"The energy transition can only be funded by big oil, as they are the only players who can balance the low returns of renewables projects with their high earning fossil fuel projects."

Olumide Esan

PARTNER AND ENERGY & CHEMICALS LEADER, DELOITTE NIGERIA

April 19, 2024

How does Deloitte Nigeria's ‘Energy and Chemicals’ division serve the local energy sector?

Deloitte’s presence is robust across various industries and service lines, with a strong foothold in West Africa and particularly Nigeria. We have been instrumental in supporting the energy industry, particularly amidst the global energy transition, by assisting clients in navigating challenges and capitalizing on opportunities. Our approach emphasizes responsible business practices, aiming to ensure success for clients in the energy and resource sector. In Nigeria, where energy poverty persists, our focus extends to facilitating access to affordable and sustainable energy solutions. Thus, our efforts include collaborating with stakeholders to shape energy transition discussions and promote sustainable energy practices.

Moreover, we assist clients in optimizing their gas portfolios, recognizing the value inherent in the gas business and its potential for profitability. As businesses increasingly face scrutiny from shareholders and stakeholders regarding ESG considerations, we support them in integrating sustainability measures into their operations. This involves initiatives to reduce carbon emissions and transition towards cleaner energy sources.

In our internal conversations with clients, we have observed a tension between sustainability and affordability. Notably, renewable energy projects returned between 6-8% in 2023, while traditional fossil energy projects returned between 12-15%. The energy transition can only be funded by big oil, as they are the only players who can balance the low returns of renewables projects with their high earning fossil fuel projects. 

We have done a lot of work for clients who are structuring their gas portfolio to optimize value, while being mindful of activist shareholders. We are increasingly seeing Nigerian oil and gas companies listing outside of Nigeria to access the global markets, which means they must comply with various international standards. Through our comprehensive services, we aim to facilitate this transition while ensuring the continued growth and prosperity of our clients in the energy and chemicals sector.

What links have you observed between financial reporting, ESG and taxation in Nigeria?

The Financial Reporting Council (FRC) of Nigeria is currently in the implementation phase of integrating ESG reporting into standard financial reporting practices. Major companies like Shell have embraced responsible tax principles, guiding their tax planning strategies and decisions. This approach emphasizes the impact of financial and tax decisions on the countries where these companies operate.

There is a close link between ESG and taxation. It is not solely about environmental sustainability but also encompasses governance and fiscal responsibility. For instance, Nigeria now has stringent laws against gas flaring, which the government takes seriously. Previously, companies could claim tax relief when flaring gas, but the government revised this incentive to discourage wasteful practices. While commercial reasons may justify flaring in some instances, the government aims to ensure responsible resource management.

Additionally, the recently issued directive offers investment allowances for mainstream gas projects and production gas credits for upstream activities. The government must maintain a delicate balance between punishing unnecessary flaring while not discouraging players from embarking on new projects. 

How can the Nigerian government improve the competitiveness of the Nigerian oil and gas sector?

I commend the government for recent regulatory changes. Moving forward, I would advocate for rigorous implementation of these reforms, particularly regarding policy directives and execution efficiency. Nigeria has historically grappled with lengthy contracting cycles, averaging around 24 months, leading to cost discrepancies due to fluctuating prices. The recent executive order aims to streamline this process, addressing issues like the cost premium associated with doing business in Nigeria compared to neighboring countries like Ghana.

I urge the government to ensure that local content policies are enforced judiciously. Competence should be prioritized over nationality in project allocations. It is essential for the government to navigate vested interests and uphold transparency and accountability in these efforts. Furthermore, regulatory agility is crucial to attract investments. The government must demonstrate a commitment to expeditious decision-making, as exemplified by the Petroleum Industry Act (PIA), which mandates timely responses to asset transfers and ministerial approvals. Such responsiveness fosters investor confidence and accelerates project timelines.

Additionally, the government's role should be confined to regulation rather than price control. 

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