Oil and Gas (5): Gas - the Evaporating Opportunity
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?