Nigeria under pressure over global energy transition, says McKinsey

Nigeria along with other African oil and gas producing countries are under mounting pressures over a global energy transition that is at once in acceleration, says a new report from global consulting firm, McKinsey and Company.

The report says most of the countries affected, including Nigeria, Angola, Equatorial Guinea, South Sudan, Ghana, Libya, Algeria, among others, are exposed to the global energy transition as their economies are highly dependent on oil and gas revenues, against the background of a global momentum building for sustainability.

Besides, McKinsey said Nigeria and the other producers in the continent have reserves that cost more to produce and are, on average, more carbon intensive than oil and gas from other regions.

The report titled, “The future of African oil and gas: Positioning for the energy transition”, noted that Africa is also pressured by the fact that its energy demand threatens to outstrip supply, projecting that while the energy transition will see Africa’s crude and condensate production fall from 6.5 million barrels per day (2021) to 2.5 million barrels per day in 2040, demand is expected to grow by 1.4 percent over the next two decades.

Demand for refined petroleum products currently at around 4.1 million barrels per day is projected to reach 5.3 million barrels per day by 2040. And while global growth in energy demand, including fossil fuel, is expected at around 10 percent, Africa is projected to grow at around 30 percent thereby piling more pressure on the continent’s oil producers in the face of an energy transition moving really fast.

McKinsey said the demand-induced pressure on Nigeria and other African producers would be an outcome of rapid population growth and industrialisation which are expected to drive energy demand growth across the African continent.

The global energy transition, which refers to the shift by the world’s energy sector from fossil-based systems of energy production and consumption to renewable sources to achieve net-zero, has put everyone involved under some pressure. The McKinsey report acknowledges that, “In this context, oil and gas majors are increasingly challenged to deliver higher returns more sustainably. As a result, many are opting to reduce

their African upstream exposure and rebalance their portfolios across resources with lower emissions intensity.”

Pressure is also coming from investor scrutiny for oil and gas projects, McKinsey noted, adding that this is intensifying as “capital providers factor environmental, social, and governance considerations into their decisions.”

Nigeria and other African oil and gas producers will find unpalatable this conclusion reached in the report, that based on McKinsey’s achieved commitments energy transition scenario, “the replacement of approximately 60 percent of Africa’s current oil production could become uncompetitive by 2040,” adding that, “As oil majors shift toward lower-emission basins, Africa’s oil-producing countries could find themselves deprioritized for further development and facing an increased risk of stranded assets with significant oil and gas reserves remaining untapped.”

Nigeria, whose spending is already under severe strains, is alerted by the report, which stated thus: “This could

put further pressure on government spending and impact development priorities; more than half of African oil and gas producing countries rely on oil and

gas exports for more than 50 percent of their total export revenues. In Nigeria, for example, petroleum exports make up more than 85 percent of the government’s total export revenues.”

Countries with more than 50 percent of projected oil production at risk in the event of a more rapid energy transition (achieved commitments scenario) can be considered vulnerable, while those with less than 50 percent of production at risk are likely to be more resilient to global shifts, the McKinsey report stated.

Nigeria and Angola, the report said, have both lower oil-resource resilience and economies that are heavily reliant on the production of oil and gas. McKinsey said countries like these could consider implementing levers to strengthen the cost competitiveness of their resources, such as optimising fiscal terms, addressing sources of cost premium (for example, insecurity), and improving the ease of doing business, adding that they could further strengthen the resilience of their resources by considering initiatives to decarbonize their existing oil and gas operations and encouraging investment in lower-carbon energy infrastructure such as gas pipelines, which could reduce the risk of stranded gas resources.

Such countries, the report stated, could diversify their energy revenues by fostering an enabling environment to encourage scale-up of renewable-energy projects that provide exposure to new energy revenue streams and help to ensure energy supply.

It contrasted Nigeria and Angola with Senegal and Côte d’Ivoire, which it described as examples of countries that are less reliant on the production and sale of oil and gas but have oil resources that are less resilient under a more rapid energy transition, and suggested that they could focus on spurring investment in renewable energy or carbon-offset businesses, while also decarbonizing their existing production to extend their licence to operate.

Countries with higher resource resilience and lower oil and gas revenue reliance, such as Egypt or Ghana, the report advised, “could focus on protecting their already resilient reserves by decarbonizing their existing oil and gas operations. This would help to maintain the competitiveness of their production in key destination markets such as Europe, which are likely to be subject to carbon border adjustment mechanisms.”

As to Algeria and Libya, described as oil producing nations whose reserves are more cost competitive and for whom oil and gas revenues represent a large share of overall national revenues, they could prioritise protecting their cost-competitive reserves, by taking measures to reduce emissions from their existing operations, while also exploring opportunities to diversify their energy revenues through investment in renewable energy projects, the report advised.

McKinsey also stated that while the speed of the energy transition is uncertain, “there is no doubt that the world is moving toward a low-carbon future. African oil and gas producing nations will need to evolve their strategies to prepare for this, taking into account the particular challenges and opportunities at stake in their context.”