Energy Transition and the Future of Oil in Nigeria

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Introduction

Energy is one of the most important driving forces of civilization. It is regarded as a propelling force behind any economic activity and indeed industrial production. It plays a vital role in the economic growth, progress, and security of any nation.

Since the industrial revolution, the world’s energy needs have been largely met with fossil fuels derived from non-renewable energy sources. Overtime, it has been established that these fossil fuels emit harmful greenhouse gases which contribute to global warming and climate change, deemed the biggest threat to the environment as we know it.[1]

In order to mitigate the causes and adapt to the debilitating effects of climate change, nations are diversifying their energy sources and driving innovations to transition from reliance on fossil fuels to clean renewable energy sources. However, for nations such as Nigeria, whose economy is heavily reliant on non-renewable fossil fuels such as oil and natural gas for government revenue and foreign exchange, the transition from fossil fuels to clean renewable energy sources will pose significant economic and development challenges. Within this context, this article examines the global transition to renewable energy and the future of oil in Nigeria.

The Global Drive Towards Renewable Energy

Energy is derived from different sources. These energy sources may be classified based on their replenishing ability, as renewable and non-renewable energy. Renewable energy relies on energy sources that restore themselves over short periods of time and do not diminish. Examples include wind, solar, hydro-energy and biofuels, while non-renewable energy sources are resources that cannot restore themselves over a short period of time and can be depleted. The major types of non-renewable energy sources are: oil, natural gas, coal, and nuclear energy. These are collectively known as fossil fuels. Fossil fuels are high emitters of greenhouse gases, which are the major causes of climate change.

Climate change, is arguably the biggest environmental challenge the world is facing today due to the increased warming of the earth’s atmosphere. It affects every sphere of human existence and livelihood, and threatens the human environment in ways which not only affects the present generation, but generations yet unborn. Climate change simply refers to changes in climatic conditions, such as temperature, humidity, precipitation, and wind, of a place over a given period.[2] These changes, which have in recent years become more severe and unpredictable have led to severe flooding, heatwaves, droughts etc. Though climate change may be attributed to natural causes, research has revealed that it is mainly caused by human activities which involve burning of fossil fuels for transportation and energy production, among others.[3]

Mitigation and adaptation measures have been proposed as the best ways to combat the causes and effects of climate change. Mitigation focuses on efforts aimed at limiting the emission of greenhouse gases such as how to achieve clean/renewable energy supply, how to develop fuel efficient vehicles and design buildings in ways that will require lower energy consumption, among others. Adaptation on the other hand is a process whereby actions, policies and other measures are adopted with the aim of minimising the negative effects of climate change by building resilience and increasing adaptive capacity to climate change.[4]

Key among the measures which are being adopted to combat the incidents of climate change is to transition from the use of greenhouse gas emitting fossil fuels to clean renewable energy sources. Although this is a significant policy measure, economic and social change is required in the energy industry around the world to drive the transition to renewable energy. Commendably, governments around the world have reacted positively by committing to renewable energy targets and have employed various policy instruments to incentivise and drive renewable energy development. Several countries, cities, regions and companies worldwide have committed to some form of renewable energy targets, whilst many are already covering most of their energy demands from renewables, especially in the areas of electricity, transportation, heating and cooling.[5]

For instance, nearly 100% of Iceland’s energy comes from renewable sources like hydropower and geothermal energy, while Uruguay is almost 100% powered by renewable energy after more than 10 years of concerted effort. Also, Sweden has set a goal to eliminate fossil fuels from electricity generation by the year 2040.[6] Similarly, Germany has set a goal to obtain 65% of its electricity from renewable energy by 2030, whilst Denmark secures over half of its electricity from solar and wind power and plans to be free of fossil fuels by 2050.[7]

In addition, due to government regulations and increased demand for electric cars, major stakeholders in the automobile industry are joining the drive towards renewable energy sources through the development of suitable infrastructure for electric vehicles and the production of energy through renewable sources.[8] Also, in a bid to encourage the shift towards electrified cars, the United States of America has committed $15 billion to build a national network of five hundred thousand (500,000) charging stations, through a combination of grants and incentive programs for state and local governments and the private sector while France, Spain, United Kingdom, Norway and the Netherlands have introduced laws, regulations and policies to ensure that most commercial and passenger cars have zero emissions before 2040.[9]

This drive towards renewable energy has resulted in a boom in the renewable energy sector, bringing with it real prospects for energy security, economic benefits, and climate change mitigation. In fact, the last decade has seen the cost of renewable energy decline continuously, making it more cost-competitive compared to conventional energy in many parts of the world.[10] A costs analysis recently published by Lazard, a London-based investment bank, reflects an 88 percent drop since 2005 in the average costs of photovoltaic solar energy whilst wind energy’s costs were down 69 percent.[11]

