The Lowdown Hub

Development needs delay Nigeria’s energy transitionFossil fuels will dominate the country’s energy

Doubling down on oil: a storage tank at the 650,000 barrels-per-day refinery being built by businessman Aliko Dangote © Tom Saater/Bloomberg

The 17-storey tower block that serves as the head office of Sterling Bank, on Lagos’s waterfront Marina Road, is covered in 3,000 shiny new solar panels — a contrast to the windows encrusted with grime from the harmattan winds.

“The entire building is about to go off grid,” says Abubakar Suleiman, the bank’s chief executive. He explains that the panels, imported from Spain, should generate 500,000kWh of energy a year, more than enough for the headquarters’ needs.

But that is where the innovation ends. Nigeria does not have the institutional or physical infrastructure to allow Sterling to sell excess power into the less-than-smart grid through feed-in tariffs. Most businesses and homes that can afford it still rely on noisy, diesel-hungry generators when the power goes off, an all-too-common occurrence.

For all the global talk of an energy transition, and despite renewable power initiatives like Sterling’s, Nigeria remains firmly wedded to oil. Far from weaning itself off hydrocarbons, the country plans to ramp up production, according to Mele Kyari, managing director of the state-owned Nigerian National Petroleum Corporation.

“We do not think the world does not want oil any more; it’s just the use of oil will change,” Kyari says. He estimates global demand for oil in 2030 at 100mn barrels per day. “The best companies producing the cheapest oil will still have a market.”

A worker cuts a pipe at the under-construction Dangote refinery. Spiralling costs have pushed the final price tag to an estimated $19bn © Tom Saater/Bloomberg

NNPC, he says, intends to double production to 4mn barrels a day, a wildly ambitious target he describes as “very practical, though I’m not sure we have the right assets for that right now”.

More than doubling production to 4mn barrels a day looks like a pipe dream. Nigeria has struggled to meet even its current Opec quota of 1.8mn barrels because of theft, sabotage, poor maintenance and the waning interest of oil majors.

International companies such as Shell, for which Nigeria has often been an operational and reputational headache, are ditching their onshore assets. It is not clear whether the local companies that buy them will have sufficient access to capital to maintain, let alone expand, production.

Kyari argues that passage of the Petroleum Industry Act — a long-awaited package of reforms that became law last year — will encourage more investment, mainly from midsized companies. “With a competitive fiscal environment and the right regulatory framework, we know for sure investment will come in,” he says.

Many doubt NNPC’s capacity to oversee an increase in production, or to repair its dilapidated, lossmaking refineries. But, in another sign that Nigeria remains committed to oil, Aliko Dangote, Africa’s richest businessman, is building a 650,000-barrels-a-day refinery — one of the biggest in the world — at an ever-spiralling cost now estimated at $19bn. After years of delay, the facility is due to go into production next year.

Even Suleiman — speaking on the top floor of his solar-panel-wrapped building — sees the logic of a last oil hurrah before the financing of new projects dries up. “From an economic perspective, Nigeria should optimise the use of its fossil fuels for the next 20-30 years, even if it is primarily to run your own industries. But I don’t think NNPC should do that.” Whatever plans there are to increase oil output, Nigeria’s bigger policy goal is to switch to gas as a so-called transition fuel. “We are more of a gas nation than an oil nation,” says Donald Duke, the former governor of Cross Rivers state.

He and others see gas as the obvious way to produce cleaner energy while satisfying pent-up demand for power in a country where nearly half the population has no access to electricity. It is, he argues, “ridiculous” that Nigeria, which has the world’s ninth largest proven gas reserves, has for decades been flaring hundreds of millions of cubic feet of gas daily.

“Common sense will tell you that, if you’re able to pipe all that energy, and distribute it throughout the country and localise the generation of power, we would be an energy-surplus country,” says Duke. “Gas could be our competitive advantage.”

Nigeria’s gas ambitions are, however, likely to rub against the changing priorities of western banks and donors, which are being pressured by shareholders and governments to abandon lending to hydrocarbons projects.

Britain’s CDC Group, a development finance institution about to be renamed British Investment International, did help to fund a gas-to-electricity power station in Edo state. The Azura-Edo power station added 10 per cent to Nigeria’s generating capacity at a stroke. But bankers say CDC and similar agencies would probably not make a similar investment today.

Modupe Famakinwa, head of corporate funding at Africa Finance Corporation, a Lagos-based multilateral bank, believes it is shortsighted to boycott gas projects when the alternative might well be worse: charcoal for cooking, diesel for home generators or coal for power stations. “Everybody is keen on renewables but there are so many other valuable projects,” she says. “You can’t just turn gas off.”

Yemi Osinbajo, Nigeria’s vice-president, has argued forcefully for a halt on the ban on financing fossil projects. “After decades of profiting from oil and gas, a growing number of wealthy nations have banned or restricted public investment in fossil fuels, including natural gas,” he complained in an article in the journal Foreign Affairs.

Yemi Osinbajo, Nigeria’s vice-president, says rich countries should overcome their reluctance to finance fossil fuel projects © Andrew Harnik/AFP/Getty

Osinbajo has pointed out that Nigeria’s emissions are a fraction of those of developed countries. Nigeria, he says, will have to increase its energy use 15-fold by 2050 if it is to bring electricity to all its people and power its industries to create a higher standard of living. “The transition must not come at the expense of affordable and reliable energy for people, cities, and industry,” he insists.

Suleiman says time is short, but that Nigeria will have to use oil and then gas to pay for a full transition to more renewable technologies. “The window is closing,” he says. “The world’s turning against this stuff. But realistically we’re going to be using oil in this part of the world for at least 20-30 years.”