EL-RUFAI ON FRIDAY Oil and Gas (5):
Gas - the Evaporating Opportunity
Nasir Ahmad El-Rufai
The gas component of
the Nigerian Oil & Gas Sector is vast in quantity and potential - much
more than oil, yet it remains sub-optimally developed. Compared with
the estimated crude oil reserves of 40 billion barrels, our gas
deposit is some 184 trillion cubic feet (tcf) - about the 7th largest
gas reserves in the world. Our gas quality is high and particularly
rich in liquids and low in sulphur. There are however other structural
weaknesses in the sub-sector that are likely to constrain the
extraction of our gas and conversion into real developmental benefits
for the nation. A typical constraint of extracting the large gas
reserves is that about 40% of it is stranded in gas caps and not
accessible until much later in time, after the production of crude oil
has been completed.
Though most of the
gas being produced today is associated with crude oil production
(associated gas), most of it is not utilized due to poor
infrastructure, short-sightedness and is therefore flared. The
monetary value of this wasted gas which can generate between 40,000
and 60,000MW of electricity, enough to power the whole West African
sub-region. In monetary terms, it is estimated at between $0.5 billion
to $2.5 billion per annum and the negative environmental impact,
mainly carbon dioxide emissions, amount to roughly 35 million metric
tons per annum, about 25% of the world's total. Not all the news from
the gas sector is hot air!
With the approval of
a National Gas Policy in 2005, and the completion of Gas Master Plan
by the NNPC in 2007, the sub-sector is now poised for unprecedented
growth if the relevant legal, regulatory and fiscal frameworks are put
in place as a matter of urgency. If that is done, output is expected
to grow from about 5bcf/d in the recent past to the projected 2011
figure of over 20bcf/d, one of the world most aggressive gas
development programs in the world.
Why is gas in
Nigeria which we have in greater abundance than oil, treated as crude
oil's poor cousin? What are the challenges faced by investors in the
sector? Has the dominance of IOCs and government agencies in the
sub-sector's value chain negatively affected its growth? What do we
need to do to remove the binding constraints in the sub-sector? We
will look at these questions briefly today.
Despite the fact
that gas is now of age globally, more importantly a more dominant
natural resource than crude oil in Nigeria, gas is yet to be a
recognized commodity in its own right. Licenses purely for gas
exploration are few and far between, if any. A major international gas
company found commercial quantities in the Gombe Basin in 2007, but
further investment has stalled due to the confusing legal and fiscal
framework. In reality, gas is subsumed within the 31 pieces of
legislation ostensibly designed largely for crude oil exploitation.
The legislations were enacted when gas was a side-show to crude oil.
While there are several licenses issued for prospecting crude oil,
there is no such framework for gas exploration.
The biggest gaps in
the sub-sector have to do with the absence of legislation clarifying
the role of government, its relationship with the private sector and
its position on several issues of interest to prospective investors –
including gas pricing, fiscal terms, access terms and purchase and
supply agreements, etc.
Regulatory and
political risks similar to the ones facing oil exploration pervade the
gas sub-sector. Under the existing sectoral structure, The Minister of
Petroleum Resources through the Department of Petroleum Resources (DPR)
regulates the gas sub-sector. The
DPR
appears to lack financial or operational independence, as well as the
technical capacity to adequately regulate the gas sub-sector; nor
really designed and configured to regulate same.
At the
operational level, the Nigerian Gas Company (NGC) a subsidiary of the
NNPC set up take the lead in gas exploration, gathering, transmission
and marketing is saddled with multiple and often conflicting roles
which include: gas purchaser, gas transporter, system operator,
concession granting agency/downstream enabler and handler of policy
issues. The overwhelming government involvement through NNPC/NGC
resulting in vertical integration of the gas sub-sector is
antithetical to its effective development.
This
situation is worsened by lack of clarity on upstream tax consolidation
with downstream capital expenditure by integrated oil and gas
incumbents. This mix-up has put new downstream gas entrants without
affiliation to upstream entities in a competitive disadvantage, and
discouraged development of the sub-sector. As it is with crude oil
licensing, prospecting and exploration, the gas sub-sector lacks
economy-wide or sector-specific antitrust legislation as the
regulators (Minister/DPR/NGC) are not independent of key stakeholders
in the industry.
The levity with
which gas exploration is handled by successive government in Nigeria
is a major reason why the problems of the country’s power sector have
remained intractable to date. The country appears like the proverbial
meat seller that continues to eat bones. Until ongoing research into
alternative technologies for power generation produce cost-effective
solutions, natural gas will remain, for Nigeria, compared to hydro,
coal and fuel oil, the cheapest and most environmentally-friendly
feedstock for electricity. Yet, in spite of the rich abundance of gas
in our soils, the failure of successive administrations to harness it
for electricity on a massive scale comparable, say, to South Africa’s
use of coal (amounting today to almost 30,000 MW out of South Africa’s
40,000 MW), is a matter of great shame and regret.