Based on the aforesaid developments, experts have predicted that by the year 2050, the demand for fossil-based sources of energy like crude oil is going to significantly reduce as countries gravitate more towards reliance on clean energy sources to meet their energy needs. This poses a great risk to a country like Nigeria which is largely dependent on the revenue from oil exports for government revenue and foreign exchange. This is more so given the fact that most of the countries which are the primary markets for Nigeria’s crude oil are at the forefront of the transition towards the use of clean energy sources. If nothing is done to reverse this trend, the country runs the risk of running into an unprecedented revenue challenge.

The Drive Towards Renewable Energy and Its Implication on Oil Production and Revenue Generation in Nigeria

In Nigeria, there is no coherent legal framework for renewable energy adoption. However, over the years, the Nigerian Government has enacted polices, plans and regulations that seek to encourage the drive towards renewable energy, such as the 2009 Draft Renewable Electricity Policy, Renewable Energy Master Plan 2012, the National Energy Policy 2013 and the Draft National Energy Master Plan (NEMP) 2014, among others. However, these policy documents in many ways failed to steer the Nigerian energy industry in the desired direction.

In August 2022, the Nigerian Government, in a bid to reaffirm the drive towards renewable energy, launched the Nigeria Energy Transition Plan (“The Plan”). The Plan is described as “a homegrown, data-backed, multi-pronged energy transition plan”, which seeks to propel Nigeria towards attaining net-zero emissions in five critical sectors – Power, Cooking, Oil & Gas, Transport and Industry by 2060.[12]

Nigeria intends in the short term, to use natural gas as a pivot to transition from crude oil to a less carbon intensive economy increasingly powered by natural gas. Overtime, natural gas is expected to overtake crude oil as Nigeria’s major source of revenue, provide a basis for reliable power supply and a cleaner environment. In the long run, solar energy, biomass, hydro and wind energy will dominate the country’s energy mix.[13] Eventually, Nigeria will join the rest of the world in developing a hydrogen economy and in accessing the vast energy trapped in the oceans and in the Earth’s crust.[14] It is estimated that Nigeria needs $410 billion to fully transition by 2060, and at least $10 billion to initiate the Plan.[15] International funding is expected to accelerate the net-zero targets set by Nigeria, and create several job opportunities in the renewable energy sector.

The pathway to Nigeria’s energy transition looks well-paved, with the plan to utilize natural gas as a transition energy, whilst gradually phasing it out to pave the way for a full conversion to clean energy sources. A rushed transition may result in a rising asymmetry in the country’s debt-to-GDP levels and an unhealthy reliance on foreign funding, which will create an environment of economic instability in Nigeria.[16] However, too slow a transition may still result in the same outcome if the transition process in the country lags too far behind the rest of the world, and Nigeria loses its main source of revenue as a result of untapped oil and natural gas being stranded underground with falling demand.

Whilst there is no doubt that there would not be an immediate snap from fossil fuels to renewable energy sources, it is projected that the global demand for oil will decline gradually whilst demand for gas will continue to grow until the mid-2030s.[17] For the foreseeable future, the oil and gas industries will continue to be pivotal to the Nigerian economy. However, Nigeria as a country must make concrete plans to cushion the effects of the transition process on government revenue in the short and in the long term. A good starting point is the use of natural gas as a transition energy. But that will only be helpful as long as the rest of the world continues to rely on natural gas as an energy source. The energy transition plan of most of the developed world does not envisage a continued reliance on natural gas as a source of energy, which invariably foretells that natural gas may not remain commercially viable in the long term. The implication of this is that, there is need to diversify not just the country’s energy mix, but also its revenue sources in a bid to reduce the country’s reliance on the revenue generated from the exploitation of non-renewable energy sources in the oil and gas industries since the 1970’s.[18] If this is done, the country stands a reasonable chance of navigating through the perilous path of energy transition with little or no challenge to its economy and sources of revenue.

Conclusion

In conclusion, and without doubt, the economic implications of the drive towards renewable energy will be enormous for countries like Nigeria, which are heavily reliant on revenue generated from the exploitation of non-renewable energy sources, and whose economies are not buoyant to sustain a seamless transition to renewable energy.

However, it is imperative that Nigeria joins the global drive towards renewable energy, in a bid to engage and adapt to an evolving policy and investment landscape, so as to ensure its participation in preserving the environment for the present and the generations yet unborn.

The Nigerian government urgently needs to adapt the country’s energy mix to align with the energy of the future, whilst at the same time ensuring that its revenue streams are not adversely affected. This will entail a strategic investment in natural gas as a transition energy and following closely with a programmatic transition to clean energy sources.

