Nigeria has an ambitious target to ramp up domestic gas utilisation by five billion standard cubic feet per day (bcf/d) by 2021 and is urging new investments in the gas sector but yearly power sector debts of $950million threaten to rain on the country’s parade.
Austin Avuru, Seplat’s Managing Director and CEO who is also a key gas producer in Nigeria, in a presentation at a gas conference hosted by Aelex, a full service commercial & litigation law firm, organised by the Association of International Petroleum Negotiators (AIPN) on February 15, in Lagos to discuss the up and down sides of domestic gas production and utilisation in Nigeria, says urgent action is now required to rescue the power sector.
Avuru said that GenCos owe domestic gas producers $350million annually, while DisCos owe the sector about $600million annually, due to insufficient revenue collection, making it difficult for more operators to invest in the sector.
The chief use for gas in the domestic market is for power generation as industries while needing gas, do not have sufficient capacity to take the volumes required to keep the market liquid. However, the power sector which has capacity, is cash challenged with shortfalls close to N1trillion, according to the government’s power sector recovery plan.
This situation spells danger for Nigeria’s plan to ramp up domestic investments which help raise volumes used locally, because the other alternative users, industries are compelled to buy gas at a fixed price of $7.30/mmbtu, while gas sells in the international market at $3.30/mmbtu. Local gas producers are forced to sell to power plants at less $3/mmbtu, and are being owed billions.
“This is why it is difficult to get new investments into the gas sector because the pricing model does not make it competitive,” says Chuks Nwani, an energy lawyer.
Through the ministry of Petroleum Resources, Nigeria is courting investors into the gas sector, saying opportunities abound, including in construction of infrastructure and distribution systems nationwide, exploitation of compressed natural gas (CNG), involving the use of tube trailers to deliver gas to consumers who are not close to existing gas facilities.
Other opportunities include gas as automobile fuel requiring new filling stations and conversion workshops to convert automobile engines from petrol and diesel to CNG.
These investments cannot however come about in a country with a gas policy that is focused on serving external markets. Major gas projects in Nigeria have been export-oriented, including the NLNG, Brass LNG, West African Gas Pipeline (WAGP), Mobil GTL, as such, to achieve domestic energy security requires a strategic re-balancing of the mix.
Speaking on why demand supply obligation for the local market, and a controlled price were set for the sector, David Ige, CEO of GasInvest Limited and a former group executive director of the Nigerian National Petroleum Corporation (NNPC), who was instrumental to the drafting of the Nigerian Gas master plan, said such policies were required at the time, to stave off the crises of power plants without feedstock.
“But the sector has now become ripe to run on market terms,” says Ige, basing this view on the ramping of domestic gas from 197 million scf/d in 1999 to about 573 mmscf/d in 2004 and 1.3bcf/d in 2017.
Avuru agrees with this perspective up to a point, “In my view, every producer of gas must guarantee that a certain volume should go to the domestic market but when you get to commercial terms and you start saying domestic gas must be priced at certain price, that is where there is a problem. We have executed all our contracts at arms-length, willing buyer- willing seller basis.”
Sina Sipasi, partner at Aelex, who was among the panel members said the critical actions required for Nigeria is to enact gas terms in the Petroleum Industry Bill (Commercial, fiscal and regulatory terms), set realistic goals and have the political will to enforce the domestic gas supply obligation.
“It is also important that we develop a business friendly environment that will help gas investments to thrive,” said Sipasi.
Avuru, charged Nigeria to move away from relying on gas as a source of income to a source of energy. An orientation of gas as source of revenue inspires policy decisions directed towards a sole reliance on production royalty, taxes and levies and sharp focus on exports. This exposes the national economy to commodity price shocks.
Meanwhile, turning the focus to gas as a source of energy, policy direction would shift to fiscal terms that encourage investment and production which will lead to higher tax receipts from the full value chain. This will also ramp up domestic utilisation with gas utilisation firing up power plants and industries critical for economic development.
Furthermore, gas as a source of energy would improve refinery utilisation rates, helping to reduce scandalous amounts of money burnt on imports of petroleum products.
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