Oil & Energy
Why Nigeria Should Brace Up For Oil Decline – Minister
Nigeria is Africa’s largest oil-producing country, and understands it will have little choice but to wean its economy off a reliance on fossil fuels as the world inches onto a low-carbon path, its environment minister said.
Mohammad Mahmood Abubakar said he did not see a long-term future for Nigeria’s oil industry if governments follow through on their promise under the 2015 Paris Agreement to cut planet-warming emissions to net-zero by the second half of the century.
“These days, anything to do with fossil fuel may have its days numbered, or years numbered,” he told The Tide source at this month’s U.N. climate talks in Madrid.
Abubakar said Nigeria should use the royalties and export earnings it receives from oil – which account for about half of its revenues – to invest in alternative sources of energy, in order to “be ready” for a global transition to cleaner energy.
“If the world is truly willing… to quit fossil fuel, then if you are not ready and finally the world comes to terms with that and there are alternatives and no one is buying enough oil from you, at that point you are in trouble,” he said.
The federal government has started to diversify into renewable power generated from solar, wind and waste and is moving its universities onto solar power systems, he added.
It is also making efforts to end gas flaring from oil-industry operations on its soil by 2030, as part of its national climate action plan submitted to the United Nations.
Burning off the gas is a waste of energy and a major source of planet-warming emissions, and Nigeria is procuring technology to capture the gas instead to produce power or heat water, said the minister, a biologist and environmental protection expert.
Nigeria’s climate action plan also pledges to improve its energy grid and expand the use of efficient gas power plants, in an effort to cut widespread use of polluting diesel generators.
Nigeria has an overall target of cutting its emissions by 45% by 2030 from 2010-2014 levels, conditional on receiving international support to achieve that.
Like many other emerging economies, it is seeking funding from wealthy governments to pursue low-carbon development and adapt to climate change impacts such as creeping desertification in the north and rising sea levels affecting its coastal areas.
Abubakar said finance was “very critical” for Nigeria and called for processes to gain access to it, which many countries struggle with, to be “made easy”.
Nigeria faces what the minister called significant “climate disruption”, such as the shrinking of Lake Chad to less than a tenth of its size in 1960, depriving local fishermen and farmers of their livelihoods and forcing them to leave their homes.
The lake’s deterioration was one reason Islamist insurgent group Boko Haram had flourished in the region, he added.
“I am sure their recruiters used that opportunity to prey on young people, and even the old ones, because there are no jobs… they are sitting ducks for extremist organizations,” he said.
Deforestation is another issue Nigeria needs to tackle, he noted, as rural communities continue to use wood as their main fuel for heat and cooking, making climate change impacts worse as rainfall-stabilizing and carbon-absorbing trees disappear.
At the same time, Nigeria faces a huge task to repair the environmental damage caused by oil extraction in the Niger Delta, which has contaminated water supplies and soils as a result of spills.
International oil companies have recognized their role in causing that pollution, and agreed to provide about $1 billion to restore the affected areas, Abubakar said.
He recently visited some of the roughly 20 sites where clean-ups are underway so far and met with the companies and United Nations officials in Geneva to review progress. More effort was still required, he added.
Businesses that exploit fossil fuels, gold, diamonds or other resources in Africa should be held accountable if those activities harm local communities, the minister said.
“Wherever there is oil or mining or whatever it is, let them pay for the clean-up but also for the restoration of livelihoods of the people that are being displaced there,” he added.
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.
