Nigeria's leading finance and market intelligence news report.

The PIA and gas as transition fuel?

The global movement towards cleaner energy sources continues to put pressure on fossil fuel reliance. Nigeria is Africa’s largest producer of crude oil and gas with over 183 trillion cubic feet (TCF) of proven gas reserves. The Petroleum Industry Act 2021 (PIA) establishes, amongst other funds, the Midstream and Downstream Gas Infrastructure Fund.

What will be Nigeria’s future energy mix given the global outlook? Should Nigeria abandon its huge reserves? And how does the fund align with this future? This article answers these questions by proposing the adoption of gas as Nigeria’s transition fuel.

To give context, it is important to first explain – “Transition”, “Natural Gas” and “Energy Mix”. Transition generally means changing from one condition to another. It implies both a process and timing. The initial and end conditions as well as the process should be finite. Natural gas is a non-renewable hydrocarbon that can sometimes be associated with crude oil. It is used for electricity generation, heating, transportation and cooking.

Read Also: Buhari’s advisers kick against two oil sector regulators in new PIB

It is also a feedstock for manufacturing fertilizer, urea and plastics. Energy mix on the other hand is simply how various countries combine the primary sources of energy – Fossil Fuels, Renewables and Nuclear.

The big minus with fossil fuel is its emission of carbon dioxide which adversely changes the climate. Coal’s emission is nearly double of natural gas whilst crude oil emits 30% more than gas. Gas is therefore the cleanest of the fossil fuels. Renewables include solar, wind, hydro and biomass, all with a net zero carbon emission although some of the supporting components like batteries are made from fossils. Nuclear is clean but then it is the most dangerous and radioactive energy source when accidentally exposed. The Fukushima Daiichi nuclear disaster is a classic example.

To better protect the earth, the United Nations in 2015 declared seventeen Sustainable Development Goals (SDG). In particular, SDG 13 seeks urgent action in combating climate change and its impacts. This requires that economies shift towards carbon neutrality in order to arrest the increasing greenhouse gas emissions. Accordingly, 196 countries adopted the Paris Agreement in December 2015 with the aim of reducing global warming to well below 2 degrees Celsius by 2050. The implementation of the Agreement demands infrastructural and cultural transformations which is why it provides a framework for financial, technical and capacity building support amongst countries. It invited countries to formulate and submit by 2020 long term low greenhouse gas emission development strategies as well as Nationally Determined Contributions (NDC) that will be upwardly reviewed every five years.

As the world races towards a net zero carbon emission various countries have projected different timelines. The fastest identifiable group are countries whose energy mix is already less hydrocarbon dependent and these are considerably European. The second category comprises the most industrialised countries that are the highest emitters led by China, USA, India, Russia and Germany with their reluctance to abandon their coal deposits. The third category are developing countries whose low development indices cannot realistically match the timelines set by the first group.

For instance, Sweden, targeting 2045, is looking to become one of the first net zero countries in the world. It has a population of 10.4 million which in contrast to Nigeria is less than half of the population of Lagos Metropolitan Area. Sweden’s GDP (nominal) per capita and human development indices rank twelfth and seventh globally, respectively. Sweden enjoys nearly 100% electricity coverage with an energy mix that is dominated by hydro and nuclear sources. It is home to global brands such as Volvo, Ericsson and IKEA.

In comparison, Nigeria ranks very high both in global population and poverty. She currently has less than 50% electricity coverage and over 70% of her electricity generating assets are thermal, that is gas-fired, whilst the rest are hydro-powered. There is no doubt that the objective of the SDG13 and the Paris Agreement is both aspirational and commendable, but clearly, Sweden to Nigeria in relation to timelines is incomparable. Therefore, in considering a change in Nigeria’s energy mix from a high reliance on crude oil to predominantly renewables, this contribution suggests a thirty-year transition during which Nigeria deliberately optimises its natural gas.

To achieve this, three imperatives are suggested. First, Nigeria should lead the advocacy for special global consideration for fossil fuel rich developing countries such as Nigeria. To better understand the efforts towards meeting the long term goals, it is suggested that the Paris Agreement’s 2024 Enhanced Transparency Framework should be preceded by an evaluation of the support from developed nations to developing nations envisaged by the treaty. Without such support, the NDCs of those countries will remain unrealistic with illusory net zero timelines.

Secondly, the recently passed Petroleum Industry Act 2021 that prioritises gas usage must draw the right lessons from what is generally agreed to be the main failure of the Electricity Power Sector Reform Act 2005 (EPSRA). The power sector has failed to attract the necessary investments because recovery of cost is not assured through the combination of electricity prices that are not cost reflective and the poor guarantee on payment across the value chain of generation, transmission and distribution. Private investment decisions are predicated upon the assurance of a return on investment. In implementing the PIA, it must therefore become an over-aching priority to de-risk the whole gas value chain from upstream, midstream to downstream.

