Demand for gas in Nigeria outstrips supply

Joe Ezigbo is the Managing Director, Falcon Corporation Limited. In an exclusive online interview with the Business Editor, Clara Nwachukwu , he shares his perspectives on gas pricing, gas commercialisation and industry opportunities among other issues. Excerpts:

What is your take on the general state of the Oil & Gas industry in Nigeria today?
The landscape of the Oil & Gas industry in Nigeria today is an interesting combination of exciting and challenging, and in my view it is at a stage within which only the most visionary and dogged players will thrive. Over the past couple of years we have seen significant divestments of assets by the International Oil Companies (IOCs) as they move deeper offshore, and this in itself has presented clear opportunities for increased indigenous participation in the upstream space. Additional divestments are in play and there are some of us who have positioned to move into these emerging opportunities. There are upside and downsides to this development, but in the long run I believe this is good for Nigeria in terms of increasing investment by indigenous players, and beefing up our local content capabilities, capacity development and technology transfer.

On the gas side of the industry, what we see now is that essentially, it is a sellers’ market at this time, with demand far outstripping supply. This presents a major challenge to the various gas-to-power projects and initiatives that are ongoing. While we see many of the new players progressing to monetize their gas reserves, we are a long way off from having sufficient molecules available to support the projects that demand gas as fuel or feedstock.

Inpite of the high expectations, many believe that the National Gas Master Plan has neither made progress nor added to the development of the industry. What is your position on this?
It would certainly not be correct to state that no progress has been made to the industry with the implementation of the Gas Master Plan. Going by the quantum of progress and how appreciable this is viz-a-viz the huge need and infrastructure gaps in the country as envisaged to be addressed by the NGMP, progress has certainly been made. One significant area of impact has been with respect to the domestic supply obligation (DSO) and the level of compliance by the producers. We can also attest to a reduction in the level of flaring. On the pricing side, we have seen some movement towards achieving a strong commercial and more cost-reflective pricing framework, and certainly the scope of the Gas Master Plan itself has created several investment opportunities that we expect to begin to see movement in over time.

In the first place, the NGMP was put in place to address the issue of long-term energy security, which as stated earlier is critical to national development. It was set to address three strategic objectives – the delivery of gas-to-power targeted at ensuring about threefold increase in generation capacity by 2015; to achieve a reasonable level of gas-based industrialisation and thereby positioning Nigeria as the undisputed regional hub for industries such as fertilizer, petrochemicals and methanol which require Natural Gas as feedstock; and of course to ensure we deepen our export gas market making it more robust and profitable.

What would you propose is critical to recording tangible results with the National Gas Master Plan?
There are certain things we still need to address to get the NGMP right. Some of these include the issue of pricing and deregulation. We must address the pricing issue across the value chain to attract investment into the sector. This way we are able to maximise the pace of investment in gas field development to be at par with investments in power generation. Right now there is a current demand supply mismatch and that is a situation that need to be addressed.

Also we must address the issue of policy. Here the PIB discourse comes into play and must be raved up more than ever before. We need to allow private investment to drive the industry, while the government sticks with providing an enabling environment and regulatory oversight. The government must give attention to enabling policy to drive investment by the private sector. Investors need to be confident in the opportunities that exist. They need to be certain of returns that are secure and sustainable over the long term. Investors need to be assured of sanctity of their contracts. Investors want to be certain that the regulatory environment is stable, and they will not have to contend with regulatory flutters that have the potential to cripple their investments or threaten their revenues. And then of course, due attention, must be paid to the reduction of undue bureaucratic bottlenecks and systemic redundancies that impinge on the close-out timelines for project reviews and approvals, in order to minimize cost escalations and distortions. The issue of multiplicity of agencies must be addressed and streamlined to enable smooth process flows.

There has always been a controversy on Natural Gas pricing in Nigeria. What is your opinion on the pricing of gas? What do you propose?
Nigeria unfortunately has different yardsticks for certain things whereas there are established working and workable frameworks that have been tested in various parts of the world. In other climes, there are established platforms for the determination of the appropriate pricing for gas and that pricing pervades whatever the end objective and application of the gas might be. In Nigeria however, I would say that we started on a faulty premise. We were content to flare all the gas we found for the simple reason that we did not value the gas and we were not willing to put the infrastructure in place for the utilization of the Natural Gas.

Today therefore, while we are a gas-rich nation, gas is hard to find and the current demand outstrips available supply of Associated Gas. It is time for us to actively explore and exploit our Non-Associated Gas reserves but the investments required to actualise this are huge, and the pricing framework does not support private sector investment in this regard. It now becomes a question of who is willing and has the muscle to bell the cat. So again, if you ask me today what is the appropriate pricing for gas, I will simply tell you this: when you prospect for oil and you get gas, the oil pays for the exploration of both the oil and gas. But where you want to actively explore for Non-Associated gas in pure gas wells, the pricing as it is today cannot pay for your exploration. So, non-associated gas cannot be exploited unless we put a better pricing for gas. An appropriate pricing for Natural Gas will be one that is market-drive, and that allows for equitable economic returns to be made by the investor within typical industry project recovery timelines.

So do we benchmark our Natural Gas pricing against other gas exporting countries or against gas importing countries?
It is unfortunate that when trying to solve a Nigerian problem, we borrow a leaf from countries whose economic, social and political landscapes bear no resemblance to ours and whose solutions therefore do not tend to have any bearing or tangible impact on Nigeria in the long run. We have, for instance, issued close to 35 licenses for refineries so far; why are they not running? It’s because we are borrowing a leaf from overseas that we cannot apply in Nigeria. The frameworks are wrong and unsuited to our own realities in the first place and because of that, it is uneconomical for anybody to build a refinery in Nigeria.

The Petroleum Industry Bill has been tossed around for the past 12 years, continues to hang in limbo. Why can’t we pass the PIB and have a level playing field and have what I will call real legal policies to undergird our operations and investments in the gas sector? Why must keep looking elsewhere? Why can’t we look inward? We have the capacity and the capability to get things right ourselves if only we are honest with ourselves and prepared to make those initial hard choices that are needed to reposition the economic direction and restore prosperity to this country.

Do you think the policy of domestic gas supply obligations is an impediment to the commercialisation of gas in the country?
I think the DSO is a welcome policy. It places an imposition on international oil companies (IOCs) to deliver a known volume for domestic use, which is an imperative for this country to attain our infrastructure development and industrialisation aspirations. But putting the DSO requirement is not the end of it. The policy must be backed by an equivalent commitment and action to deliver on the infrastructure that will be used to deliver the gas accrued out of DSO compliances to the end users that need to use the gas. Minus distribution infrastructure, the DSO will not achieve the purpose for which it was put in place