Debts, Subsidies, and Stranded Oil Are All Stumbling Blocks in Nigeria’s Energy Transition

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By Habib Sani Galadima

  • Fuel subsidy payments of $15.7 billion are stopped after UN, IRENA, and SEforALL review their alternatives.
  • According to UNDP, requesting loans from abroad for Africa’s energy transition is a fruitless endeavor.
  • Prof. Bala claims that Nigeria may designate 1% of its oil fund for renewable energy.
  • The rising cost of borrowing has divided stakeholders.

 

Yesterday, as world leaders considered the challenges of the energy transition, the issue of pressuring African nations, particularly Nigeria, to increase their borrowing to finance the energy transition in the midst of depressed economic indexes and a continued romance with fossil fuel subsidies was brought up.

 

Energy and economic experts are very worried about what will happen to Nigeria’s current reserves of 37 billion barrels of crude oil and 206 trillion standard cubic feet of gas, as well as the economic planning that still puts a high priority on these resources, despite the country’s growing population and persistent poverty.

 

The United Nations and Sustainable Energy for All (SEforALL) were especially concerned about the plight of Africa at the 13th Assembly of the International Renewable Energy Agency (IRENA), which concluded yesterday in Abu Dhabi, United Arab Emirates (UAE). They sought a compromise between asking Africa to borrow money to transition to cleaner energy with the rest of the world or continuing to use their existing resources.

 

Nigeria’s expected debt by May of this year is N77 trillion ($171.2 billion). According to reports, Africa’s state debt has increased by two times since 2010, reaching 65 percent of the continent’s GDP in 2022. In 2010, it barely reached 32.7%.

 

This is taking place as borrowing costs are rapidly increasing. This is because refinancing costs have doubled, going up by an average of 600 basis points and by as much as 1800 basis points in some locations, making it more difficult for many African governments to issue Eurobonds.

 

The Overseas Development Institute had stated that with $140 billion in Eurobonds and an average duration of 10 years, interest costs would total $8.4 billion per year, or $84 billion overall, at a refinancing cost of 600 basis points, or six percent. This amounts to 0.3% of Africa’s annual GDP, and the think tank stated that since Eurobonds account for 30% of the continent’s total debt on average, the overall cost of additional debt payment will be a painful 1% of GDP annually.

 

Nigeria is promoting an energy transition plan of $1.9 trillion and a road map for renewable energy worth $1.2 trillion, despite the International Monetary Fund (IMF) predicting that by 2026, the government of Nigeria may spend nearly all of its earnings on debt payment alone. The nation is also subsidizing premium motor fuel to the tune of $15.7 billion.

 

In spite of the fact that COVID-19 and the war in Ukraine have aggravated the world’s energy crisis, UN Secretary-General António Guterres declared that investment in the energy transition must triple to $4 trillion annually.

 

The director of SEforAll, Damilola Ogunbiyi, insisted at the event that the special circumstances of nations, particularly those in Africa, must be taken into account. He claimed that since these nations continue to face problems with energy access, they may want to start with clean energy options rather than transition discussions.

“You can’t ask people to transition to nothing. We have the opportunity to make sure the energy they are getting is clean from the start. We don’t need to talk about transition because we are starting from the base.

 

“The administrator of the United Nations Development Programme, Achim Steiner said if the world would deal with the problem of slow transition, especially in Africa, the question of finance would have to be critically considered. Worried that Africa is heavily indebted, he said, “Asking Africa to borrow more to finance climate change is futile.”

 

He advocated for a private sector-focused investment strategy that would let both domestic and foreign investors contribute to the cost of combating climate change.

 

Steiner characterized Nigeria’s subsidy regime as unreasonable, however, he acknowledged that a progressive reduction in petrol subsidies may be implemented to mitigate the effects of outright removal on the economy and the populace.

 

Nigeria is one of many nations that have pledged to net-zero goals in an effort to save the planet, but current events, particularly COVID-19 and the conflict in Ukraine, have seriously disrupted the world’s energy and supply chains and upset projections.

 

However, IRENA’s Director-General Francesco La Camera and other significant figures argued that preparations must continue as planned and even pick up speed in order to guarantee 1.5°C by 2050.

 

Prior to COP28, La Camera made a suggestion that world leaders may need to restructure current partnerships and find more workable space to ensure quicker progress toward attaining climate change goals.

 

According to Eli Bala, director general of the Energy Commission of Nigeria (ECN), the Federal Government has been asked to allocate 1% of oil and gas revenue to the development of renewable energy.

 

He claims that legislation on the subject is already under consideration and, if approved into law, will help Nigeria move toward a clean energy economy.

 

Concerned about government subsidies for fossil fuels, Bala argued that if money were instead directed toward renewable energy, the government would be making a more sustainable investment.

 

Borrowing for transit is “a no-go area,” according to Prof. Wunmi Iledare, Chairman of Ghana National Petroleum Corporation, but the energy transformation will take place and continue to gather momentum.

 

Iledare, who praised Nigeria for discussing and outlining its energy transition choices, was also in favor of Nigeria continuing its search for crude oil on the justification that an energy transition is not about achieving net zero emissions but rather a net zero target.

 

“There is also a global understanding that 2050 is a moving target because the transition speed differs across the globe. For Nigeria, since transportation fuel is the biggest source of carbon emissions, petroleum subsidies must be removed as part of the plan to reduce consumption. Furthermore, borrowing money for transportation is not recommended because so much money has been borrowed to subsidize petroleum.

 

“Debt is unjustifiable unless it is for infrastructure development for sustainable development.  The mother of entitlement is expectation without effort. I am glad there is a transition plan but sad there is even a thought process to borrow money to transit! It is a no go area more so when the current level of emissions in Nigeria is minuscule,” he said.

 

While borrowing may still be a possibility for Nigeria, Joseph Nwakwue, a former president of the Society of Petroleum Engineers and a partner at Zera Advisory and Consulting, emphasized that borrowing to finance an energy transformation would be a wrong priority.

 

He claimed that if the nation wishes to compete as an oil producer or in any other sector of the economy, it must address its severe infrastructure deficit.

 

Nwakwue said: “Unless the development projects are transition-related, we will not specifically borrow for energy transition at this point. We have much more to do than rely on fossil fuels for transportation.”

 

 

 

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