and state capitals should by now be in an emergency mode. Alarm bells should be going off in governance and policy circles in Nigeria post COP28. But it is hard to sense anything of such. We are still carrying as if nothing has changed or as if nothing will change. In fact, the only thing we see in such international gatherings as COP and UNGA is the opportunity to junket and showcase to the world what a profligate lot we are. The operating philosophy of Nigeria’s political-economy, including social life, still revolves around extracting, sharing and spending oil money.

Yes, we can make all the right noises about how we are one of the lowest emitters of greenhouse gases in the world, about how our capacity to develop should not be unfairly constrained, and about how the highest emitters, the developed countries, should bear most of the burdens of heating up the planet, including the responsibility to provide adequate funding for developing countries to adapt to changing weather patterns and economic realities. Yes, there is an argument to be made around climate justice, climate finance and all that. But it will be more useful for us as a country if we put more of our energy on swiftly fashioning out a strategic response to the evolving reality.

To start with, we need to stop paying lip service to diversifying away from oil. We need a well-thought-out and thoughtfully implemented strategy for significantly reducing our exposure to oil and gas for revenue, export, and energy purposes. The diversification pipeline will need to be funded. One way to do this is to use the bulk of oil revenue between now and the end of oil as investment in future sources of revenue, exports and energy. We need to stop borrowing against future oil and gas revenue to meet current consumption needs. We also need to get over the fixation with sharing and fighting over the sharing of oil and gas earnings. We have not covered ourselves in glory in the management of our oil revenues so far. We should use whatever window we have left to sow the seeds for a more bounteous future.

We also need to quickly review our energy transition plan in line with the renewed commitment to achieving net zero by 2050. We should move fast and concretely to rebalance our energy mix. In Kenya, renewables account for about 90% of electricity supply, a pointer to what is possible. Most countries, including the advanced ones, are moving on the same path. There are certainly lessons for us there in terms of policies and incentives that can unlock both demand and supply for alternative sources of energy. We need to focus on all points of the alternative energy value chain and in ways that will add value and create jobs within Nigeria. We need the same approach to the critical minerals of the green economy.  

And very significantly, we need to undertake massive mobilisation and sensitisation of key stakeholders about the reality and enormity of climate change, about the benefits of alternative courses of action, and about the specific things, big and small, that all of us can do to make the difference. Most of our people, including public officials and politicians, are still ignorant of or in denial about the far-reaching ramifications of climate change and the potentials of the new economy. The COP28 deal should serve as our national wake-up call, otherwise it will end up as a decisive goal against Nigeria.