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Addressing issues in Nigeria’s gas value chain

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It is no longer news that Nigeria has the world’s 10th largest gas reserves but ranks only 17th in production – demonstrating untapped potential. While government seeks new measures to increase utilisation, more needs to be done in the fiscal environment. FEMI ADEKOYA writes.

Some months ago, the Director of the Department of Petroleum Resources (DPR) Sarki Auwalu, said that Nigeria’s proven gas reserve has risen to 203.16 tcf, which is believed to be enough to support both domestic consumption and serve as a major foreign exchange earner if utilised.

Notwithstanding, experts believe there is much yet undiscovered. But the incentive for exploring gas is limited, even as much of Nigeria’s discovered reserve can only be processed with great market incentives and better infrastructure.

According to gas operators, there is urgent need for the federal government to address issues bordering on a pricing regime that allows the market to determine the price of gas in line with the basic global market principle of willing buyer, willing seller model.

They said that transitioning to a market-led gas pricing regime would unlock the abundant potentials in the sector through increased investment in the sector.

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The gas players, at a recent virtual business forum organised by the Nigerian Gas Association (NGA), themed, “Consensus pricing for the Nigerian natural gas value chain”, said the time had come for the country to leverage its gas resources to address its developmental challenges including huge infrastructure deficit, poor electricity supply, unemployment and poverty.

Arguing for a market-led pricing regime for the Nigerian gas value chain, the Oil Producers Trade Section (OPTS), an arm of the Lagos Chamber of Commerce and Industry (LCCI), stressed that a market-driven regime will encourage competition and attract investments into the country.

It said in the meantime, gas pricing should be set at a price that is cost-reflective of the investments and in addition, provides decent returns to encourage investors and investments, adding that this will enable investments and encourage further developments of the Nigerian gas industry.

The OPTS in its position paper presented at the session by its Chairman, Mike Sangster, recommended that the three –tier sectoral demand segments of power, gas-based industries and commercial be maintained and that domestic gas framework should not be linked to export parity pricing.

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Sangster who was represented by the Chairman of OPTS Gas Subcommittee, Okechukwu Mba, said: “Domestic gas demand obligation in the DGSO (Domestic Gas Supply Obligations) arrangement should also be capped at the current multi- year levels and discontinued after 2022, which is the end of the current multi-year allocations. This will represent a major transition milestone to liberalise gas market in Nigeria after marking 15 years of domestic gas supply obligations.

“Nigeria should also draw lessons from other countries and make it competitive to attract the much-needed investments into the gas sector and stimulate the growth of our GDP. This is even more critical in low commodity pricing environment and in a situation of reduced capital flow to the economy.

“In general, a successful and timely development of Nigeria’s vast gas resources including its deepwater resources, will require the industry and authorities working together as close partners to achieve these common objectives”.

He said the OPTS believed that accelerating gas development in Nigeria was key to boosting the country’s economy, advising that Nigeria needs to strike a balance between viewing gas as a source of revenue and more importantly, as a catalyst for economic growth.

He also said that the Petroleum Industry Bill (PIB) currently in consideration at the National Assembly poses a unique opportunity to make a change towards the transition to a gas-based economy by enabling commercial terms that will pave the way for market-based pricing in the near future.

“In this regard, it is expedient that the federal government continues its leadership role to align a broad group of government ministries and industry stakeholders,” Sangster added.

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Speaking at the session, the President of NGA and Deputy Managing Director of Falcon Corporations, Mrs. Audrey Joe-Ezigbo, said there was need to get it right in terms of gas pricing, stressing that that would enable gas development in the country.

“Now, talking about pricing methodologies, I think that one thing that we agreed on is the fact that we have to get it right in terms of pricing, to be able to enable gas development in the country; because of the fact that gas is an enabler of various sectors, and I spoke to that in my opening remarks.

“Now, when you look at Nigeria in terms of production and in terms of actual utilisation of gas, the Nigerian gas market is the least developed amongst peer nations and this is something one has to keep bringing to the fore,” she said.

