Gas-to-power: Revisiting policies to drive domestic utilisation

Considering its huge reserves and potential for economic transformation, Nigeria is considered to more of a gas nation, against its reputation as an oil-producing country. With many discoveries across Africa, the need to explore gas for domestic development and implement policies to drive its utilisation, especially as it relates to electricity and industrial growth, remain a major agenda for stakeholders in the natural gas space, FEMI ADEKOYA writes.

Natural gas has been described as a transition fuel that is ‘environmentally friendly, affordable, reliable, accessible and flexible.’ As countries face mounting pressure to provide electricity and reduce carbon emissions, natural gas has emerged as a great compromise between industry and environmental activists.

With the coronavirus disrupting global energy balance, leading to declining in oil prices due to low demand, the need to encourage local consumption of gas, especially for power generation in a country with huge energy deficit remains key.

With nearly two-thirds of the continent lacking access to electricity, and most countries depending on expensive fuel imports, there are calls for increased energy spending and the need to explore hydrocarbons for domestic growth rather than solely trading such.

Given the global migration from oil to cleaner fuels, such as gas, the Nigerian economy is going to become increasingly dependent on gas and less dependent on crude oil. The gas sector simply cannot be allowed to follow the same path as the power sector as this would have terrible consequences for our economy.

According to the Nigerian National Petroleum Corporation (NNPC), demand for natural gas by the country’s domestic market, which currently comprises mostly of power and industries, would rise from 1.5 billion standard feet per day (bscfd) to 7.4bscfd in 2027.

But the Corporation said it was making plans to plug this expected rise in demand with seven natural gas projects it christened the ‘Seven Critical Gas Development Projects (7CGDP)’ which would bring in about 3.5bscfd of gas in 2021.

Similarly, the Gas Exporting Countries Forum (GECF), to which Nigeria belongs, noted that gas will be the only fossil fuel to increase its market share until 2050, and Africa will make a big contribution, more than doubling its gas production over the next 20 years.

Achieving a real quantum leap and breaking the ‘gas ceiling’ will demand Africa’s version of the New Silk Road – a trillion-dollar idea that calls for new exploration, import and export infrastructure, processing plants, downstream and power facilities and gas utilization technologies.

To however achieve this, there is a need to address challenges with domestic gas utilisation as well as pricing and fiscal policy issues limiting adoption.

Operators, however, note that the current Domestic Supply Obligation (DSO) procedure that allocates arbitrary pricing on gas supplied by the upstream gas producers without considering the viability of such pricing does not work, and is a disincentive to gas producers investing in the gas infrastructure required to utilise Nigeria’s vast gas reserves.

Indeed, the National Gas Association (NGA), noted that the gas sector can aid Nigeria’s diversification agenda if the government is deliberate about the gas-to-power initiative, especially for industries.

Noting that the 2008 regulation already defined the commercial regulations for the gas sector, the NGA added that fiscal abuses bordering on producer cartels and economic hold up as well as regulatory illiteracy should be addressed.

The President of NGA, Mrs. Audrey Joe-Ezigbo, emphasized the need to build capacity and domesticate the supply chain, reduce imports and create new markets for gas while exploring other funding opportunities in supporting the status of Gas as Nigeria’s comparative advantage.

She reiterated that natural gas has risen beyond the status of a commercial product to become an economic growth driver, energy security product, and enabler for industrialisation, job creation and economic recovery.

The Programme Manager, Nigeria Gas Flare Commercialisation Programme, Office of the Minister of State for Petroleum Resources, Justice Derefaka, stressed the importance of domestic utilization in maximizing value and directly improving the local economy whilst also touching on some of the challenges across the gas value chain that need resolution in order for the economy to enjoy the full benefits of the commodity.

Derekafa painted a positive picture of what might be on the other side of the pandemic with gas not particularly suffering any major hits but being the key driver of the Nigerian economic recovery.

The Managing Director of the Nigerian Gas and Power Infrastructure Company, Dr. Salihu Jamari, noted that focus must be on gas infrastructure to ensure that the lines of distribution from the producers to the consumers are better managed.

While many local producers in the food and allied products sector may have switched to gas-powered plants, the need to develop infrastructure as part of measures to deepen adoption remains key.

Operators like Promasidor, Honeywell, and CHI have described adoption as helpful in driving down production costs, but seek intervention in addressing outages and quality of the gas being supplied to factories.
Gas pricing challenge and need to develop a strategy for distribution

The end user gas price of $3.85/Mscf directive by the Minister of Petroleum Resources for textile manufacturers based on a distribution tariff of $1.15 and marketing margin of $0.50 is believed, according to operators, to have failed to cover the scope and cost of last-mile distribution companies and does not consider the capital that has been invested to develop the distribution network.