Recently, the Oil
and Gas Reform Implementation (OGIC) which was constituted and
coordinated by the BPE, and which drafted the National Oil and Gas
Policy, estimated that we imported about $1 billion worth of diesel
for private or self-generation in 2006 - an avoidable loss in foreign
exchange, apart from being a cost to Nigerian industry and private
consumers. This is of course, quite apart from the losses, also
estimated at about another $1 billion, lost by the national economy
due to unreliable electricity supply.
New investment in
gas-fired power stations will have a catalytic effect on the growth of
a domestic gas market and vice versa. These two sectors will stand or
fall together because, unlike in temperate countries, there are no
domestic applications for gas outside electricity, LPG for cooking,
and (maybe, one day) automotive consumption. LNG export, a business
that provides modest employment opportunities and benefits that goes
mainly to project sponsors, offer negligible socio-economic value
added, compared to electricity and LPG. For now and into the
foreseeable future, therefore, gas-to-electricity is the only viable
application that has the capacity to bring about massive cross-sectoral
social and economic benefits to Nigeria.
Another challenge,
however, is to deliver gas to the power sector at a price which does
not translate to unreasonably high electricity tariffs, while at the
same time ensuring that investors in both power projects and the
construction of gas pipeline infrastructure secure adequate returns on
their investments. We all know that PHCN, which currently consumes 70%
of Nigeria’s domestic natural gas supply from NGC, is unable and
unwilling to pay cost-reflective prices for the gas that are supplied
to it. PHCN pays =N=12 per mmscf of gas to NGC, while private sector
customers such as WAPCO pay between =N=194 and=N=235 per mmscf. Yet,
PHCN has managed to accumulate a debt of =N=6 billion over the years
on gas feedstock supplied to it. Let me add, perhaps obviously, that
NGC entertains little hope of this debt being liquidated very soon,
and yet it must continue to supply to ensure that power outages are
not worse than they currently are.
The irony, which
graphically demonstrates the current impossibility of PHCN and NGC’s
effective contribution to real socio-economic development, is that
NGC, in spite of being systemically unable to collect revenues from
the single state-owned customer that takes 70% of its output, is
expected to finance, build, operate and maintain a national gas grid
all by itself. PHCN, on the hand, has many plans and feasibility
studies drawn up for gas-fired plants to be built in various parts of
Nigeria, without clear intentions to pay. Apart from this, IPP
developers, including Nigerian oil Exploration and Production
companies focused on gas-to-electricity utilization projects and core
IPP developers, have also drawn up plans for similar projects.
Who will bell the
cat? None of these projects will see the light of day for as long as a
technically insolvent and financially moribund PHCN (or its successor
organization) remains the single buyer of electricity in Nigeria.
Apart from the power
sector, a diagnostic review of the gas sub-sector creates other
opportunities and challenges. For example, energy from gas is a major
requirement (about 40% of direct cost) for cement manufacturing, and
feedstock for LNG, methanol, fertilizer, aluminum smelting and power
generation. The most critical challenge is the varying capacities of
each of the sectors to afford gas.
There are other
draw-backs that are commercial in nature - such as absence of
transparent gas sales and purchase agreements, unpaid debts by
domestic gas buyers - mainly government owned parastatals and entities
such as PHCN, ALSCON, Delta Steel Company (DSC) etc; and the
unwillingness of the IOCs, operating in Nigeria, to invest heavily in
gas gathering, transmission and supply infrastructure unless adequate
interventions on revenue security are provided. The current domestic
market does not have the capability to earn the confidence of
investors. The half-hearted restructuring of the power sector has
created lack of clarity on who the relevant parties to gas supply
agreements in the sector are.
A major impediment
to the full growth of the gas sub-sector is the inexcusable delay in
enacting laws that could have transformed it. Bills submitted to the
National Assembly (NASS) towards the enactment of Downstream Gas Act
and the Natural Gas (Fiscal Reforms) Act since 2005, on which both
houses of the NASS have had public hearings, are yet to be passed into
law. Potential revenue loss to government as a result of delays by
NASS to take necessary legislative steps to protect the sub-sector is
put at $4 to $5 billion annually by industry experts.
For the country’s
167 million people, the big question is how fast government can ensure
gas improves their lot. We are all waiting for the overpaid National
Assembly, the President and his oil minister to give us some hope. Is
it too much to ask?
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