In pursuit of gas based industrialisation

Nigeria aspires to produce at least 46,000MW of electricity from gas by 2020 as well as power its industrial development. Nigeria’s 183 trillion cubic feet of gas (or 32 billion barrels of oil equivalent) can catalyse economic prosperity.

We firmly agree that this aspiration, this bold objective, makes sense in every Nigerian ethnic language because, as industry watchers confirm, “Nigeria has a huge potential to become an important gas player”.

The goal of Nigeria’s gas master plan is to make it the regional hub for gas-based industries by 2014. Nigeria has the largest proven gas reserves in Africa, it is the 9th largest global gas producer and there is an underserved domestic market whose demand for power consumption is rapidly increasing.

Lagos, for example, requires 10,251MW to power homes, commercial activity and industries. Currently Nigeria’s commercial capital is allocated a paltry 850MW.

The benefit of exploiting this potential is not lost on businesses: Dangote Cement’s expansion strategy is based on efficiency, using state-of-the-art technology, and low cost production, using gas.

The Roadmap for Power Sector Reform projects a total income benefit of $145bn a year if Nigeria generates 40,000MW by 2020. Meeting this target would require supplying 7 to 8 billion cubic feet of gas a day. Other benefits include: savings from lower tariffs and subsidies avoided, savings from switching from diesel/petrol generation to grid power and new business activities that spring up from filling the underserved energy gap.

However, insufficient gas supply, absence of infrastructure i.e. from upstream gas fields to main domestic consumer regions, and regulation of gas prices are slowing down Nigeria’s gas-powered aspirations. Nigeria flares 2 billion cubic feet of gas daily and abundant gas in the east needs to be piped to the west where there demand is.

In addition, industry experts warn that the current fiscal terms of the petroleum industry bill may scuttle Nigeria’s gas-based industrialisation potentials. They contend that the terms are much harsher than current terms and render majority of new gas projects unviable.

They also add that the imposition of Domestic gas Supply Obligations (DGSO) without addressing key issues such as infrastructural deficit and low pricing will not increase supply for power generation.

Currently the regulated price of gas is $1.5 per million British thermal units (mmBtu) is considered too low to make gas-to-power projects economically viable. Investors contend that an inappropriate price will stall the value chain, i.e. the development of gas fields, gas processing and transportation, power generation, transmission and distribution.

Gas is a crucial link in this chain. Without enough power, distribution companies (Discos), the closest in the value chain to consumers, won’t be able to meet their revenue requirements and, as a consequence, the money to fund their operating and capital expenditures which is necessary to improve electricity supply. Like any complex network, the electricity industry is as strong as its weakest link.

We thus commend the efforts of the Nigeria Electricity Commission (Nerc) to undo this Gordian knot. Firstly, through its “embedded generation regulation” initiative, a short-term solution that will allow modular or captive power plants to sell power directly to Discos, by-passing the Transmission Company (Transco). Secondly, the regulator’s willingness to accept gas supply contracts over and above domestic supply obligations is also welcome.

We urge the ministry of petroleum resources to complement Nerc’s “incentive-based” regulatory process-based approach to solving structural problems in the sector. It will enhance the gas market.

One of the many strategies of Seplat, an indigenous independent oil and gas company which recently announced plans for an Initial Public Offering (IPO) on the Nigeria Stock Exchange, is to monetise of its “significant existing gas reserves [gross average production in 2013 was 99 million standard cubic feet] over and above its domestic supply obligations by selling to commercial ventures in Nigeria such as power plants and manufacturing plants”.