How realistic is the energy transition plan launched by Osinbajo?

Much of the developed world believes that the most existential threat we face as humans is the threat of climate change, even though much of Western Europe, mainland China and the North America was built on fossil fuels and coal.

In fact, the boldest and most ambitious goals for the clean energy transition, where President Buhari also made very bold commitments, were at COP22 – just months before Russia decided to invade Ukraine. . This event triggered many disastrous consequences, the main of which led to a complete embargo on Russian oil and a virtual embargo on Russian gas, a decision which in turn led to inflation in Europe – to levels not seen since 1984.

Nigeria vs Oil

Although it is the 13e The world’s largest oil producer, Nigeria has failed to take advantage of the largesse that comes with the price being above $100 a barrel for almost six months now due to self-inflicted problems, such as:

  • Organized theft of crude oil;
  • Inability to negotiate higher quotas at OPEC (an organization created at a conference in Baghdad in 1961, which mostly favored the US-Saudi diplomatic ploy to keep oil prices low in an oil-for-security deal); and
  • The lack of energy policy clarity after decades of refusing to pass a comprehensive oil industry bill that only came into effect months ago, and has stifled new investment by oil companies companies in new platforms that will increase the production of its Deep Offshore Inner Basin (DOIP-Basin) as expressed in the joint venture’s production sharing contracts.

Nigeria vs natural gas

This West African nation has the ninth largest proven reserves of natural gas with declared reserves of 206 tn cubic feet. However, it has not benefited from soaring gas prices in Europe, which has seen prices rise to as high as $34 per mm of standard cubic foot, from a capped price of $7 per mm of standard cubic foot in the Nigeria.

This is due to the failure of the NNPC, which controls the Nigeria Gas Management Company (NMGC), to deregulate natural gas pricing in the country. The debacle is much to the chagrin of investors who form the Gas Association in Nigeria, which has has discouraged companies from building infrastructure for compression of filtered dried gas into CNG, or pipeline infrastructure for distribution across the states of Nigeria.

The Vice President’s plan is thus to create 340,000 jobs by 2030 and 840,000 jobs by 2060. However, attracting $10 billion in investment per year remains wishful thinking if the following fundamental issues are not resolved:

  • Allow gas prices in Nigeria to follow twisted formula that tracks diesel prices by 40%

This means that since calculating prices at $7 per mm of standard cubic foot for gas will yield N105 ($0.25) per standard cubic meter, the price of gas which is 0.97 equivalent for diesel should naturally track the 300% increase over the past seven months. at N315 per standard cubic meter. This will attract a flow of non-speculative foreign direct investment (FDI) in the construction of pipelines, compressor stations, regasification plants and CNG trucks needed to increase the use of gas as a less energy medium. expensive and more sustainable, as well as reducing the carbon footprint in Nigeria.

There are currently six different exchange rates in Nigeria. Take the example of Emirates Airline’s decision to halt flight operations in Nigeria by September 1, and British Airways’ decision to close inventory on ticket sales from Nigeria. It shows how impossible it is for the treasury of a multinational (MNC) or an institutional investor to bring non-speculative long-term investments into the country without the guarantees provided by a futures market managed at NAFEX .

This is because market makers do not have forward-looking guidance to provide liquidity in counterparty risk to firms that place a premium at the lock-in price, to avoid that a negative return in the currency risk curve is higher than the internal rate of return at the time of the repatriation of profits.

Companies won’t take government incentives such as the tax reliefs expressed in pioneer status according to the National Industrial Tax Relief Act (as amended in 2014), or the Import Duty Exemption Certificate (IDEC) on the yield curve on the pricing of the risk for the repatriation of income and profits. The only solution on which there is consensus, based on working models like the Egyptian pound which returned in November 2016, is a floating exchange rate model (which eliminates government subsidies on rates).

  • Ensure NNPC integrates 100% LPG supply upstream

Over the past seven years, LPG consumption has increased by 260% from 400,000 to 1.04 million metric tonnes, while the price per kg of cooking gas has risen from N200 to N800 due to a depreciation of the naira during the interim period.

The Vice President talks about the migration of rural dwellers from using charcoal (obtained by cutting down trees) or dual purpose kerosene (DPK obtained from refining crude oil), but the government has failed in its main responsibility to ensure that NNPC integrates upstream 100% the supply of LPG and not the import from Equatorial Guinea and the United States.

  • Having the right executives to attract investing companies

To emphasize, Nigeria has these minerals and natural resources, so the issue is having the right frameworks to attract the different layers of investment firms to explore it and do import substitution. Importing it, even as completely knocked down (CKD) parts from China or Germany, and granting exemptions to companies that do so will not change the fact that there is exchange rate risk that will be passed on to consumers. .

At the end of the line

One of the best decisions the VP can make to help the economy is to request a review of Nigeria’s supply chain so he can see how unrealistic his energy transition plan is in reality. although it may look very good on paper. A high-profile global figure has endorsed the plan, but it begs the question: did you show Michael Bloomberg the Nigeria supply chain fact sheet?