With growing global investments in oil and gas, experts are recommending ways Nigeria can monetise her vast gas reserves estimated to be about 600 trillion cubic feet. As some NLNG contracts are elapsing soon, new ones are not being developed and investors are pulling out on account of political meddling and untidy fiscal framework, ISAAC ANYAOGU, writes on options to leverage gas investments to salvage Nigeria’s dipping economy in the face of oil decline.
Global oil market declines have fuelled calls for diversification of the Nigerian economy. However, industry experts recommend gas as one of the best alternatives. However, strategies to promote gas investments have been stalled by needless political meddling and untidy fiscal framework. This has stymied the prospects of harmonising the interests of partners in various Liquefied Natural Gas (LNG) projects in the country.
Three LNG projects with over $37billion worth of investments are awaiting Final Investment Decision (FDI). These are Olokola LNG ($10billionn), Brass LNG ($15billion), and the Nigerian LNG Train 7($12billion). Olokola LNG project with a 12.6 metric tonnes capacity was stalled because the international oil companies (BG, Shell and Chevron) withdrew from the project. The 10 million metric tonnes annual Brass LNG project ran into troubled waters when ConocoPhillips withdrew from the project in 2013. NLNG train 7 has been in the works for years. Industry operators are urging NNPC to go ahead and develop one with the experience acquired in Nigerian LNG.
Fiscal regime for gas
LNG contracts are mostly long-term; plants are built only when there is a supply contract that is equivalent to the life of that asset. Contracts range between 20 and 25 years. Trains 2 and 3 of the NLNG will lapse by 2021.
The gradual shift away from long-term contracts in the global LNG market to spot and short-term (less than four-year duration) contracts have been on the rise since year 2000, making up about 25% of the market since 2011. LNG markets are increasingly becoming liquid due to greater participation of new suppliers and customers.
The implication is that Nigeria needs to re-think her gas fiscal regime. Experts have consistently called on the government to stop fixing gas prices, stating that it hinders investments and affects domestic supply.
“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 productions are 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,” said Rolake Akinkugbe, head, Energy and Natural Resources, FBN Quest.
Gas – a profitable enterprise
Meanwhile, gas is a strong catalyst for growth and multiplier effect on the economy of nations who monetise it. According to a report by the International Gas Union (IGU), total Liquefied Natural Gas (LNG) trade in 2015 reached 244.8MT, up 4.7MT from 2014 and the largest year ever for the trade, even surpassing previous high of 241.5MT achieved in 2011.
“Natural gas accounts for roughly a quarter of global energy demand, of which 9.8% is supplied as LNG. The 2016 IGU World LNG Report shows that major expansions of LNG supply through 2020 positions LNG to further increase its market share,” said David Carroll, President of the IGU.
Even local experience has shown that monetising gas is a profitable enterprise. Between 1999 and 2013, NLNG has converted 133BCM (Billion standard cubic meters) or 4.68TCF of Associated Gas (AG) to export products (equivalent to more than 1630 LNG and NGL cargoes) which otherwise would have been flared.
Babs Omotowa, NLNG managing director said that between 1999 and 2014, Nigeria received $24billion in revenue and dividends from its operations in Bonny Island. $13 billion of the amount was earned as dividend for Nigeria, while $11 billion was raked in from the sale of feed gas. Last year, Nigeria earned about $3.2 billion from its LNG operations.
With six trains currently operational, the entire Nigeria LNG complex is capable of producing 22 million tonnes per annum (mtpa) of LNG, and 5 mtpa of NGLs (Liquefied Petroleum Gas [LPG] and Condensate) from 3.5 Billion (standard) cubic feet per day (Bcf/d) of natural gas intake.
Geologists claim even this is far lower than Nigeria’s capacity where gas reserves are potentially up to 600 tcf (trillion cubic feet), if companies deliberately explore for gas, as opposed to finding it while searching for oil. Gas flares continue because IOC’s with exploration licenses treat gas as a nuisance proffering to pay penalties for flaring rather than monetise the resource.
According to the NNPC, Nigeria lost $518million last year due to gas flares of 271.38 billion standard cubic feet of gas flares at the current gas price of $1.91 per 1,000 standard cubic feet. Environmental rights group insist that what is flared is actually more than what is reported. In any case, few would agree it makes economic sense to burn what you can sell.
Oil and gas companies operating in Nigeria were fined a paltry N1.81 billion in nine months between January and September 2015, for failure to comply with the Federal Government’s directives on gas flaring according to data released by the Central Bank of Nigeria (CBN).
“Gas flaring is a preferred option for oil companies as it is cheaper to pay fines than investing in the technology required for reinjection of the gas flared back into the ground,” said legal expert, Toyese Adenipekun, Principal Partner at McCoy Barristers & Solicitors.
Low crude earnings make a case for better gas engagement
In recent times, Nigeria’s crude oil earnings have been facing sharp declines, and investments in crude oil exploration have plummeted.
“There has not been any significant investment in Nigeria’s oil exploration in the past ten years. We are fast depleting our oil reserves and are not trying to explore new fields,” said Israel Aye, oil and gas consultant and managing partner, Sterling Partnership.
In 2014 when oil prices hovered above $100 per barrels, Nigeria raked in $88 billion while revenues fell sharply by $36 billion in 2015, according to an International Monetary Fund calculation.
Industry watchers say revenues will fall further in 2016 as oil prices have dipped below $50 and Nigeria’s output have seen over 800,000 per day loss due to renewed militancy.
“The problem with Nigeria’s engagement with oil is that it is not engaging fully with the entire value chain,” says Dauda Garuba, Nigerian officer for Natural Resource Governance Institute (NGRI). “No nation ever succeeds by exporting crude oil without adding value. Nigeria should focus on gas because it has more opportunity to add value,”
Emeka Ene, chairman, Society of Petroleum Engineering (SPE), Nigeria Council said there is need to identify and secure Nigeria’s closest markets and develop an integrated flare-out model.
He said government should implement the pipeline network code, fast track captive power and inaugurate gas powered public transportation to ensure accelerating stranded flare gas monetisation.
“Private sector people respond well to incentives rather than penalties, hence to monetise gas, Nigerian government should provide incentives and get out of the way of business people,” said Yomi Fawehinmi, in a training session for journalists at Pan Atlantic University, Lagos.
Isreal Aye, further said, “We need gas for increased power generation as most of Nigeria’s power plants are gas fired plants. Gas can also serve us more as fertiliser as most of our land is undernourished. Gas for cooking is also essential.”
Analysts say Nigeria has some of the lowest penetration of domestic gas consumption. Nigeria is ranked lowest in sub-Saharan Africa in per capita usage of LPG, consuming 1.1kg compared with Ghana at 3.0kg; South Africa consumes 5.5kg; while Morocco consumes 44kg per capita.
ISAAC ANYAOGU
