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Nigerian Energy Sector: Inherent challenges, massive potentials

The on-going reform in the energy sector followed the radical transformations witnessed by sectors such as financial services, aviation, and security services after their various reforms in the late 2000s. The energy sector is critical to the sustenance of the political and economic system of Nigeria and in the realisation of the country’s economic growth ambitions. While the goal of being one of the top 20 nations by the year 2020 may be overly ambitious given the pace of the economic growth in the last 5 years, the potential to grow significantly is huge if the benefits of a successfully reformed energy sector provide the springboard.

Over-reliance on oil as the mainstay of the economy is creating huge structural challenges

Across the full energy stream, Nigeria has not performed badly in terms of exploitation and turnover, with the exception of the power subsector. The oil and gas sector contributes about 16.05% to Nigeria’s total GDP, and accounts for over 74% of the national budget revenue. It has however been unable to support major employment creation and skills building for other industries as skilled employees are largely imported.

Another major challenge surrounds the inability of the country to escape from the obvious Dutch disease which it has been bedevilled by since oil and gas exploration commenced. The discovery of the vast economically viable oil and gas reserves led to conflicts and marginalisation, and in the real sense, dependence on a single resource has led to the crowding out of other sectors, like agriculture, solid minerals etc. Annual budgets rely principally on income from the oil sector which often leads to extreme volatility, a lack of transparency in government spending of proceeds, and difficulty in capturing economic multiplier effects through reinvestments in appropriate sectors of the economy.

To tackle these challenges, the sector requires the provision of a stable and reliable environment, with proper dependable legislation. There must be a clear distinction of roles played by stakeholders, such as resource owners, operators and industry regulators, and consistent economic policies. These are sufficiently addressed in the proposed Petroleum Industry Bill (PIB) which is expected to be passed during the current fiscal year. In addition, the government should attract investments in the sector through incentives such as waivers and tax credits. Reforms should also be aimed at supporting a desperately under-developed area and remediating the unsustainable environmental degradation caused by countless spillages from petroleum extraction.

The Petroleum Industry Bill (PIB) to drive the reform

The basic purpose of the PIB is to reform the petroleum sector in order to align it with global industry performance and achieve 21st century standards. The bill intends to decentralise the industry and make it more efficient, result oriented and profitable. The major tasks in the industry are those of policy regulation, national asset management and commercial operations; these operations are conducted by the Nigerian National Petroleum Corporation, implying that dissolution of the NNPC into its component subsidiaries would be necessary. The key arguments on the PIB are the set of taxes to be paid by oil companies, defining penalties for gas flaring and improved metering.

The main laws that regulate the Nigerian oil industry were enacted in 1969 and a revision has become necessary. The current laws are fragmented, outdated and reinforce the unwieldy nature of the industry, for instance the NNPC acts as the customer, agent, regulator and policy driver, an abuse of its role.

The biggest wins in the PIB are the new set of guidelines which stipulate that licence sales must be open and transparent. Revenues from the industry that accrue to the government would improve from the current 48% from Production Sharing Contracts (PSC) and 82% from Joint Ventures (JV), to international rates which average 56% PSC to 90% JV. JV cash calls would be deducted at source; hence government would no more be responsible for NNPC commitments. 

International oil companies (IOCs) have lots of undeveloped fields, crowding out local companies who would have gone on small level production. The PIB instructs all IOCs to define what they will do with undeveloped fields, a process which might lead to them having to forfeit or sell them. Oil companies would now pay company income taxes to FIRS, which they are presently exempted from. The Bill also sets up a trust fund for communities where oil is explored which suggests direct payments could be made to indigenes.

The volatility in oil prices leads to unstable revenue and affects other fiscal responsibilities

The macroeconomic volatility in Nigeria has been occasioned largely by swings in oil prices which affects the nation’s revenue. Poor corporate relations with indigenous communities, vandalism of oil infrastructure, severe ecological damage, and personal security problems throughout the Niger Delta, Nigeria’s oil-producing region, continue to plague the oil sector. The oil industry has been scarred by political and economic conflict largely due to a long history of corruption and complicity of multinational corporations.

The gas sector is the next growth sector if we can quickly overcome the related challenges

Nigeria is known to have the 7th largest gas reserve in the world with about 184tcf gas reserve of high quality sweet-gas. Remarkable progress has been made in the Nigerian gas sector in the last few years in a bid to grow its Liquefied Natural Gas (LNG) capacity to about 30% of total Atlantic LNG capacity. This has led to a sustained shift in gas prices since 2004; a trend that is likely to be sustained in view of the current imbalance between global NLG demand and supply and the robust economic growth and energy demand in many emerging economies in recent years.

Considering the size of the nation’s gas reserves, the potential for huge investment and revenue inflow from the sector is enormous. Three factors that have been identified to help aid in delivering economic growth in Nigeria through the gas sector are: sustained investment inflows, stimulating growth of domestic labour and efficient institution and regulatory environment.

However, there are factors likely to inhibit the pace of growth of Nigeria’s gas sector and consequently, its economic impact. These include pricing, fiscal terms, institutional and infrastructural arrangements, legal and regulatory framework and financing.

The gas sector has huge potential as a full-fledged industry

In line with the proposed implementation of the gas sector reform act, significant progress is being made on various projects to ensure increased production of sweet-gas. The gas industry is still evolving considering that most of the gas discoveries in Nigeria were achieved through petroleum exploration. Yet, the country remains the number one gas flaring nation in the world. World Bank Statistics suggest that 40% of Nigeria’s annual gas production is being flared.

Reform of the Power Industry is  key to achieving Vision 20:2020

Through the Electric Power Sector Act of 2005 (EPSA 2005), the Federal Government began the unbundling of the power industry for the eventual deregulation and privatisation of the power generation and distribution in Nigeria in a bid to make it more efficient in meeting existing and prospective consumption demand. As a result, the Power Holding Company of Nigeria (PHCN) was established with an intended strategy to privatise core functions of the power company such as generation and distribution, whilst transmission operations would be retained by the government.

Despite accounting for over 85% of national revenue, the energy sector contributes only 16% to GDP

The sector is largely detached from the mainstream of the Nigerian economy, employing a mere 21,794 people directly. Driven by the petroleum industry bill when passed into law and supported by the local content act 2010, repositioned oil and gas industries could add substantially to national output via increased local job creation.