Falling gas investments raise calls to de-risk sector

Experts say the dwindling fortunes of Nigeria’s gas sector can be salvaged through policies delibrately tailored to deepen gas exploitation and commercialisation, ensure incremental reserve addition and address fiscal terms through the  passage of a sector-wide bill.

Militancy has cut supply of natural gas to the domestic market by half, to about 700 million standard cubic feet per day or 16 percent and even oil and gas companies now struggle to meet their gas supply obligations which has fallen to 23 percent compliance, according to the Department of Petroleum Resources (DPR).

Analysts say investments to increase gas supply have been stalled due to fiscal and governance issues and challenges of commercialising gas. This has impacted on the development of new Liquefied Natural Gas (LNG) trains and crimped manufacturing.

“Stability in policies and a legal framework is the critical consideration here. Although security is a big issue, uncertainty in the legal and fiscal frameworks makes it impossible for capital to flow. Investors and entrepreneurs can model risks but not uncertainty,” Isreal Aye, oil and gas consultant and managing partner of SterlingPartnership, told BusinessDay.

Aye further said, “The major impact of this uncertainty on investors from the perspective of their financiers is that lenders are unable to conclusively ascertain the approvals that are required for the creation, perfection and (where necessary) enforcement of security interests in respect of oil and gas assets.”

Analysts say commercialising gas in Nigeria is problematic due to contradiction in pricing. While domestic gas pricing under the Domestic Supply Obligation, which is gas supplied to power plants is $2.50/mmscf, international gas prices according to the Henry Hub spot price index is $2.94/mmbtu but commercial gas price, supplied to manufacturers and industries is set at $7.38/mmscf by the Petroleum Minister for 2016.

“Today, due to the exchange rate being so high, buying gas at commercial price of $7.38 makes production quite unattractive. It is therefore more profitable for most of the industry to discontinue buying commercial gas for their own power generation and rather take power from the Grid which, as it is today, is still selling power under the old business model assumption of $1=N200 for Domestic Gas Supply,” Chuks Nwani, an energy lawyer told BusinessDay.

Also, the inability to resolve fiscal and governance issues has been traced to the non-passage of a petroleum industry bill. While northern legislators challenge the inclusion of a 10% host community royalty to oil producing states, who already have a 13 percent derivation, southern legislators have vowed not to support the bill if the provision is removed. The Bill has now been broken into three segments – governance, fiscal and the petroleum sector aspect that will touch on upstream, downstream and midstream.

“The lack of passage of PIB has made it difficult to resolve fiscal issues in the upstream sector. Commercial terms for gas in Production Sharing Contracts are not defined and operators are at a loss as to what to do with the gas,” said Dolapo Oni, Head of Energy Research at EcoBank.

Wesley Omonfoman, an energy consultant said that to deepen domestic gas consumption, the issue of gas supply needs to be addressed first. “Passage of the PIB to spell out clear fiscal terms for new gas development projects, particularly non associated gas development projects is sorely needed,” he told BusinessDay.

A lack of market reflective gas pricing has resulted in dearth of gas for domestic consumption and this has impacted power generation which only rose to about 4,000 megawatts on the back  of rising water levels in hydo power plants and increased availability of gas. Within the past two months, about a dozen power plants across the country have been shut down on account of lack of gas.

“Presently, it is estimated that natural gas accounts for more than 80 per cent of Nigeria’s fuel needs. It is important that there is an increase in the percentage of domestic consumption of gas particularly as shortage of gas has led to poor power generation from the Gencos, amidst the challenges faced with the gas infrastructure especially in the Niger-Delta region of the country,”Ayodele Oni, a legal practitioner specialising in international energy investment law and policy told BusinessDay.

Industries are also feeling the squeeze. In May, the activities of Niger Delta militants led to disruption of gas supply to about 87 manufacturing companies in Agbara Industrial Area in Ogun State. This led to a spike in production cost and consequent rise the prices of consumer goods. Manufacturers cite gas constraints in the recent 67% hike in the price of cement.

“The Federal government should provide payment guarantees to gas suppliers who provide gas to power plants. At the moment, gas suppliers are owed billions of naira by the power sector and this has affected their ability to provide more gas on a firm basis to the power sector,” Omonfoman suggested as interim solution.
Ayodele Oni also said that initiating regulations geared towards addressing shortcomings in the sector and ensuring a full implementation of the Nigerian Gas Master Plan policy document will also help.
“A combination of these strategies will culminate in a more robust sector. The speedy execution and delivery of a number of on-going infrastructure projects is inevitable. It is incontrovertible that the challenges faced in the gas sector have to be handled with all seriousness and all hands should be on deck to address the issues plaguing the sector,” Oni said.
Ambrosie Orjiako, chairman of Seplat Petroleum Development Company, at the recently concluded Africa/Singapore Business Forum hosted by the International Enterprise (IE) in Singapore, said that gas has the potential to transform Nigeria economy if it is harnessed properly.

“What is expected is that the right fiscal discipline to channel the associated savings to the real sector, particularly in infrastructure, manufacturing, agriculture will evolve. Gas is at the center of this transformation because in Africa, the power infrastructure gap is the biggest barrier to real growth. The huge deficiency in power presents a huge investment opportunity with good headroom for returns on investment,” he said.