Nigeria: Addressing fragility away from oil?

25 February, 2022

Sebastian Oberthür (Ecologic Institute)
Dennis Tänzler (adelphi)
Emily Wright O'Kelly (adelphi)
Gauri Khandekar (Brussels School of Governance)

The following excerpt gives an overview of Nigeria's exposure to global decarbonisation trends.

The full case study addresses the following issues:
•   Exposure and risk
•   Past and present eforts to decarbonise
•   Trends and potential
•   Cooperation with the EU

The fortunes of the Nigerian economy are closely tied to the oil price, making it vulnerable to oil market fuctuations and the phase-out of fossil fuels. Possessing the largest oil and gas reserves in Sub-Saharan Africa, Nigeria is the region’s largest and the world’s 12th largest oil producer (BP 2020). Nigeria’s oil boom began when the oil industry was nationalised and the country joined the Organization of the Petroleum Exporting Countries (OPEC) in 1971. In 2019 production totalled about 2.1 million barrels per day (BP 2020). The marginal production cost of onshore oil is relatively low at US$15 per barrel and US$30 per barrel for deep-water extraction (Knoema 2018). While it is only the 17th largest producer of natural gas (BP 2020), Nigeria ranks sixth in the world in terms of liquefed natural gas (LNG) exports (International Gas Union 2021). Since Nigeria’s natural gas reserves came on stream in 1998, the gas sector has been developed for domestic supply and foreign export, with production increasing by about 35 percent since 2011 to 49.3 billion cubic metres in 2019 (BP 2020). However, large quantities continue to be fared, or burnt of, as many oilfelds lack the infrastructure to capture the gas they produce (Raval 2017).

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The oil industry accounted for 7.4 percent of Nigeria’s GDP in 2019 (World Bank 2021b). Although this figure is relatively low compared to some other oil-producing nations, revenues from the oil and gas sector are a vital source of foreign exchange and the largest single source of government revenues. Fossil fuels constitute about 90 percent of Nigeria’s total goods and services exports (World Bank 2021i), and in 2019 fossil fuel exports generated US$50.3 billion, accounting for about 95 percent of Nigeria’s foreign exchange earnings (Chatham House 2021; see also Figure 2.1). Tax revenues from the oil and gas sector provide by far the largest share of the government budget, and, as such, public spending at federal and state level is dependent on production levels and international commodity markets. Non-oil government revenue comprised only 3.4 percent of GDP in 2018, one of the lowest in the world (EIA 2020). Nevertheless, the underassessment and underpayment of taxes have been a signifcant issue in Nigeria, and in 2017 the government realised only 53 percent of budgeted oil revenues (World Bank 2018). Furthermore, the Nigerian government supports the industry with significant subsidies. As the government began to rein in its subsidies, Nigeria has reduced government energy subsidies to less than US$1 billion in 2020 (IEA 2021).

Between 2005 and 2015, the Nigerian economy experienced impressive GDP growth of 8 percent per year on average. This was largely driven by the high oil price, with the country’s exports generating the foreign currency to import most of the country’s needs (Adeosun 2017). In 2019, these included US$8.8 billion worth of refned petroleum imports, 71.6 percent of which came from Europe (Chatham House 2021). However, the economy’s exposure to changes in the international oil market became strikingly apparent when oil prices collapsed from more than US$100 per barrel in 2014 to under US$30 in early 2016 (BBC 2016). This broke the economy’s strong upward trend, as a result of major knock-on efects on non-oil sectors dependent on imports of inputs and raw materials such as industry and services (World Bank 2017). As a result, in 2016, Nigeria experienced its frst full year of recession in 25 years, with real GDP contracting by 1.6 percent (World Bank 2021c). Although still at relatively low levels, public debt as a result also rose from 17.6 percent of GDP in 2012 to 29.1 percent in 2019 (Trading Economics 2021a).

The Covid-19 crisis has further reconfirmed the risks inherent in Nigeria’s continued dependence on fossil fuels. With the oil sector accounting for half of government revenue, oil revenues were 65 percent lower than expected during the first half of 2020. The Nigerian economy contracted by about 1.8 percent in 2020, even exceeding the recession of 2016 (Natural Resource Governance Institute 2020; World Bank 2021c).

Nigerian oil production has also fluctuated significantly over time. Since the mid-2000s, this has predominantly been due to militant groups sabotaging pipelines and other key infrastructure in the Niger Delta and staging kidnappings and militant takeovers of oil facilities to forward their political objectives of greater redistribution of oil wealth and local control of the oil sector (EIA 2021).

Fossil fuel reserves make up 40 percent of Nigeria’s total assets (Manley et al. 2017). With proven reserves of 37 billion barrels of oil in 2019, Nigeria could maintain current oil production levels for another 48 years (BP 2020). Exploration has slowed in recent years due to the low oil price, increased security threats, and regulatory uncertainty (EIA 2021). Nonetheless, under the 450 ppm scenario,4 estimates have suggested that by 2025 Nigeria may unnecessarily invest US$42.5 billion in capital expenditure – 22 percent of the oil sector capital expenditure for that period (Ivleva et al. 2017).

The National Petroleum Policy adopted in 2017 evaluates the potential end of the oil era and explores options for reducing oil dependency (George and Onuah 2017). One key pillar of plans to diversify the economy is to significantly expand gas production for domestic use and international export (Raval 2017; Wallace et al. 2018), given the longerterm prospects of this fuel in the global low-carbon energy transition. The country currently has discovered reserves of 5.4 trillion cubic metres of natural gas (BP 2020), which would allow it to maintain current production levels for more than 100 years. In any event, heavily investing in infrastructure to exploit these natural gas assets is likely to create stranded asset risks further down the line.

Although diversifying the economy has become a government priority, the rise in federal revenues from petroleum extraction from the 1970s was accompanied by decades of neglect of other key economic sectors, particularly agricultural production (Eigege and Cooke 2016). Prior to the oil boom, Nigeria was a world leader in the production of cocoa, palm oil and kernel, and other cash crops, with agriculture contributing over 60 percent to GDP. In 2020, this figure stood at 24 percent (World Bank 2021d), and Nigeria is losing an estimated US$10 billion in annual export opportunity from palm oil, cocoa, and other cash crops due to a decline in the production of these goods (FAO 2018). Although the declining fortunes of the agricultural sector may in part be attributable to – and corresponding to – the reduced global importance of this sector relative to others, the competitiveness of Nigerian agricultural products may also have sufered the efects of the ‘Dutch disease’ – an appreciating exchange rate due to the overwhelming amount of oil-based foreign currency earnings. Nigeria went from being a major exporter of agricultural products to an importer of basic foodstufs, such as wheat (Otaha 2012; Eigege and Cook 2016).