The good news is that the PIA has already set out, in comparison to the EPSRA, a pathway that offers certainty in gas price. This must be complimented by instilling financial discipline that guarantees payments within the industry. The transportation of gas, especially, is capital intensive because of the temperature and pressure requirements which is why investors must from the beginning be assured of payments down the stream. Without such a comfort the sector will fail to attract investments in an industry that is already characterised by a stiff competition for capital.

In this context, Section 52 of the Act establishes a Midstream and Downstream Gas Infrastructure Fund from 0.5% of both petroleum and natural gas sold wholesale. The fund will be deployed as equity investments in midstream and downstream operations infrastructure that aims to increase domestic consumption of gas in Nigeria and encourage private investments in selected high risk projects as well as reducing or eliminating gas flares.

Finally, a number of micro recommendations is pertinent to the Nigerian gas sector. Even though granular, they combine into a forceful variable in the successful optimisation of gas and the following mapping of the industry discloses these. The midstream, which spans refining and transportation, has in particular remained the least developed in Nigeria’s Oil & Gas value chain with a huge market potential for both revenue and employment. The Nigerian gas market is segmented into three: the power sector; the gas based industries; and the domestic consumer.

The under-performing power sector, even with the availability of natural gas, is regrettably characterised by evacuation issues, that is, in addition to the already discussed glaring matter of cost recovery. The transmission capacity of the national grid remains grossly inadequate. As an alternative, embedded generation for captive markets is beginning to gain increased consideration. The overall good news is that the electricity generating assets are substantially plugged into available gas supply and that if these other issues are mitigated then Nigeria can see electricity generation, transmission and distribution at installed capacities.

The Nigerian gas based industries have the highest market growth potentials. Currently, Nigeria produces about 8 billion cubic feet (BCF) of natural gas daily. The Nigerian LNG Bonny receives roughly 4BCF that is 50% of the daily natural gas production. The Bonny LNG currently has six operational trains and represents the nation’s most strategic investment since the nineties. 2.5BCF of produced gas is re-injected back mostly by Exxon-Mobil. 1.4-1.6BCF is used by other industries as well as for domestic use. About 600 MMCF of natural gas is flared.

One of the industrial off-takers of the 1.4-1.6BCF is Notore which is the earliest Nigerian manufacturer of fertilizer and requires 30 MMCF of gas daily. Indorama Petrochemicals with two operational trains and Dangote Fertilizer’s second train also in view each require 200MMCF of gas daily as feedstock. The Qua Iboe Terminal (QIT) pipeline is expected to feed the proposed Nigerian-Moroccan Urea joint venture in Ikot Abasi as well as other proposed industries. The Brass Fertilizer and Petrochemical Company has also signed its Final Investment Decision in the sum of $3.6m and is expected to come on line in 2024 producing 10,000tonnes of methanol daily. Nigeria currently imports all its methanol and, until recently, all its fertilizer.

To succeed, the Midstream and Downstream Gas Infrastructure Fund must be market driven and targeted by taking the following micro recommendations. First, major pipelines must serve and terminate in industrial clusters. Secondly, there should be a priority focus in growing the gas based industries which create about 100 employment per plant.

Its revenue and foreign exchange saving potentials will be critical to the economy. A growth in this industry can be sufficiently powered even in the short term by the otherwise re-injected gas and also the gains made in reduction in flaring anticipated under the PIA.

Thirdly, the Fund should aim to build infrastructure that enables private investments to develop the non-existent auto-gas sector. Nigeria must gradually embrace the global movement away from petrol or diesel powered cars to electricity or natural gas powered cars. Fourth, the Fund should enable the transportation, storage and distribution of cooking gas with a view to the consumer market expansion and the elimination of wood burning which otherwise contributes to deforestation.

The Midstream and Downstream Gas Infrastructure Fund represents a very strategic goal towards increasing reliance on gas. If judiciously deployed, the Fund promises to position gas as Nigeria’s transition fuel. A consistent industrial growth powered by natural gas will leap-frog Nigeria economically and developmentally to a position from where it can then begin to set very realistic carbon reduction targets. This means that in the medium term Nigeria’s reliance on oil will become very significantly substituted by gas thereby cutting the oil versus gas carbon dioxide emission by 30%.

In the long run, the anticipated economic stability will enable Nigeria to make a very critical investment in renewable energy and gradually reduce its total fossil fuel reliance. To be clear, this contribution recommends, on the basis of global trends and relevant provisions of the PIA, that Nigeria optimises its reliance on gas for the next thirty years as transition from crude oil to renewables. Ultimately, oil and gas will lose their significant share of the Nigerian energy mix. But then the question will still remain – if Nigeria will ever completely abandon its natural gas which arguably is safer than Sweden’s nuclear power, not to mention Chinese coal power?

Ukoha is an Energy Law & Management Consultant., 08033120677

Get real time updates directly on you device, subscribe now.