The extension of a special pricing arrangement to any arm of the industry is expected to be preceded by extensive consultation, in-depth research and a holistic assessment of the consequences of such arrangements for the manufacturing industry to ensure that no element of the value chain is broken in the process.

The National Gas Policy 2017 (the “Gas Policy”), also recognises the importance of relevant stakeholders being carried along in regulatory decision making. For example, the regulated tariff for monopoly infrastructure is to be based on a tariff methodology and model developed by the petroleum regulatory authority with input from industry.

In the era of energy transitions, the introduction of discriminatory regulations against cleaner hydrocarbon fuels such as natural gas, disturbs gas markets design, undermines investment in crucial gas infrastructure and new gas supply projects.

Managing Director of EnergyInc Advisors, Mrs. Rolake Akinkugbe-Filani, emphasised the need to build local sources of funding for gas infrastructure and addressing gaps in policies that could help propel the sector for growth.

According to players in the natural gas distribution chain, the end user gas price of $3.85/Mscf, which took effect from January 1, 2018, is a retroactive price, which fails to consider the cost of services or the capital they have invested.

They added that the decision will have a crippling effect on their businesses and result in “gross value erosion for local and foreign investors who have already committed funds, and created unanticipated liabilities for Local Distribution Companies (LDCs).

They noted that other manufacturing customers will expect back payments at the LDC’s expense based on policy-generated debts for 2018 (resulting from the $3.77/Mscf difference between the $7.62/Mscf price that was in effect during 2018 and the $3.85/Mscf price in the Directive); and potential future tax complications, levies and penalties against LDCs.

“Others are making LDCs face significant difficulty in meeting up with financial obligations to lenders for facilities expended towards gas infrastructure deployment, which ability to meet up with financial obligations was under severe strain as a result of the significant currency devaluation; and negative effects for contracts executed before the release of the directive”.

On capital recovery, the gas players said: “We have invested very significant capital to develop our extensive downstream distribution network. This capital is recovered through a portion of the end-user gas price. The directive, however, does not make any provision for capital recovery.

“This would grossly erode already constrained margins, meaning that we would never be able to recover our prior investment and would be unable to carry out any further development of the distribution network to promote further industrialisation.

“This will compound our already pressured ability to conduct Operations and Maintenance (O&M) at the right quality and safety standards in the normal course of business.

“Additionally, the imperative to upgrade our distribution infrastructure as required from time to time demands the fresh injection of significant capital”.

The producers added that provisions made for these at the initial investment decision phases have become grossly inadequate as a result of changes in macro and microeconomic variables – currency devaluation, foreign exchange constraints and inflation, among others.

Though the Gas Policy is clear that to fully develop the industry, there is a need to move towards a deregulated market allowing for willing buyer-willing seller arrangements, operators note that strict regulation of the gas price for the entire gas value chain is at variance to the spirit of the National Domestic Gas Supply and Pricing Policy 2008 and the Gas Policy, which enshrine the government’s position on the achievement of a market-led pricing approach and incentivising private sector investment in the gas industry.

“Without an end-user gas price that considered the cost of services and enabled recovery of capital invested, we would have been unable to develop the gas infrastructure, which has enabled this industrial development.

“In facilitating industrial development, we have even gone as far as incurring the costs required to connect some customers to our network that did not pass the economics required for new connections (achieved through cross-subsidising with customers that passed economics).

“The overall effect of this strict regulation of the gas price in the manner set out in the directive is that the development of the gas industry would be significantly hampered when there is a need for our nation to move towards a gas-based economy”, they added.

Encouraging the expansion of natural gas utilization domestically and internationally in different forms and sectors, operators hope that the Nigerian government will revisit regulations that will attract investments and growth, therefore spurring improved access to electricity in many households and industries for improved productivity and competitiveness.

To avoid a downward trend in the gas industry, it is crucial that a system that encourages private sector investment, including foreign investment, is put in place.

To achieve this, operators believe all the participants in the gas value chain (gas producers, gas processors, pipeline developers) must be confident of a return on their investment.

“The current DSO procedure that allocates seemingly arbitrary pricing on gas supplied by the upstream gas producers without considering the viability of such pricing does not work and is a disincentive to gas producers investing in the gas infrastructure required to utilise Nigeria’s vast gas reserves.

“Likewise, imposing arbitrary end customer gas prices on downstream gas distribution companies without considering the significant investment made to develop the gas distribution infrastructure and the cost of operating and maintaining the infrastructure will have a similarly damaging effect”, they added.