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NIGERIA: An Introduction to Projects & Energy

Nigeria battled one of the worst inflations in history in 2022. As part of the valiant efforts to bolster the Nigerian economy and attract private sector capital, there has been an increase in legislative and regulatory activity in the Nigerian energy and projects space.

Notwithstanding the economic and political uncertainties, a number of significant projects are nearing completion while the sector is replete with investment opportunities. This overview highlights key trends, developments and challenges in the Nigerian energy and projects space.

Current Trends and Regulatory Developments 

Concession and privatisation of public assets 

The Nigerian government, both at the federal and state level, appears to have gained an appetite for privatising and concessioning public assets. The Federal Government of Nigeria (FGN) recently announced preferred and reserved bidders for the proposed concessioning of the Murtala Muhammed Airport in Lagos State and the Nnamdi Azikiwe Airport in the Federal Capital Territory, Abuja.

The FGN has continued the privatisation of several assets forming part of the National Integrated Power Project and this is in addition to proposed concessioning of the 700 MW Zungeru Hydroelectric Power Plant in Niger State. In a bid to save some electricity distribution companies (DisCos) in Nigeria from impending insolvency, the FGN took over the affairs of five DisCos as a result of alleged debts owed to commercial banks. As expected, this step has elicited mixed reactions from stakeholders within the electricity sector.

Further, the Lagos State Government (LASG) formally conducted a test run on its newly completed a 27-km electric powered rail system, the Lagos Rail Mass Transit Blue Line. The LASG also made significant progress with the concessioning of the proposed fourth mainland bridge project, recently announcing the preferred and reserved bidder for the project.

In view of the foregoing, it would be interesting to see the deal structure that the FGN and state government alike will propose to potential investors, as well as how far the relevant government will be willing to bend in terms of the security – for example, a guarantee and/or, perhaps, a put and call option – in order to provide comfort to potential investors.

Proposed change to key electricity legislation

In the third quarter of 2022, the Electricity Bill 2022 was passed primarily to repeal the Electricity Power Sector Reform Act 2005 and consolidate all legislation that touches on the Nigerian electricity supply industry. One of the key provisions relates to the rights of the states to make laws on and regulate the generation, transmission and distribution subsectors.

Although this will attract more investors to the sector, there a residual risk that a parallel federal electricity licensing regime is likely to increase the cost of doing business in the sector.

Promotion of mini-grid development and renewable energy

There has been a sustained interest in the mini-grid development by the FGN and investors alike. With the objective of attracting more investors, the Nigerian Electricity Regulatory Commission (NERC) published a consultation paper relating to the review of the Regulations for Mini-Grids to provide for a single registration of portfolios of interconnected mini-grids and isolated mini-grids.

Indeed, mini-grids appear to be the most sustainable and cost-effective option of achieving Nigeria’s renewable energy penetration target of 10% in the short term and 30% by the year 2030. Also, the repayment assurances afforded by the post-development and connection grants provided by the World Bank and the African Development Bank make financing mini-grids attractive.

Nigeria’s Energy Transition Plan 

In 2022, Nigeria unveiled its Energy Transition Plan (ETP), which sets out the country’s key strategies to achieving carbon neutrality by 2060. The ETP sets out a timeline and framework for the attainment of emissions reduction across the electricity, industry, oil and gas, cooking and transport sectors. About USD10 billion is required annually to get Nigeria to net zero by 2060 and this presents enormous opportunity for potential investors.

Investment in the Nigerian upstream sector

The mini-bid round for seven deep offshore oil blocks, the increasing discovery of crude oil in frontier basins, and the development of marginal fields awarded pursuant to the 2020 bid round all combine to herald investment opportunities in the Nigerian upstream sector. Although the Petroleum Industry Act (PIA) is expected to bolster investment, the outcome of the presidential elections in Nigeria in 2023 may impact the inflow of investments.

Following the pending change in cabinet as a result of the coming elections, the timely appointment of a Minister for Petroleum Resources is also critical for investments – given that the minister is empowered to perform several key roles, including the award of petroleum prospecting licences and petroleum mining leases.

Flare gas commercialisation 

In 2016, the Nigerian Gas Flare Commercialisation Programme (NGFCP) was launched as one of the FGN initiatives to – among other things – achieve zero routine gas flaring by 2035. Pursuant to the NGFCP, flare gas destined for flaring at the flare stack – and which, by law, the FGN has a right to take – will be sold by the FGN to permit-holders for the development of sustainable gas projects.

The regulator recently announced the selection of 139 qualified applicants who will proceed to the next stage in order to obtain a permit to access/purchase flare gas. The NGFCP creates opportunities for investment in gas projects in Nigeria and is estimated to unlock about 2,000 MW of electricity annually and about 600 tonnes of liquefied petroleum gas.

Upstream divestments 

Divestments by international oil companies remains a trend in Nigeria. These divestments present an opportunity for increased participation by indigenous companies. However, key concerns around funding and technical capacity of these companies – along with the impact of the divestments on Nigeria’s oil production levels – remains topical.

NNPC transitioning 

The Nigerian National Petroleum Corporation (NNPC) was transitioned into a fully commercialised private entity that will no longer act as pseudo-regulator and will conduct its affairs without recourse to government funding. This requires NNPC Limited to develop more innovative financing options for its operations – even more so as it ventures into renewables and other energy investments as part of its core objects.

Midstream developments 

The Dangote 650,000 barrels-per-day refinery is scheduled for completion in the first quarter of 2023 and will, upon completion, propel Nigeria to be a continental leader in refinery operations – with the refinery supplying more than 12% of Africa’s demand. The Assa North-Ohaji South (ANOH) 600 million standard cubic feet per day gas processing facility is also scheduled for completion in the second quarter of 2023 and will be one of the largest greenfield gas condensate development projects undertaken in Nigeria.

Regulatory development pursuant to the PIA

The upstream regulator issued critical regulations in 2022. These include the Nigerian Upstream Petroleum Host Communities Development Regulations, which provided the framework for the establishment and administration of a host communities’ development trust aimed at enhancing harmonious co-existence between licensees or lessees and host communities.

In the coming months, the regulators are expected to issue additional regulations that will provide the much-required certainty and clarity required in the sector.

Crude oil theft and pipeline vandalism 

Crude oil theft and pipeline vandalism continue to pose a major challenge to investors in the Nigerian petroleum industry. In 2022, Nigeria’s crude oil production plunged significantly to unprecedented levels. In order to combat this problem, the FGN took several measures – including engaging private security contractors to provide surveillance within the affected areas.

These measures are expected to restore normalcy to crude oil production levels in the coming months, as reports state that several illegal connections have been identified and eradicated. This resulted in an increase in crude oil production at the end of 2022.

Conclusion 

The outlook for the Nigerian projects and energy sectors remains positive, despite the challenges posed by insecurity, illiquidity, and change in government. The increase in regulatory activities in the Nigerian projects and energy space is indicative of the Nigerian government’s commitment to close Nigeria’s infrastructure gap and boost the energy sector while prioritising the energy transition.