By Ronke Luke | –
If electricity and the management of power sector reforms are key to Nigeria’s economic future, crude oil/gas – and the mismanagement thereof – is at the heart of its current mess. And the decline in oil prices since 2014 constrains Nigeria’s abilities to manoeuvre at a time when it needs maximum flexibility. Whoever wins the next election, will have to face the ghosts of Nigeria’s energy past, to set the country towards a brighter future. Add to this a volatile security situation, and the next President will face a challenging time. What happens in Nigeria will reverberate across West Africa.
Crude Oil – Ghost of Nigeria’s Past
Mention the resource curse, and Nigeria makes the list. Nigeria’s cumulative oil revenue, between 1965 and 2000, totalled roughly $350 billion (in 1995 prices and deducting payments to foreign oil firms). Flush with oil revenue, and a belief central government knows best, Nigeria neglected the once strong agricultural sector. Instead, successive central governments poured oil money into mega projects intended to create an industrial manufacturing base. Every one of these publicly-funded projects underperformed. One of the most egregious examples being the Ajakouta steel complex; built in the seventies, it never produced a ton of steel.
Oil revenue per capita in 1965 was $33; GDP/capita was $245. In 2000, 35 years later, oil revenue per capita was $325; GDP/capita, however, was unchanged. $350 billion delivered no growth. As Bevan et. al noted of this period “almost the entire windfall was invested, and yet . . . there was nothing to show for it.”
The failure of its citizens to broadly benefit from the country’s oil wealth, gave rise to the unrest in the Niger Delta, where Nigeria’s oil wealth is found. Activists and militants in the Delta have protested the pollution and privations through civic protests and armed means for years.
Rightly or not, Royal Dutch Shell has become synonymous with all that is wrong with Big Oil in Africa, in general, and Nigeria in particular. Activists in the United Kingdom and Nigeria celebrated the landmark settlement in Jan 2015 in which Shell’s Nigeria subsidiary, facing trial in the U.K., agreed to pay 55 million pounds to the Bodo people, affected by the environmental pollution from two oil spills from Shell’s pipes in 2008 and 2009.
If misery likes company, the people of Nigeria’s oil-producing Delta region, many of who live in poverty, can commiserate with their fellow citizens. Nigeria accounts for 9% of the world’s extreme poor living on less than $1.25/day. Unlike China, which also makes this list, Nigeria socio-economic data is moving in the wrong direction.
Crashing Oil Prices – Ghost of the Present
Having forsaken other economic sectors, particularly agriculture, Nigeria depends on oil for 70 percent of government revenue and 95 percent of foreign exchange earnings. In its 2015 budget, the government assumed $78/barrel; which was up from $77.5/barrel used in the 2013 budget. However, per the IMF, Nigeria needed $119/barrel to balance its 2014 budget. So with oil prices hovering in the $50+/barrel range; the country is already running a deficit and will need to tap its Excess Crude Account (ECA) and other reserves.
But Nigeria’s oil revenue troubles started before oil prices plummeted in summer 2014. Starting in 2012, Nigerian oil exports to the U.S. declined rapidly, down from 1.3m b/d in 2006 to just 0.5m b/d in 2012. In July 2014, for the first time since EIA started keeping records in 1973, no U.S. refinery imported a single barrel of Nigerian crude. It had all been replaced by U.S. shale oil production. In 2013, Diezani Alison-Madueke, the oil minister, warned that shale was “one of the most serious threats for African producers.”
As long as global demand was high, Nigeria could pivot and sell its output to Asia. Sales rose in the first part of 2014 by 40 percent over 2013. But Asian demand has slowed. Nigeria is now facing fierce competition from Middle Eastern suppliers who dominate Asian markets. Its shipping costs are higher and it cannot match the discounts, which Kuwait or Saudi Arabia can offer.
Nigeria is scrambling to find new takers for its oil. India’s recent interest to take a stake in African oil and gas fields is welcome news to the continent’s exporters.
Sometimes fortune smiles just when all seems bleak. Falling crude oil prices mean that Nigeria’s light sweet crude is now cheap enough that it can seize on Venezuela’s woes. Unable to supply its neighbours,
Nigeria now exports crude to Brazil and Uruguay. Prospects are good for increasing sales as Brazil and Mexico do not have spare capacity to pursue Venezuela’s customers.
Nigeria imports roughly 70 percent of the refined petroleum products consumed domestically. As crude oil prices have plummeted, there have been greater calls for Nigeria to remove the $7 billion in fuel subsidies. In Jan 2012, the government tried to withdraw the fuel subsidy arguing they were no longer affordable. Massive public strikes forced a re-think. Then in May 2012, the House of Representatives committee released a report implicating Nigerian National Petroleum Corporation’s (NNPC), and highly-placed governmental, allies in a $6.8 billion fraud; embezzling subsidies the central government provides to import and reduce the cost Nigerians pay for refined fuels. The inquiry found that the government was paying subsidy for 59m litres of fuel/day, yet Nigerians only consumed 35m litres/day. Billions were paid for fuel that was never delivered. Nigerians await accountability. So the suggestion – no matter how economically correct that the government can withdraw fuel subsidies as crude prices fall is politically difficult to envision.
Subsidized, cheap refined fuels are the only benefit ordinary Nigerians say oil has brought them.
