Achieving local demand for gas prospects hinge on right pricing

From all indication, Nigeria remains very strong in terms of gas production as production has not dropped by any significant margin since the global crude oil price drop started.

Recent figures show that Nigeria currently produces 7 billion scf per day. 43 percent of production is either re-injected or flared without any commercial benefit, another 43 percent is exported via NLNG, WAGP etc. Only 13.3 percent is consumed locally of which 8.9 percent is allocated to gas-to-power.

Industry analysts are of the view that Nigeria’s gas development in the medium term could derive much from local demands as from export, if not in volume but in value.

They are optimistic that the quantum value gain from the combine price increase and the demand from the power and industrial sector will outstrip LNG which will remain constrained by new supplies into the global market from unconventional gas.

While it is not difficult to decipher that ultilisation of gas has assumed a new dimension for both economic and technological development this is even made manifest in business decisions as industries especially are seriously embracing gas as alternative source of energy generation with the with the recent shortfall in electricity.

Analysts believe that achieving the desire result in local gas supply or the lack of it will remain a very sensitive issue with government involvement in unrealistic prices.

  They insist that to achieve the local gas demand projection, the domestic market must be made attractive to investors who need to invest huge capital upfront in gas processing and pipeline for distribution.

The Nigerian Gas Master Plan

According to the gas master plan document, it aims to create a structure that will enable Nigeria to leverage on the multiplier effect of gas on the economy, consolidate Nigeria’s position in the high value export markets, and manage the gas asset for national energy security. These objectives are to be achieved through focus on four key areas.

Firstly, a short term gas availability that will focus on meeting immediate power sector requirements, jump-start the domestic gas-based industries and more importantly, provide a base load of domestic gas volumes that will underpin a major investment in gas infrastructure.

It is anticipated that this will set the tune for a sustainable commercial framework underpinned by “credible and enforceable gas contracts, and a price regime that is commercially driven and recognises the long term affordability across different buyers.”

This is expected to encourage investment in building a domestic gas infrastructure that will ensure accelerated supply growth in line with demand growth. Part of the plan is also to introduce a gas-based economy in the Niger Delta, to drive a rapid industrialisation and ownership amongst the states and host communities.

Domestic gas obligation

The aspiration for putting in place a Domestic Gas Supply Obligation Regulation is that at a national planning level, the energy requirement for the country will be rigorously determined for various planning horizons – five years, 10 years, and so on.

This plan according to NNPC sources will stipulate power requirements, gas and other petroleum product requirements to meet the long run economic aspirations of the federal government.

The domestic gas supply obligation mandates all oil and gas companies to set aside a pre-determined amount of gas to the domestic market. However the source stresses that the reality still remains that no commitment will be made to investing in the plan by the companies unless valid gas supply and purchase agreements (GSPA) are in place.

Analyst indicate that with these developments in the gas sector as well as the transformation in the upstream, it is believed that energy sector driven initiatives could contribute up to 60 percent towards doubling of the nation’s GDP over the next 10 years.

Experts view on gas pricing

Wumi Iledare, Director of Emerald Energy Institute, University of Port Harcourt, Rivers State observes that the Gas market is still evolving adding that perhaps a Gas Purchase agreement per contract can help as the domestic Gas market evolves.

According to him, “Export parity pricing with respect to LNG may not be the best way to go if the domestic market is to be expanded for gas.  This is intertwined with the tariff paid by Electricity Consumers as well, more so if Gas remains the primary input for Power Generation”.

Gas demand for power in Nigeria could reach 5 billion scf by 2017 observes Rolake Akinkugbe, Head, Energy and Natural Resources, FBN Quest. She however pointed out that supply is likely to fall short due to limited incentives for companies to invest in gas processing plants and pipelines to supply the local market.

According to her, “The government raised the price of gas from $1.80 per MMBTU to $2.50 per MMBTU in August 2014, but more than 50 percent of Nigeria’s 6 billion scf daily production is still exported as LNG and another 2billion scf is either flared or re-injected into oil wells. Less than 2billion scf is being used domestically for industrial and power generation use.

Akinkugbe opine that improved gas prices could help secure off takers for produced gas at higher price although the regulated price of electricity will still hinder the ability of power plants operators to raise the price of feedstock.

“Given the sheer demand for gas, the prospects are bright, but whether that gas can reach its desired market is a completely separate issue” she added.

The solution to this is simple and not in any way complicated, a local gas market without government interference in pricing will definitely be attractive to investors Kareem Jubril Adedayo, an energy expert observes.

Kareem noted that government determination to keep cost of electricity low is hindering this development as a cost reflective gas price will translate to higher tariff for electricity consumers.

He is however optimistic that in the long run when such investment are matched by improvement in power generation and transmission price will definitely find a lower level than the expected interim surge should the government decide to deregulate the industry.

“There are some levels of improvement among local gas producers and I expect them to be the major driver of local gas market in 2016. Producers with high gas production are likely to begin commercialisation to cushion the effect of revenue drop from crude oil production. I also expect a push for higher gas price among producers supplying power plants, although I believe export and non-commercialized gas are still going to dominate the industry” he said.

On his part Dozie Arinze, an energy policy and strategy specialist in his book Nigeria and her oil insist that the key to unlocking this growth potential in domestic gas with all its predictable benefits will be government getting away from unrealistic prices. 

KELECHI EWUZIE