The Nigerian Gas Conundrum

Nigeria is a well-known leading oil producer and a key member of the Organisation of Oil Producing and Exporting Countries (OPEC). It is the highest oil producer in Africa and the sixth in OPEC. Nigeria currently produces about of 2.5 million barrels per day. While Nigeria is well known for its abundant oil resources, Nigeria is not as well known for its gas potential. Ironically, Nigeria appears to be more endowed in gas than oil. It is therefore not surprising that the gas sector has recently been receiving increased attention, especially with the dwindling fortunes of the oil business.

Nigeria’s gas reserve is put at around 180 trillion standard cubic feet (SCF). It in the top-10 bracket of the world in terms of its gas reserves and it is the leader in Africa. If its enormous gas potential is properly harnessed, Nigeria is capable of experiencing great developmental strides and growth that should naturally accrue to a country as blessed with so much abundant resources as Nigeria is. To achieve its potential, however, Nigeria has to overcome some critical challenges.

One of the ways of realizing income from gas sales is via Liquified Natural Gas (LNG). As stated in its website, “NNPC’s vision is to make Nigeria the leading Liquified & Natural Gas (LNG) producing nation in the world and to promote sufficiency in the domestic power supply.

“We intend to achieve this goal by monitoring the commercialization of Nigeria’s abundant natural gas reserves, reducing gas flaring, promoting viable LNG projects, power plants and associated gas projects”. This vision is far from being realized.

 

According to the website, The Federal Government has set the following objectives for NNPC as regards Gas production:

  • To monitor and expedite the commercialization and the development of Natural Gas for Domestic and Export markets
  • To protect the Federal Government interest in LNG & IPP ventures
  • To monitor and support all LNG and Independent Power Plants (IPP) ventures
  • To support NNPC Human Resource capacity building
  • To work towards achieving and sustaining “zero” flaring of Associated Gas
  • Promote the Nigerian Content.

Nigeria’s initial foray into the LNG market started with the establishment of the Nigeria Liquified Natural Gas (NLNG) plant. The facility is located in Bonny Island and  currently has six liquefaction trains with a seventh train planned to increase its capacity to more than 30 million tons per year (1,440 Bcf/y). It has enjoyed relative success, in terms of earning revenue for the nation and meeting the objectives of its establishment. However, other planned LNGs such as the Olokola LNG and the Brass LNG Limited are yet to take off and key members have divested, despite initial enthusiasm generated at conception..

Nigeria exports some of its natural gas via the West African Gas Pipeline (WAGP), which began commercial operations in 2011. The pipeline is operated by the West African Gas Pipeline Company Limited (WAPCo), which is owned by a consortium of Chevron, Shell and representatives of interests of Nigeria, Ghana, Benin and Togo. All has not been smooth in this axis too as gas off-takers, have not been meeting their payment obligations. Also, due to the need to satisfy the domestic market and disruption in operational areas in Nigeria, gas demand by the off-takers have sometimes not been met.

In 2009, NNPC signed a memorandum of understanding (MoU) with Sonatrach, the Algerian national oil company, to proceed with plans to develop a 2,500-mile pipeline – the Trans-Saharan Gas Pipeline (TSGP) which would carry natural gas from oil fields in Nigeria’s Delta region to Algeria’s Beni Saf export terminal on the Mediterranean Sea and is designed to supply gas to Europe. Due to various factors, including lack of political will, security concerns along the pipeline route, increasing costs, and ongoing regulatory and political uncertainty, this project is yet to take off.

The development of the Nigerian natural gas sector has been hampered by lack of infrastructure to monetize natural gas. Some associated gas (gas that are produced with oil) is currently flared. The inability of the Nigerian government (represented by NNPC) to meet its cash call obligations to its Joint Venture partners has contributed in large measure to this. Several flare-out targets have been set by the industry, but these have never been met due to non-availability of fund to develop the much-needed gas processing plants and gas pipelines.

The militancy in the Niger Delta area, where Nigeria’s oil and natural gas are produced from has also affected adversely the growth of the gas sector. Constant conflicts between local groups and attack on oil companies by locals seeking a share of the national wealth often lead to field shut-down and declaration of force majure in existing contracts and projects. This has made Nigeria a non-attractive sector for potential investors. Cost of operation due to insecurity has skyrocketed and making investment unattractive.

Uncertainty around legal and regulatory framework has also been the bane of development of the gas sector. In 2008, the government of Nigeria initiated The Petroleum Industry Bill (PIB), to re-organise the oil and gas industry, re-structure the Nigeria National Petroleum Corporation (NNPC) and codify new fiscal terms governing the oil and natural gas industry. Up to this moment, the Bill is yet to be passed into law due to various objections to its provisions by various interest groups. The IOCs are concerned that proposed changes to fiscal terms may make some projects commercially unviable, particularly deep-water projects that involve greater capital spending. The uncertainty created by the non-passing of the Bill into law has dampened enthusiasm and interest in investment in the gas sector.

In the last few years, because of the need to increase its power supply capability, the Nigerian government began to pay attention to the supply of gas for domestic use, especially to power generating plants operating within the country. This has led to imposition of what is termed “domestic gas supply obligation” on gas producers, as part of the new National Gas Master Plan (NGMP). By this, the gas producers are required to reserve certain proportion of their gas produce, for the domestic market. However, due to the very unattractive tariff structure for domestic gas (when compared with international gas prices), producers are very reluctant, to supply gas for domestic needs. Government has seen need to address this disparity between domestic and international gas prices and have started gradual increases of domestic gas prices with the ultimate objective of bringing it at par with the international ones.

With a new government in place, it is hoped that proper focus would be placed on re-positioning of the gas sector as a lever for development of the Nigerian economy. Natural gas and its by-products have the capability of aiding the growth of the other sectors of the economy particularly the power, manufacturing and the agricultural sectors. The new government should re-position the gas sector by tackling the challenges discussed above, as the sector has tremendous potential of facilitating rapid growth of the Nigerian economy.