Many indicate that Boko Haram, founded in 2002 to oppose Western education, has been able to exploit the corrosive effects of poverty and corruption. Since it launched its military campaign to create an Islamic state in 2009, the group has pulled off increasingly violent attacks across Nigeria’s northeast. Nigeria’s security apparatus has to-date been unable to counter with a robust sustained response. Boko Haram’s spectacular kidnapping of 200+ school girls from their dormitory in 2014 brought home the audacity of a group confident of the state’s impotence to hit back. Across Nigeria, including in Abuja – its capital there have been increasing bombings by unknown assailants that have left scores dead and maimed.
President Jonathan is increasingly being asked why his government is unable to secure the country. His challenger, Muhammadu Buhari, who is pounding the security issue believes it will resonate with voters not only in the northeast terrorized by Boko Haram, but also across the country where bombings and violent attacks are rising. Nigerians will consider a multitude of issues when they vote on March 28. But whoever wins, will need to be able to concurrently address three major challenges: security, 2) economic reforms in the electricity and oil sector and 3) diversification of the country’s economy away from its dependence on oil
Electricity – Ghost of Nigeria’s Future
Diversifying Nigeria’s sources of non-oil revenue depends on delivering reliable electricity. The largest economy in Africa has less installed capacity than Puerto Rico and is hamstrung by power cuts. Sixty million people self-generate with diesel generators. Power shortages have cost Nigeria at least 14% in GDP.
Privatization of the power sector – 10 years in the making and not without controversy – has attracted strong domestic and international interest. Winning bidders at the auction of government-owned generation assets include companies from Nigeria, the U.S, China and Russia.
But gas supply has been insufficient to fire the plants. Without oil and gas sector reforms that raise gas to realistic rates, operators are unlikely to develop the fields and infrastructure to deliver the gas.
Responding to President Obama’s signature Power Africa initiative, a Who’s Who of U.S. businesses have pledged $20 billion in power sector investments in 6 countries including Nigeria.
The bulk power trader – Nigerian Bulk Electricity Trading Plc (NBET) – has been capitalized at $750 million to guarantee purchases and payments between generators and transmission companies.
In Oct 2014, President Johnathan, who made power reform a centrepiece of his administration, turned sod at the site for the first fully-private, project-financed Independent Power Project (IPP) in Nigeria; the $1 billion, 450 megawatts gas-fired Azura facility. Per the President, Azura “… is the first power generation project to receive the World Bank Partial Risk Guarantee and Multilateral Investment Guarantee Agency (MIGA) support.”
These risk guarantees are critical as Nigeria has refused to give sovereign guarantees typically sought by foreign investors. A major concern has been NBET’s ability to pay and what happens when it can’t. Azura’s ability to secure risk guarantees is an important positive signal for project-financed power in Nigeria. But each deal will be different. President Obama envisions Power Africa will provide project-specific assistance to address concerns and move projects through the pipeline to bankability
If deregulation is now yielding success on the investor side, it hasn’t been smooth sailing for customers. Power tariffs have risen steeply since privatization. In January 2015, in response to complaints from consumers and the Manufacturers Association of Nigeria (MAN) the Federal Government stepped in and cut tariffs by 50%. President Jonathan hailed the cuts while opponents cried foul, calling the intervention pure politicking ahead of the Presidential election.
Nigerian Electricity Regulatory Commission (NERC) backed away from its own tariff plan, supported the reduction, and indicated that distributors could not pass on technical and operational losses to paying customers. Privatization was to create a regulator safe from such government intervention.
Success with power sector deregulation in developing countries rests on success with distribution. Someone has to pay for the power. If Nigerians cannot cover the full costs, who covers the losses? If it is the distribution companies, they will eventually suffer the same fate as their predecessor state-owned utility. If it is the Nigerian government, then it will have to pay power subsidies; adding to the fuel subsidies it currently pays. Businesses need reliable affordable power to expand. Until tax revenues from economic growth flow to government coffers, oil revenue will need to cover any additional subsidies. Low oil prices could haunt Nigeria’s future.
What Happens in Nigeria affects West Africa
By one account Nigeria accounts for a whopping 78% of West Africa’s GDP. What happens there affects the region. The West Africa Gas pipeline, which starts in Nigeria, and carries gas down the coast to run gas-fired plants in Benin, Togo and Ghana has never lived up to its promise. The pipeline’s first stop is Lagos;
Nigeria’s metropolis that has an economy double the size of Ghana’s. After meeting Lagos’ needs, not much gas remains for the other countries. The West Africa Gas pipeline needs oil and gas reform in Nigeria to meet its lofty goals.
Many of the World Bank and development consultants who worked on Nigeria’s power sector unbundling decamped to Sierra Leone to advise and implement that country’s power sector privatization. Sierra Leone’s energy minister, who has a petroleum business background, was formerly the country’s ambassador to Nigeria.
Nigeria needs to succeed; not just for itself but for the region. Hence the actions of the next President in addressing the security challenges and steering energy reforms will be closely watched not just by Nigerians, but by its neighbours up and down the West African coast.
Ronke Luke s a chemical engineer, originally from West Africa with experience in the energy and environment sector in the US. Currently a manager for Petroleum Marketing Surveys at EIA (for Z Inc.)