Nigeria: PWC Wants Govt to Float Future Energy Fund, Not Frontier Exploration Account

13 September 2021

Abuja — A new report by PricewaterhouseCoopers (PwC) has advocated the setting up of a "Future Energy Fund" that would incorporate elements of the transition to cleaner fuel sources, rather than devoting 30 per cent of profit from oil and gas to the Frontier Exploration Fund (FEF) as provided in the Petroleum Industry Act (PIA).

The global professional services and consulting firm, in a document which analysed the implications of the PIA, noted that based on the World Economic Forum (WEF) data, a country's energy transition readiness was measured by six factors. It listed the factors as availability of investment and capital; effective regulation and political commitment; stable institutions and governance; supportive infrastructure and innovative business environment; highly skilled human capital and consumer participation; and robust energy systems structure.

It stated that Nigeria scored 35 per cent in its energy transition readiness.

The report, titled, "The Petroleum Industry Act: Redefining the Nigerian Oil and Gas Landscape," explained that lack of enabling infrastructure, regulatory framework and governance of energy transition were the major reasons for the low score.

The new PIA stipulates that a frontier exploration fund shall be maintained for the exploration of unassigned frontier acreages financed by 10 per cent of rents on prospecting licences, 10 per cent rent on mining leases, and 30 per cent of NNPC Limited's oil and gas profit in production sharing, profit sharing, and risk service contracts.

However, PwC, in the document, stated that the country should begin moves to join the global energy transition, stressing that presently, Nigeria's resources are being devoted almost solely to a fast waning commodity.

PwC stated, "Exploration is a high-risk endeavour. In addition, raising the needed finance for the development, production and evacuation from the frontier basins might be a tall order as investors are staying away from high cost emission-intensive assets.

"These basins will compete for funds with ambitious and more-environment friendly projects like gas, hydrogen, solar and wind. Rather than a frontier exploration fund, Nigeria could consider setting up a future energy fund.

"The amounts being set aside in the PIA for the frontier exploration fund can be applied towards funding the development of Nigeria's future energy potential, which will include, but not be limited to, petroleum, in readiness for the energy transition.

"The fund can also be deployed for funding the development of abatement technologies that can aid carbon neutrality." T

The firm, which operates in about 157 countries worldwide, maintained that with the projected decline in global demand for hydrocarbons, leading oil and gas production companies were cutting back significantly on their oil and gas business and on further investment in fossil fuels.

It recalled that British Petroleum (BP), for example, had announced that it would be suspending oil and gas exploration in new countries from 2021, saying the company aims to make a tenfold increase in its spending on low carbon energy.

In the case of Shell, based on its new strategy launched in 2021, the report explained that the company aims to decrease its total oil production by one to two per cent per annum and make no new frontier exploration investment by 2025.

According to PwC, Shell, which accounts for about 50 per cent of Nigeria's oil and gas production, has the broad theme of its strategy for its upstream petroleum business to generate the cash to fund the growth of its low carbon business.

The report said, "The PIA by its very essence is hydrocarbon-centred. While the PIA is expected to attract investment into the Nigerian oil and gas sector and serve as a catalyst for the development of the sector, the PIA doesn't say much on the energy transition and its likely impact on the sector and its outlook.

"In recent times, clean energy has accounted for the majority of global investments in the energy sector. According to the International Energy Agency (IEA) investments in new power generation are expected to account for 70 per cent of $530 billion to be spent on all new generation capacity in 2021.

"In 2017, the World Bank announced that it would no longer finance upstream oil and gas projects. In exceptional circumstances in the poorest countries where there is a benefit to energy access and this is consistent with the countries commitments.

"The foregoing puts to question how much investment Nigeria will be able to attract into the oil and gas sector with the signing of the PIA amidst the energy transition."

It emphasised that conversations on energy transition had continued to gain ground, accelerated by climate change and the renewed focus on Environmental, Social and Governance (ESG) issues.

The PwC report added that the European Union (EU), which includes some of the biggest buyers of Nigeria s crude oil, had pledged to cut carbon emissions by at least 55 per cent by 2030, while the UK had also pledged to cut carbon emissions by 78 per cent in 2035.

Furthermore, it pointed out that Canada had pledged to cut carbon emissions by 40-45 per cent by 2030, while in June 2019, the UK became the first major economy to set a legally binding commitment to reach Net Zero emissions by 2050, in addition to countries like Ukraine and China that have unveiled plans to achieve net zero emissions by 2060.

These, the report noted, put Nigeria among the countries that must redouble national sustainability efforts along all fronts, pointing out that the low scores indicate the need for greater attention to the spectrum of sustainability requirements.

However, the report noted that the silver lining of the PIA on the energy transition was that it appeared to focus on gas as the transition fuel for the country and provided improved regulations and incentives for gas investment with tax holidays of up to 10 years and expansion of incentives to cover midstream gas operations.

But while Section 64 of the Act stipulates that NNPC Limited was to engage in the development of renewable resources in competition with private investors, the firm noted that Nigeria needed to do more in providing the enabling infrastructure, regulatory framework and the right level of investment for the energy transition.

On the lean sum contributed by the oil industry, the report said despite being a major source of revenue, the oil sector lagged behind other sectors in terms of GDP contribution, which declined to seven per cent in the last seven years.

"The relative importance of the oil and gas sector in Nigeria appears to be declining, from 13 per cent of Nigeria's GDP in 2013 to about seven per cent in 2020, while those of other sectors continue to increase," the report said.

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