She pointed out that many countries and regions were literally moving away from the realm of regulated pricing into a market-led pricing, saying across Europe and North America, the gas markets were fully market-led, while there was an increasing push towards a deregulated market-led regime in the Asia countries of China, India, Malaysia and the rest.

Joe-ezigbo said: “Of course, in Nigeria, we haven’t really seen that. And when you consider the fact that there is such a clear correlation between the pricing framework in use within your country, the depth and the vastness of the domestic gas market and of course, the economic development like a-one dollar to three-dollar correlation of the GDP side, it explains to some degree why we are where we are, and we have to be able to rethink that.

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“It’s good to look at models and then try to contextualise them within your own peculiarities; and I think that is critical and I know that’s the kind of work that is being done.

“So, when you think about Nigeria over the last 10 to 15 years, from the Gas Master Plan even today, we have to ask ourselves why we have not seen the kind of supply side projects; the kind of midstream projects that would have enabled a broader gas supply in the country; and that would have taken care of a lot of the pricing conversations we are having today.

“Now, we have to be able to do things very differently. So whatever pricing framework we come up with has to take this into cognisance. If we look at Egypt for instance, and Egypt is a good example because they have gone through the same journey of regulated pricing and so had that grossly constrained investments and they had to do a quick turnaround.

“So you have a situation where in a very short time line, within this same period that Nigeria was doing Gas Master Planning and all that, we saw Egypt go through over 80 E&P agreements.

She further said: “In this time, we saw Egypt get the Gas and Offshore Gas Development Projects of over 30 trillion cubic feet in offshore – about 1,500 meters of water; and in less than three years, they had delivered these projects.

“In this time, Nigeria has not been able to do the same thing. We don’t have the infrastructure, no doubt, and yes, the liquidity issues and all that have continued to impact on the sector. Yes, there is always the tension about what is the appropriate level of recovery and incentivisation for the sellers or investors on one side, which will still ensure affordability for the buyer on the other side.

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But the economics have to be right for the investors and then, if we have more investors, we are able to net off this issue of costing overtime.”

She opined that the appropriate pricing framework for the gas value chain should be the one that ensures availability, cost recovery, and the one that ensures return on investment will be commensurate to the risks taken by an investor.

However, citing some encumbrances, the Nigerian National Petroleum Corporation (NNPC) while recognizing the concerns of the operators and their demand for transition to a market-led gas pricing regime, said the country was not yet prepared to go that way now.

The Chief Operating Officer, Gas and Power, NNPC, Yusuf Usman, explained that the issues of infrastructure and power needed to be addressed before Nigeria could transition to a free market price regime for the gas sector.

Although, Usman said that the issue of infrastructure was almost solved, considering the progress recorded so far in gas infrastructure development, he said that power remained an issue that is yet to be solved, adding that it is only when the issue is addressed that Nigeria can proceed towards a willing buyer, willing seller gas price environment.

“For the transition period, there are many things to look at in determining how many years it will take to get the market into the willing buyer, willing seller basis. We look at infrastructure. Do we have a robust infrastructure to go into willing buyer, willing seller basis? I can confirm to you today that we have made progress in infrastructure.

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“So, the key infrastructure is actually at the line of sight and therefore, it may not be a consideration for determining how long it will take us to the willing buyer, willing seller basis.

“But there are other challenges. If you look at our projection based on demand for gas, power continues to play a significant role in determining market-based pricing model for gas.

“Therefore, the key consideration is, how long will it take us to resolve the issues in the power value chain? Once we are able to do that, then I think we are in the mode that we can go into a willing buyer, willing seller basis”.

On achieving consensus pricing for the Nigerian gas value chain, Usman said that doing that would require having an alignment of all the players in the gas value chain, from the gas suppliers, transporters, the distribution businesses, off-takers, and alignment with the stakeholders including government and the Nigerian people.

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