The Energy Transition Is Underway. Nigeria Is Dangerously Unprepared

Oil Well
Credit: Eric Kounce / Wikimedia Commons

COP26 was preceded by much fanfare and ended with lofty promises, dramatic ocean-shot videos, blame-shifting and more. Like other countries, Nigeria was well represented. The country has acknowledged the impact of climate change and the need to take decisive action. Nigeria made the commitment to reach net-zero by 2060. However, unlike many countries, Nigeria is dangerously unprepared to make the transition. Data from the US Environmental Protection Agency show that CO2 emissions increased 90% between 1970 and 2011. Fossil fuels account for over 78% of total greenhouse emissions during this period. This makes them one of the major culprits as well as a major target in the global strategy to reach net zero. Various scientific findings, including the August 2021 report by the Intergovernmental Panel on Climate Change, have advocated a complete halt in new oil exploration as well as an aggressive phasing out of existing fossil fuel sources. Neither of these is good news to Nigeria. 

The Nigerian economy, like many commodity-dependent economies, relies heavily on crude oil exports for just about everything. Crude oil revenue is the country’s fiscal lifeline, generating almost 65% of government revenues which is shared among all three tiers of government (federal, state and local). For some states, with less than 10% of internally generated revenues (IGR), the federal allocation (or pocket money in the local parlance) accounts for the near entirety of their fiscal sources. This allocation pays salaries, builds roads (if there’s anything left), and buys loyalty in election years and more. A threat to their fiscal lifeline amounts to a threat to the survival of a significant number of the country’s thirty-six states and 774 Local Government Areas (LGA). Beyond its role in fiscal survival, oil revenues account for about 90% of foreign exchange earnings. This helps stabilize fluctuations in the exchange rate through central bank interventions. A dwindling of foreign exchange earnings, amidst relatively high import of everything from wheat to medicines and fighter jets, significantly weakens the local currency. This in turn increases local prices for imported goods, making lives harder. Then there is the increased spate of foreign borrowing by the country which currently amounts to about $32 billion and requires semi-annual debt servicing. In hard currency, of course. All of these require access to foreign exchange. Most of those earnings had long come from crude oil exports. 

So, where do we go from here? That’s the $400 billion question. At least that’s the price tag the Nigerian president put on the country’s energy transition. While acknowledging the importance of making the shift towards cleaner energy sources, the president had promoted the importance of natural gas as a transition energy source. And Nigeria has much of that. Recent estimates put Nigeria’s proven natural gas reserves at 5.7 trillion cubic meters, making it the largest on the continent and the fifth largest in the world. Admittedly, concerns and controversies remain over how “clean” natural gas is, and how suitable it will be as a transition energy. While some have argued for this role, critics see it as a ploy to scuttle and/or elongate the transition. However, depending on where you stand in this debate, there is no gainsaying the importance of natural gas in the short to medium term. Recent spikes in prices, thanks to Putin’s games and other politico-economic factors, demonstrated that. When push came to shove, everyone walked back their promises and dipped into strategic reserves. Survival first. But back to the question. Considering the inevitability of the global transition and its potential impact on the Nigerian economy, what options does the country have? 

Foremost, Nigeria (and most oil-producing African countries) needs to move beyond whining over the global north’s failure to keep up with the $100 billion annual climate support fund. The arguments advanced by these countries are understandable. The developed world (and recently, emerging economies) has been, and still are, responsible for the bulk of activities that got us to where we are today. Africa still accounts for just over 3% of global emissions. Therefore, those who’ve long been responsible for the emissions should subsidize those who are been forced to curb usage of cheaper but environmentally-dangerous energy sources. That’s understandable. But there is no law which mandates this subsidy. And Nigeria cannot gamble her future on gaining support from the global north especially in light of the pivotal role of fossil fuels to the Nigerian people as explained above. There is the need to harness the advantages enjoyed by the country with a view to making the transition without going bankrupt. Some of these advantages include the size of the Nigerian market (which is the biggest in Africa) and the country’s massive natural gas reserves (which will remain a crucial part of the world’s energy mix for many decades). In light of these advantages, a pragmatic and well-thought investment promotion strategy should be deployed. This includes conditioning access to certain local markets on the amount of bilateral investment deployed to Nigeria’s natural gas sector. While funding for fossil fuel projects developed abroad is expected to be halted by many countries, natural gas isn’t on that list. At least for now. So, better to make the move before anti-gas activists gain the upper hand.      

However, while natural gas promises significant revenues in the coming decade, if the country is successful at harnessing these investments, there is no gainsaying the danger of single-commodity dependence. As the world makes its transition away from fossil fuels, Nigeria needs to make her transition away from single commodity dependence and its inherent risks. Oil exports provided the Nigerian government relatively easy and “lazy revenue”. Those days might be coming to an end. There is the need to actively explore multiple revenue generation opportunities, including in mining, agriculture, light manufacturing and services among others. These require clear investment and business-friendly policies (in words and action), a relatively safe environment and an efficient and transparent justice system. But these are domestic policies. Externally, there is the need for the Nigerian government to clearly define its priorities in its relations with other states. A key consideration should be the potential impact of each relationship on Nigeria’s economic survival. Is country X a potential market for Nigerian products or a potential source of funding for key sectors of the Nigerian economy? That’s a question that hardly defines the country’s external relationship. Yet, other countries ask these questions while engaging with Nigeria. Nigeria needs to start asking the same questions. 

The actions (or inactions) of Nigeria and other African oil-producing countries in the next few years could determine what the future holds for them as the transition gets into full gear. Best case scenario: A well developed natural gas sector that powers other key sectors internally and provides much-needed export earnings, which in turn develops other sectors and leads to reduction in single commodity dependence. This requires a clear-eyed engagement with the rest of the world. Worst case scenario: dwindling demands for crude oil across the globe, a massive public debt crisis, runaway inflation, consequent austerity measure, and a massive unraveling of the sociopolitical fabric of the country. Where we go from here is entirely in our hands.

The views and opinions expressed in this article are those of the author.