Phillip Ihenacho is the chief executive officer of Seven Energy. In this interview on the sideline of the Nigerian Oil and Gas Conference in Abuja with Frank Uzuegbunam, editor, West Africa Energy, he spoke on the opportunities and challenges facing the Nigerian domestic gas market, milestones attained by Seven Energy, among other issues. Excerpts:
Congratulations on the successful commissioning of the Uquo Gas Processing Facility. Since the official commissioning by President Goodluck Jonathan, how has the journey been?
One of our key areas of focus since the official commissioning has been to connect our gas infrastructure with that of NGC’s in the area of our operations to allow us to deliver gas all the way from Eket, where the Uquo Gas Processing Facility is located, and via our Gas Receiving Facility at Ikot Abasi, to Aba, Port Harcourt and Calabar. This project has already been completed and we are in the process of commencing the supply of gas to the Calabar NIPP power station and the Alaoji NIPP power station, in addition to the UniCem cement plant, the Ibom Power station and the Notore fertilizer plant, which we are already supplying through our gas infrastructure.
Considering the potential power generation capacity of the Calabar NIPP power station of 560 Megawatt (MW) and the Alaoji NIPP power station of 1,000 MW, there is in excess of 1,500 MW of power generation capacity awaiting gas supply and to be added to the national grid upon the commencement of the supply of gas to these power stations. This will significantly increase Nigeria’s generation of power.
What is your assessment of the domestic Nigerian gas market, given your experience to date?
The domestic market for gas in Nigeria is potentially very large. When you talk about gas, you are talking about energy. Most consumers of diesel for electricity generation could be gas consumers. If those who are running diesel generators at a very high cost and using a source of fuel that is very damaging to the environment could move to gas, the demand will be huge. The only challenge is the significant gas infrastructure deficit that Nigeria is currently experiencing. There is no shortage of demand but a shortage of gas infrastructure which is required in order to deliver gas to the end customers.
So, what are the key opportunities and challenges?
The key opportunity is in the supply to the power sector, the industrial sector and even the transport sector. Most forms of transport, whether it be buses or lorries, can move from consuming diesel to gas. Compressed natural gas is a much better option for the environment. It is also cheaper. The key challenge is that unlike diesel, where all that you need to do is put it on a lorry and transport it by road, gas is much more difficult to transport and to reach your end customer. Gas is most effectively delivered by pipelines, which means that you have to build pipelines in the ground to reach your end customers. It is possible to deliver some quantities of compressed natural gas or liquefied natural gas by road but those quantities would be relatively small.
To be able to deliver gas to major power stations, you would need a medium- to long-term strategy focused on delivering the necessary gas infrastructure, connecting supply with the demand. Construction of gas infrastructure takes time and skill. Construction of pipelines is particularly challenging and you face not only construction risks but also community and right-of-way issues. When handled with care, these issues can be overcome, but it takes time and commitment. We have invested heavily in our community relations and we have learnt through years of experience how to effectively lay pipelines and what good community relations are all about.
In summary, with the strong demand profile, the opportunity is great, but dedication to a medium-to-long-term strategy, supported by a strong community relations programme are key to be able to benefit from this demand curve and opportunity.
During your presentation at the NOG Power Forum, you made a statement that the future of the power sector reform is tied to meeting the deficit in the supply of gas. Can you shed some more light on this?
From the perspective of a gas producer and supplier, the single biggest source of demand will come from the power sector. If you are trying to do well in the gas business, some 50 percent of your customers are going to be power customers and your fortune is going to be tied to your customers’ fortune. If your customer is not doing well, indirectly it will affect you.
What has happened historically in Nigeria is that we have had a tradition of non-payment throughout the whole power sector, as well as illegal tapping of electricity lines. What this has meant is that the distribution companies have not been able to collect money for the electricity. The spiral effect is that the distribution companies are not paying the money that they are supposed to pay to the generating companies to generate electricity and the generating companies are not paying for gas supplied to them. So at each level of the chain, you have a tradition of non-payment and unless this changes, we have a huge problem in Nigeria. We must have a “Gas to Power” sector that works and for it to perform and operate as it is done in any other viable industry. The fulfillments of payment obligations will also further the investment levels in the sector.
Therefore, one of the key challenges that we have, as a company, is to ensure that we are very careful about how we contract with our customers. We make sure that we put in place signed guarantees and other means of making sure that our customers will pay us when due. Fundamentally, we need the power sector to work commercially throughout, so we need the customers to pay for their electricity and electricity companies to pay for their gas.
Vandalism is a major problem threatening the operators in the oil and gas sector. How do you overcome this issue, particularly as vandals do not discriminate between a gas pipeline and one that carry oil?
We have undertaken heavy upfront investments to minimise any such issues, and in particular on our community relations. We liaise closely with our local host communities close to our pipelines and carefully explain that it is gas pipelines that are going to supply a nearby power station to generate electricity for the communities themselves. We also highlight that gas pipelines are very dangerous and if you tap into it, you and many others can get killed. As a result, the local host communities affected by our operations are fully aware of the nature of our pipeline infrastructure and that it is impossible to steal anything from these pipelines.
We also partner with our local host communities to provide security and clearing the right-of-way. Interestingly, it is our experience that if you get a local host community on your side who clearly understand that it is a gas pipeline, they will leave it alone. Most of what we call vandalism is really the outcome of desperate people who are looking to find a means of extracting value, so if they know there is no means of extracting value, they would not waste their time or endanger their lives tapping into a line that has no value.
What impact would PIB, if eventually passed, would have on the gas market in Nigeria?
The biggest issue is to ensure that the power sector reforms works and that we have a viable and a bankable power sector. It is hugely important that the power sector is able to pay for their gas. There are clearly some elements of the PIB that will help, such as having a regulatory regime that has a specific provision for gas. However, although this is helpful, the fundamental issues are around the bankability of the power sector.
What are the critical factors for achieving success in “gas-to-power” in Nigeria?
There are three main factors for achieving such success. Infrastructure is the first factor. What most people should realise is that when we talk about the need for gas, what we are really talking about is the need for infrastructure. You cannot deliver gas in large volumes unless you are building pipeline infrastructure. The second factor is availability of capital.
In order to achieve such development of pipeline infrastructure, we would need long-term capital for investment in such infrastructure and such long-term capital will not be available unless investors can see customers who are bankable and that are going to honour long-term contracts. Those customers would need to be in the power sector. The power sector must become bankable and must be willing to honour long-term gas supply agreements. The third factor is the community. Local host communities, close to such pipeline infrastructure, would need to be supportive of what we are doing in the gas sector.
