With the reluctance of the Buhari administration to yield to the quest of the Nigerian people for restructuring, what is Nigeria’s exit plan from fossil fuel?
The COVID-19 pandemic opened the underbelly of the country’s economy and its poor health facilities. While the country is still battling at recovery, the worsening security situation has been compounding matters.
Now, Nigeria is at a very big risk. The gushing oil wells will not sustain the economy any longer without restructuring and some radical reforms.
A seeming disturbing research finding by Rystad, an independent energy and business intelligence firm, says oil-producing countries like Nigeria have been asked to kiss trillion-dollar oil income goodbye as energy transition has started biting.
In a new report, it says the global government income from oil and gas taxation fell to a multi-year low in 2020 of around $560 billion, as production and prices shrunk.
It said before COVID-19, oil and gas taxes usually exceeded the trillion-dollar mark, pointing out that Petro-states will miss these former glories.
Rystad projection is coming as it noted that the accelerating energy transition will cause this source of state income to shrink and never again exceed or meet $1 trillion.
According to it, 2021 will be the last year global oil and gas taxes will approach the trillion dollar mark, reaching about $975 billion, assisted by high oil prices.
It said from the coming year, taxes will be limited to the low $800 billion range, only ticking up in the early 2030s to about $900 billion, before starting their final and uninterrupted decline to as low as $580 billion in 2040 and about $350 billion in 2050.
”As the energy transition ramps up, countries highly dependent on tax revenue from the upstream industry may have no other option than to diversify their economy to sustain state budgets.
”This is clearly the rational course for them to follow, but there are inherent challenges in the form of insufficient economic and legal institutions, infrastructure and human capital”, Head of Upstream Research at Rystad Energy, Espen Erlingsen, said.
Adding, he said the earlier the energy transition risks are realised the better they can be addressed. Structural changes will be crucial to stabilise petroleum-reliant economies and avoid geopolitical instability as the global energy systems shift onto a sustainable pathway.
Using Saudi Arabia as an example, we see that about half of the government take is at risk towards 2050, while total tax income from oil and gas made up 27% of the country’s gross domestic product (GDP) in 2019.
Algeria, Iraq, Kuwait, and Libya – all of which are heavily dependent on tax revenue from the upstream industry – all garnered around 40% of GDP in 2019 from oil and gas tax revenue.
Rystad said in these countries, about 50% of the government’s take is at risk, meaning that this group is the most exposed to revenue risk as a result of the energy transition.
”Our data and tools allow us to quantify energy transition risk for the oil and gas upstream sector in different low-carbon scenarios”
However, the International Energy Agency’s (IEA) Sustainable Development Scenario (SDS) model has perhaps become the most widely used benchmark, calling for temperature increases well below 2 degrees Celsius.
”We have also modeled this scenario in our report, and our model suggests that if it materializes, global government income from oil and gas taxes will be much lower than our own Mean Case, with Petro-states losing a cumulative further $4.8 trillion from today until 2050.
”Price risk (which underlies revenue risk) is a central driver of energy transition risk. To understand the revenue risks inherent in the energy transition, it is essential to know which oil prices to expect within each of the key decarbonised demand scenarios.
”Our price forecasts are formulated from our supply and demand balances projections and Rystad Energy has been a front-runner in warning the market that peak oil demand is closer than ever and at a lower ceiling than previously thought”, the report said.
Rystad said even with production significantly reduced, some new development and new discoveries will be required to meet demand, as 25% of production must come from new developments and 10% from new discoveries in the 2021 to 2050 period.
Investment in upstream projects is therefore still needed, even in the most aggressive energy transition scenario considered in this report, it added.
