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Why Should Nigeria Explore Inland Gas Basins for Power Generation? II

Why Should Nigeria Explore Inland Gas Basins for Power Generation? II

The case for developing inland gas basins for power generation is in line with the goal of the “Nigeria National Gas Policy” which aims to establish a vibrant gas economy. One of the policy’s strategic objectives is to ensure priority in gas supply for power generation across the country. Such entails identifying, exploring and producing from gas reserves in inland basins, in addition to the Niger Delta.
As discussed in the last article, exploring inland gas basins has significant benefits. It can enable distributed generation, which is more reliable for power supply than the current localisation of thermal generation plants in the southern parts of the country. Inland gas exploration and production would also enable power generation for industrial clusters, and improve gas security for the domestic market.

Despite the benefits associated with the exploration of inland gas basins, the current regulatory and fiscal frameworks hinder its progress. Gas sales into the domestic market encounter a series of hindrances. Some of these include inadequate infrastructure, largely unenforced regulation, the inability of generation companies to pay gas suppliers, and the issue of Naira gas sales contracts. Therefore, to enable further inland gas basin exploration for power generation, incentives for investors and operators should consider the regulatory framework, fiscals, pricing and agreements and infrastructure and finance.

Regulatory Framework

Nigeria’s gas industry regulatory framework is not yet structured to incentivise further inland gas exploration. First, there is a duplication of efforts in regulations and oversight. The Federal Ministry of Petroleum Resources (FMoPR), Department of Petroleum Resources and Federal Ministry of Environment all regulate different aspects of production and supply of natural gas, giving room for lack of coordination and places a degree of regulatory over-burden on the industry. The nature of Nigeria’s gas industry necessitates the introduction of only one regulator. However, such an arrangement is not without risks; it may ease the business environment for gas producers, but on the other hand, such a regulator may become too powerful and manipulate the industry to meet the interests of a few.

Industry regulations and the discretion of the ruling government regime also challenge the development of assets in inland basins. The conditions set by the administration has made the transition from Oil Prospecting Licenses (OPLs) to Oil Mining Leases (OMLs) unattractive for licensees; therefore, a significant portion of these assets remain unexploited. Incentivising development entails the industry introducing a regulation that specifically addresses the exploration of inland gas resources, especially as it relates to power generation. Such regulation should make adjustments to significantly relax the pre-conditions for OPL to OML conversion, provided the gas produced is for power generation. Furthermore, the regulator should aim fiscal measures at further incentivising the sole-risk investments in inland basin gas development.

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Fiscal Considerations

The current fiscal structure ties the recovery of gas income to oil production and discriminates against companies without oil operations. Such a situation is a disincentive for further gas exploration. The National Gas Policy has proposed a new framework that recognises gas as a standalone value chain. Although the Nigeria Gas Policy is well-conceived, there is a need for implementation to be progressed and closely monitored. On a positive note, the proposed Petroleum Industry Bill will most likely include fiscal incentives that would attract investments in further gas exploration and development.

The gas framework should enable gas projects to be developed based on their value chain economics, rather than being dependent on oil taxation metrics. The framework should also provide an environment where pricing reflects market forces. Fiscal policies can also introduce more attractive terms for investment in inland activities. Such terms can include more favourable production allowances for Production Sharing Contracts, reduced royalty rates and reduced hydrocarbon taxes for gas production.

Pricing and Agreements

Price regulations in energy markets intend to limit the monopolistic tendencies of producers and utilities from making excessive price demands that do not align with investments. Based on the Petroleum Act (PET 1969), the Federal Government has the powers to approve the pricing for the electricity market. Nevertheless, a state-regulated pricing approach is a disincentive to investments for further inland gas exploration for power generation.

Power producers in the domestic market have built a track record of not being able to pay for gas supplied due to the liquidity crisis in the electricity industry. Initially, the government used gas price control as a tool for incentivising investment in electricity generation. The price control achieved its objectives when international gas prices were as high as $15.46/MSCF in 2008 or $6.22/MSCF in 2010. Now that international gas prices have dropped to beneath the $2.00 mark in 2020, such incentive has become redundant. Considering new realities for gas pricing, the government should shift from using price control as a tool for incentivising investment. Instead, the policy thrust should be towards encouraging competitive markets. Facilitating a competitive electricity market will improve liquidity, which will, in turn, enable power producers to pay for gas supplied.

Gas pricing for inland basins should be agreeable to both producer and power generator. The gas and electricity industry pricing regulations need to align to enable fair and competitive pricing, without necessarily resorting to domestic gas supply obligations (DGSOs) and the government set pricing in the form of price caps. The industry regulator should liberalise regulations to allow for a willing-buyer willing-seller transaction model, where the gas and power producers agree on pricing.

Gas supply Agreements (GSAs) between suppliers and power producers have to be active and transparent to encourage the development of gas for power generation. The contracts for gas to power agreements should go beyond reasonable endeavour where a supplier is only obligated to fulfil its agreements when it is commercially reasonable. Instead, such contracts should clearly define what being ‘commercially reasonable’ entails, to clarify areas where both parties take responsibilities for their roles. Agreements should guarantee a realistic return of investment for gas supply to power producers.

Finance and Infrastructure

The development of gas production and processing facilities, as well as power generation facilities usually entails high infrastructure costs. Potential investors and developers can consider staged development processes to fully utilise assets while ensuring supply security and optimum recovery of investment. Power generators can consider building modular power plants that can grow in capacity to serve surrounding regions and industrial clusters. Such projects would be easier to finance and take less time to realise compared to more significant projects. Some industry experts have cited delivery times of smaller power plants at about 12 months compared to the 3 to 5 years it requires to deliver the bigger power plants. Constructing power plants near the gas producing and processing plants will reduce pipeline transportation infrastructure and operation costs. Developing smaller projects also means that different investors can handle multiple power plants simultaneously.

Conclusion

The current industry operating conditions are unattractive for gas sales to the domestic market, including power. As a result, many producers would not consider it viable to develop upstream gas discoveries based on gas sales into the local market. Therefore, to enable further inland gas basin exploration for power generation, considerations to incentivise investors and operators should be in place in the regulatory framework, fiscals, pricing and agreements and infrastructure and finance. The starting point in the race to utilising existing inland reserves is for the industry to identify an active regulator for the gas industry. Besides, the Electricity Supply Industry must be made financially viable and able to pay its bills
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