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For further information on this article and area of law please contact

Emmanuel Abasiubong Bassey and Ifeoluwa Oyemade

At  S. P. A. Ajibade & Co., Lagos by

  • Telephone: +234.703.805.9736, +234.815.088.2839 or +234.809.790.4774, +234.813.454.0857
  • Mobile: +234.12703009;+234.14605091;+234.14605092
  • Fax (+234 1 4605092)
  • www.spaajibade.com

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[1]     See, https://www.ohchr.org/en/press-releases/2022/10/climate-change-greatest-threat-world-has-ever-faced-un-expert-warns#:~:text=Related&text=NEW%20YORK%20(21%20October%202022, price%2C%20a%20UN%20expert%20said, accessed on 10th November 2022.

[2]     United Nations, “What is Climate Change?”, available at – https://www.un.org/en/climatechange/what-is-climate-change, accessed on 10th November 2022.

[3]     United Nations, “Causes and Effects of Climate Change”, available at – https://www.un.org/en/climatechange/science/causes-effects-climate-change accessed on 10th November 2022.

[4]     National Aeronautics and Space Administration, “Responding to Climate Change’, available at – https://climate.nasa.gov/solutions/adaptation-mitigation/, accessed on 10th November 2022.

[5]     See, IRENA Coalition for Action – “Towards 100% Renewable Energy: Status, Trends and Lessons Learned”, available at https://coalition.irena.org/-/media/Files/IRENA/Coalition-for-Action/Coalition-for-Action_Towards-100-percent-RE_FINAL.pdf?la=en&hash=EB31B7CEB0E1F9999D3DE05A 1030AB537ED376E2 accessed on 14th October 2021.

[6] World Population Review, “Renewable Energy by Country 2022”, available at https://worldpopulationreview.com/country-rankings/renewable-energy-by-country accessed on 10th March 2022.

[7]     Ibid.

[8]     See, “10 Ways Toyota’s Environmental Impact Is Driving Sustainability Forward”, available at –  https://pressroom.toyota.com/10-ways-toyotas-environmental-impact-is-driving-sustainability-forward/, accessed on 10th November 2022.

[9]     Eric Hamilton, “The Rise of Renewable Energy in the Automobile Industry”, available at https://www.sciencetimes.com/articles/31487/20210601/the-rise-of-renewable-energy-in-the-automobile-industry.htm accessed on 9th September 2022.

[10]    Ibid.

[11]    See, “Friends of Europe – What a Global Drive on Renewable Energy can (and can’t) deliver.” Published 28th September 2021, available at https://www.friendsofeurope.org/insights/what-a-global-drive-on-renewable-energy-can-and-cant-deliver/ accessed on 10th November 2022.

[12]    Tobi Oluwatola, “Nigeria’s Energy Transition Plan: Challenges for Decade of Gas” – Premium Times, available at – https://www.premiumtimesng.com/news/headlines/553662-analysis-nigerias-energy-transition-plan-challenges-for-decade-of-gas.html accessed on 10th November 2022.

[13]    Smruthi Nadig, ‘Nigeria launches energy transition plan, including doubling of gas’ – Offshore Technology available at –  https://www.offshore-technology.com/news/nigeria-launches-energy-transition-plan-including-doubling-of-gas/ accessed on 9th September 2022.

[14]    Prof A. S. Sambo et al, – “Implementation of Energy Plans: A Solution to Nigeria’s Energy Crisis”, available at https://www.researchgate.net/publication/321342659_IMPLEMENTATION_OF_ENERGY_PLANS_A_SOLUTION_TO_NIGERIA%27S_ENERGY_CRISIS accessed on 7th September 2022.

[15]    Terhemba Daka, ‘Osinbajo leads energy mission to USA, meets Kamala Harris, W’Bank group Seeks $410b to deliver transition plan’ – The Guardian, available at –  https://guardian.ng/news/osinbajo-leads-energy-mission-to-usa-meets-kamala-harris-wbank-group-seeks-410b-to-deliver-transition-plan/ accessed on 9th September 2022.

[16]    PwC Africa Energy Review 2021, available at https://www.pwc.com/ng/en/assets/pdf/africa-energy-review-2021.pdf accessed on 7th September 2022.

[17]    Ibid.

[18]    Currently, the oil and gas industries contribute about ninety-five percent (95%) of Nigeria’s foreign exchange earnings. See, Nigeria Bureau of Statistics – Annual Abstract of Statistics, 2019, available at https://nigerianstat.gov.ng/elibrary/read/1241069 accessed on 10th November 2022.

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