5bn cubits domestic gas demand threatened as low incentives scare investors

Government involvement in pegging unrealistic prices for gas may forestall Nigeria chances of achieving 5 billion standard cubic feet (scf) of domestic gas demand projection in 2017, BusinessDay investigations have revealed.

Analysts believe that achieving the desired result in local gas demand depends on implementation of a Gas Purchase agreement per contract, as the domestic gas market evolves. But absence of an enabling business environment in the gas sector is also not helping matters, and can contribute to forestalling the projection.

They say to achieve 5-billion scf local gas demand projection, the domestic market must be made attractive to investors who need to invest huge capital upfront in gas processing and pipeline for distribution.

Gas demand for power in Nigeria could reach 5 billion scf by 2017, says Rolake Akinkugbe, head, energy and natural resources, FBNQuest, but however points out that supply is likely to fall short due to limited incentives for companies to invest in gas processing plants and pipelines to supply the local market.

According to Akinkugbe, “The government raised the price of gas from $1.80 per MMBTU to $2.50 per MMBTU in August 2014, but more than 50 percent of Nigeria’s 6 billion scf daily production is still exported as LNG and another 2 billion scf is either flared or re-injected into oil wells. Less than 2 billion scf is being used domestically for industrial and power generation use.”

Akinkugbe opines that improved gas prices can help secure off takers for produced gas at higher price, although the regulated price of electricity will still hinder the ability of power plants operators to raise the price of feedstock.

“Given the sheer demand for gas, the prospects are bright, but whether that gas can reach its desired market is a completely separate issue,” she adds.

Statistics indicate that Nigeria remains very strong in terms of gas production, as production hasn’t drop by any significant margin since the global crude oil price drop started.

Recent figures show that Nigeria currently produces 7 billion scf per day. 43 percent of production is either re-injected or flared without any commercial benefit, another 43 percent is exported via NLNG, WAGP, etc. Only 13.3 percent is consumed locally of which 8.9 percent is allocated to gas-to-power.

The solution to this is simple and not in any way complicated, a local gas market without government interference in pricing will definitely be attractive to investors, Kareem Jubril Adedayo, an energy expert with Ecobank, observes.

Kareem notes that government determination to keep cost of electricity low is hindering this development, as a cost reflective gas price will translate to higher tariff for electricity consumers.

Industry analysts are of the view that Nigeria’s gas development in the medium term could derive much from local demands as from export, if not in volume but in value. Nigeria is endowed with abundant gas resources and the sector holds huge potentials for unprecedented growth, he however observes that the existing legal and regulatory framework, written primarily for oil, does not provide robust technical and commercial framework for gas.

On his part Dozie Arinze, an energy policy and strategy specialists insists that the key to unlocking this growth potential in domestic gas with all its predictable benefits will be government getting away from unrealistic prices.

They are optimistic that the quantum value gain from the combine price increase and the demand from the power and industrial sector will outstrip LNG, which will remain constrained by new supplies into the global gas market.

Adedayo is however optimistic that in the long run when such investments are matched by improvement in power generation and transmission price will definitely find a lower level than the expected interim surge should the government decide to deregulate the industry.

“There are some levels of improvement among local gas producers and I expect them to be the major driver of local gas market. Producers with high gas production are likely to begin commercialisation to cushion the effect of revenue drop from crude oil production. I also expect a push for higher gas price among producers supplying power plants, although I believe export and non-commercialised gas are still going to dominate the industry,” he says.