Nigeria has been described as a natural gas basin with some deposits of oil, however Nigeria’s domestic gas market is underdeveloped and corollaries of this is that gas commercialisation and utilisations remain low.
For many years, Nigeria has conducted itself such as to be called a resource cursed country. The resource curse is a paradoxical situation in which countries with an abundance of non-renewable natural resources experience stagnant economic growth or even economic contraction.
The resource curse occurs as a country begins to focus its entire production means on a single industry, such as mining, in Nigeria’s case oil and gas and neglects investment in other major sectors.
As a result, the nation becomes overly dependent on the price of commodities, and overall gross domestic product (GDP) becomes extremely volatile. Additionally, government corruption often results when proper resource rights and an income distribution framework are not established in the society, resulting in unfair regulation of the industry. The resource curse is most often witnessed in emerging markets following a major natural resource discovery. How can this be reversed?
To help convert this resource curse status and move towards becoming a more productive economy, the Society of Petroleum Engineers organised its annual human capacity building in Lagos, which was followed by the Nigeria Annual International Conference and Exhibition (NAICE).
The overall theme of this year’s conference was ‘Diversification of the Nigerian Economy – The Oil and Gas Industry as an Enabler.’ Without the oil and gas sector, Nigeria’s diversification effort will hit a cul-de-sac. However, the oil and gas sector has been dwarfed by poor funding because loans from traditional sources such as commercial banks have dried up. Alternative sources of financing are needed.
Finding alternative financing model
Nigerian oil companies need alternative funding schemes including contractor financing, insurance funds, private equity, pension funds among others to get financing for new projects in an industry where lenders have become weary and wary.
In exchange for some of the funds, operators have been offering equity participation, profit sharing and various crude for payment schemes supported by the Nigerian National Petroleum Corporation (NNPC) which provides guarantees that gives the lenders confidence.
For instance, the contracting financing model with Schlumberger has a win-win element to it, but this would not have been possible without the support the joint venture partner, the Nigerian National Petroleum Corporation. Without this confidence to the contractor it would never have been possible.
Nigeria needs over $20bn in new financing to ramp crude oil production to 2.5million barrels per day (bpd) but with local banks exhibiting low appetite for lending to the sector due to high non-performing loans estimated last year to constitute about 40 percent banks NPLs , local players say they are being forced to task their brains for new solutions.
In June, Nigerian National Petroleum Corporation (NNPC), FIRST Exploration & Production (First E&P) and Schlumberger signed a tripartite agreement for development of the Anyala and Madu fields under OML 83 and OML 85, offshore Nigeria at the cost over $700m.
Under the agreement, Schlumberger will contribute the required services in kind and capital for the project development until first oil. The joint project team will leverage the technical expertise of Schlumberger and the extensive local knowledge of the partners.
Globally the oil and gas industry is evolving with talks about more prolific technologies that will displace hydraulic fracking, the impact of electric cars, move to low sulphur content which will render all of NNPC’s refineries obsolete, but poor policy, weak fiscal terms and corruption continues to destroy value from the sector in Africa’s largest crude oil producer. With alternative sources of finance, Nigeria needs to rapidly develop the domestic gas market.
Developing domestic gas market
The quickest way to diversify Nigeria’s economy is by developing its domestic gas market. To develop a viable domestic gas market, 5 billion standard cubic feet (scf) of daily gas supply will be needed, according to the Nigerian National Petroleum Corporation (NNPC).
Gas is a big source of economic diversification. It can transform agro based industries and boost food production through the use of fertilizers. But to attract the needed investment, there is need for fiscal terms that incentivise investors. Some companies have supplied gas but have not been paid. There is also need for fiscal terms that encourage small and medium term projects.
Investors have stayed away from Nigeria’s domestic gas market due to opacity of fiscal terms, lack of functional gas infrastructure and high entry barriers, which have in turn kept the market underdeveloped and impacted gas utilisation.
To reap the benefits of a gas driven economic diversification, Nigeria needs to build gas infrastructure. An initial phase of about 2,500km of gas pipeline infrastructure was planned to be completed by the end of 2018. This target, when achieved, will boost investor’s confidence in natural gas market in the country.
For incentives, the NNPC have stipulated variable gas prices for different sectors of the economy to drive investment inflows and competitiveness. There is one gas price for power, one for industries and another for industries that use gas a feedstock to manufacture fertilizers and petrochemicals. In this sense a Nigerian fertilizer manufacturer should be able to compete with other fertilizers makers around the world.
To reach this target of developing Nigeria’s domestic gas market, huge upfront infrastructure spending is needed. The oil and gas sector needs $20 billion to $30 billion annually to maintain production.
Other pipelines that need attention include: expansion of the Escravos-Lagos Pipeline System (ELPS) from 1.1 Bscf/day to 2.2 Bscf/day.
The Trans Nigeria Pipeline Project (TNPP) needs to be completed. TNPP aims to connect the gas pipeline systems in Nigeria to create an inter-connected system that will provide flexibility and better management of gas supplies.
The framework of this system is an integration of the three gas pipeline systems: Obiafu-Obrikom-Oben (OB3) system with a flow capacity of 2.0 Bscf/day, the Calabar-Ajeokuta-Abuja system with flow capacity of 3.0 Bscf/day, and the Abuja-Kaduna-Kano system.
STEPHEN ONYEKWELU
