Nigeria’s bid to settle a crippling N2.7 trillion ($3.5 billion) debt owed to gas suppliers has drawn scepticism, with analysts warning that the move may provide only short-term relief while leaving the underlying dysfunction in the country’s electricity market unaddressed.
Nigeria’s gas-to-power debt is not new. Since the privatisation of generation and distribution assets in 2013, the electricity market has failed to achieve cost recovery. Tariffs, though rising, remain below the true cost of supply. Distribution companies (DisCos) often remit less than half of what they invoice, blaming rampant electricity theft, low collection rates, and non-cost-reflective pricing.
The Nigerian Bulk Electricity Trading Company (NBET), the government’s clearinghouse, is left unable to pay generation companies in full. Gas suppliers, who provide the bulk of the fuel, bear the brunt of the arrears.
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Over time, the shortfall has ballooned into the trillions. Producers have responded by slashing deliveries, forcing plants offline and leaving consumers reliant on expensive, polluting diesel generators.
Against this backdrop, Abuja has been under pressure to act.
The federal government has proposed that gas producers offset the arrears by deducting them from royalties payable on resource extraction.
In theory, the arrangement offers a ‘budget-neutral’ mechanism: instead of waiting indefinitely for cash from the NBET and distribution companies, producers will reduce their royalty obligations until the debt is extinguished.
Officials have touted the initiative as a way to unlock liquidity, stabilise gas deliveries to power plants, and ease persistent shortages on the national grid, which relies on gas for as much as 80 percent of its generation.
“The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) is providing guidance to the authorities, both to the Decade of Gas and to the minister, on how such a mechanism can be implemented in a manner that is not going to disrupt the industry or even the revenue flow to the government,” Gbenga Komolafe, chief executive of the NUPRC, who was represented by Dennis Anyanwu, an official of the commission, said at an industry event on August 22, 2025.
Yet many observers remain unconvinced.
Royalties on domestic gas are fixed at just 2.5 percent of value, based on a benchmark of roughly $2.42 per million British thermal units.
At that rate, industry insiders estimate it could take decades to clear the stockpile of arrears. Even with monthly deductions, the numbers do not come close to matching the size of the debt.
Adetayo Adegbemle, executive director of the advocacy group Power Up Nigeria, is blunt about the scheme’s shortcomings.
“How much is the royalty in the last one year? How long do you think it will take for the royalty to pay off the debt? What happens when the debt piles up again?” he asked. “Using royalty to pay off the present debt might temporarily solve the immediate debt profile, but without tackling the root of the debt itself, it amounts to nothing.”
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A senior executive in Nigeria’s power sector, who requested anonymity, echoed these concerns but also questioned the credibility of the debt figures themselves.
“This is a good and thoughtful move. The question is whether the thinking has gone deep enough. Another question is how the sums due were calculated to be N2.7 trillion when we’ve been hearing N4 trillion for a long time. The N1.3 trillion is a big drop. How did it happen?”
He warned that injecting such a vast sum into the economy, even over time, risks becoming an ‘inflation bomb’ if not carefully managed. “Second, if a good part of this N2.7 trillion does not go back into capex in the gas supply value chain, that would be yet another waste. Third, this solution does not in any way address the root causes of the debt accumulation, even though it recognises the problem.”
The real danger, he said, is the return to an already familiar situation. “In another five years, we will have another multi-trillion naira problem unless the federal government recognises that the true solution is a series of multi-level, multi-stakeholder, multi-regulator and multi-transactional engagements.”
The Nigerian Electricity Supply Industry (NESI), he described, is “both a hydra-headed organism and a many-handed octopus.” Any lasting fix requires coordination between gas producers, generation companies, transmission operators, DisCos, regulators, banks, and state governments.
Analysts say this explains the attraction of the royalty offset: it creates the appearance of progress without demanding painful political choices. But that same caution risks entrenching the very distortions that created the arrears.
Risks to FAAC and state finances
One immediate casualty of the scheme could be the finances of state governments. Royalties are part of the federal revenue distributed monthly through the Federation Account Allocation Committee (FAAC).
Any reduction in inflows, even if gradual, could shrink allocations. With wage bills rising and inflation biting, states are already stretched. Governors have privately voiced concerns about a plan that could squeeze their revenues.
Officials insist NUPRC will manage the phasing to protect FAAC, likely by capping monthly offsets. But this means slower clearance of arrears, again underscoring the mismatch between the size of the debt and the mechanism chosen.
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Macroeconomic shadows
Beyond FAAC, economists warn of broader macroeconomic consequences. Assuming the scheme successfully channels N2.7 trillion back into the economy, it could stoke inflation unless tightly managed. Nigeria’s inflation is already above 30 percent, driven by food prices, transport costs, and the impact of subsidy removals.
Currency markets may also take notice. Foreign investors, already wary of Nigeria’s opaque energy sector finances, may see the royalty offset as further evidence of fiscal stress.
To be effective, experts said the scheme must be paired with comprehensive reforms.
“These reforms should compel DisCos to become more efficient, attract credible equity owners, debt providers, new investors and managers, and encourage them to re-engage commercial and industrial customers. This would boost revenue, expand service, and reestablish cross-subsidies for residential users, ultimately moving the sector towards a more robust and bankable future,” another senior energy executive told BusinessDay.
Comparisons abroad
Royalty offsets are not unprecedented. Some Latin American countries have experimented with similar mechanisms to manage arrears in their energy sectors, often with mixed results. In Venezuela, royalty offsets in the 1990s temporarily eased tensions with oil contractors but failed to prevent debt from ballooning again as pricing policies remained distorted. By contrast, in Colombia, offsets were paired with tariff reforms and stricter enforcement, creating a more durable solution.
Nigeria’s challenge is that the offset is being introduced without parallel reforms. “You can’t solve a structural problem with a fiscal gimmick,” said one international energy analyst. “Unless Nigeria tackles tariffs, collections, and grid constraints, the offset is just buying time.”
Banks as kingmakers
For gas producers, the real test is whether banks will treat royalty credits as collateral. If securitised, companies could secure immediate liquidity, allowing them to drill, compress, and invest in supply. If not, the relief will be too slow to matter.
“The success of this programme depends entirely on the ability of the gas companies to securitise this scheme and get banks to advance them the funds,” the senior executive noted. “If banks do so without demanding reforms to NESI’s underlying infirmities, then we will be back here facing an even bigger debt problem than N2.7 trillion within the next five to seven years.”
Politics and reform fatigue
President Bola Tinubu’s administration is already under political pressure after scrapping petrol subsidies and allowing the naira to float — reforms that have driven up the cost of living. Electricity tariffs, while increasing, remain a sensitive territory. Pushing through cost-reflective pricing is likely to provoke further public backlash.
Analysts say this explains the attraction of the royalty offset: it creates the appearance of progress without demanding painful political choices. But that same caution risks entrenching the very distortions that created the arrears.
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A fragile way forward
The African Energy Council, in its assessment, called the scheme ‘a short-term fix.’ It acknowledged that stabilising gas deliveries is vital to prevent grid collapse but stressed that real reform requires tariff adjustment, enforcement of DisCo remittances, and significant investment in transmission.
For consumers, the offset will not end blackouts. For gas producers, it provides uncertain relief. For states, it threatens FAAC allocations. For the economy, it carries inflationary risk. And for the government, it risks being yet another stopgap in a sector defined by half-measures.
“The government is trying to buy time,” Aisha Mohammed, an energy analyst at the Lagos-based Centre for Development Studies, said. “The question is whether they use that time to push through the tough reforms. If they don’t, the debts will return, and the problem will only grow.”
