Deepening investment in Virtual Pipeline to tackle energy hiccups in Nigeria

Nigeria currently produces an estimated 7 billion scf per day and account for an estimated 182 trillion scf of gas reserve. Despite the country’s abundance of natural gas deposits, several challenges have over the years continued to stifle the translation of the benefits of this huge gas potential into improved power generation for domestic as it concern the gas to power projections.

As in most sectors of the economy, the power sector in Nigeria continues to grapple with several challenges, from poor infrastructure, poor maintenance, unavailability of gas, poor grid and near impossibility of evacuation of power from certain points of the grid and liquidity problems in the electric power sector.

Industry experts believe that electricity supply or the lack of it will remain a very sensitive issue with several political and economic sophistications, as the questions that continue to beg for answer among industry watchers is will Nigeria ever attain  effective power supply to grow the economy?

According to analysts, the lack of a proper commercial structure for gas production especially for domestic use, insufficient gas pipelines and lack of a strong infrastructure backbone remains a subsisting challenge, amongst others

They further opine that vandalism of the existing pipeline infrastructure also posted a challenge with gas supply in the country such that even where the government has sought to make domestic production and use of natural gas profitable and attractive and despite Nigeria’s natural advantage of having large gas reserves, not much gas reaches the location where same is required for power generation.

Industry experts in their various summations are of the opinion that deepening investment in virtual pipelines system could be instrumental to improving gas availability, especially for electric power supply in the country.

X-raying domestic gas

Ayodele Oni, energy expert in a recent article posited that one of the measures being implemented under the Nigerian Gas Master Plan (NGMP) is the requirement that all gas producers in Nigeria dedicate a portion of their gas production, as specified by the Minister (typically acting through the department of gas within the Ministry of Petroleum Resources), for sale and utilisation in the domestic gas market (Domestic gas supply obligations or DSO). The idea, however, was that gas suppliers who have supplied their DSO quantities could sell excess gas (or non-DSO gas) on a “willing buyer, willing seller basis,” to third party buyers; reflecting such price as may be determined by market forces.

Oni highlighted that in furtherance of the DSO, various sub-sectors in Nigeria were sub-divided into 3 taking into consideration at the time (year 2008), their ability to bear gas prices and the strategic needs of the Nigerian economy. These sub-sectors were the (a) power sub-sector, (b) strategic industrial sub-sector that uses gas as feedstock (e.g. methanol and fertilizer producers); and (c) strategic commercial sub-sector (e.g. cement and steel manufacturers). Gas suppliers were obliged to reserve specific quantity of gas to be sold to the various subsectors of the economy as subdivided herein.

According to him, “It was determined that because of low power tariffs paid by electricity consumers, power generation companies could only afford low cost gas in the short term. Hence, the gas to power price was the lowest and started from 10 cents but increased annually as electricity tariffs increased. The government paid particular attention to gas to power because of the importance of natural gas to electricity generation as over 80 percent of the electricity generation capacity is tied to gas”.

Despite the government’s best efforts, however, the electric power sector has contended with gas production and supply challenges. It appears that as one challenge is solved another rears its head. At some point, it was the challenge of pricing of DomGas that made it unattractive for private sector participants to get involved in the sector. However, over time, the government has sought to improve the attractiveness of DomGas supply through a structured increase of gas prices for the various sectors of the economy and in particular, the electric power sector.

“Nonetheless, in the last few months, the DomGas supply challenge has taken a new dimension as gas supply for economic growth and development has reduced by as much as fifty per cent of its peak. The gas industry, arguably, produced the lowest supply from its key pipelines in the last four years between May and June 2016 and matters do not appear to be improving.  At the core of the gas crisis is the on-going pipeline vandalism due to renewed militancy and insurgency in the Niger Delta Area of Nigeria, a region where much of Nigeria’s gas is produced from”, he said.

Streaming the Issues around virtual pipelines

The concept of virtual pipelines in the views of Ayodele Oni appear simple but as with most seemingly simple projects, the challenge is typically with implementation and lack of robust consideration of all relevant project dimensions, prior to commencement.

Oni identified insufficient road network, particularly where several businesses get involved in the virtual network system as the first challenge. He observed that this could potentially make road travel inherently risky and horrendous. However, the law could play a role, by mandating companies which carry on this business to also participate in infrastructural development whilst also receiving tax breaks/ cuts, amongst other fiscal incentives. There could also be a structure that ensures that the LNG trucks only ply the roads at certain periods of the day to reduce the adverse impact on road transportation. This is plausible, because it is not at every point of the day that vehicular traffic is heavy.

“Irrespective of the role played by the private sector to improve power supply, it is pertinent that the Federal Government of Nigeria and State Governments too, also invest in improvement of road infrastructure. Alternative transportation modes like the cable cars being developed may serve as a plausible means of transporting the LNG or compressed natural gas”.

“Yet another option which is crucial in connection with this endeavour is transportation by rail. This option is however expensive and time consuming and will therefore require government support at all levels to be successful. It is common place in other more advanced countries like Canada, for example to see petroleum products transported this way”, he said.

The energy expert further said that pricing for the gas to be purchased for compression or liquefaction may constitute a hiccup towards the drive for investment in virtual pipeline. In his opinion, “The federal government and indeed the Minister of Petroleum Resources may need to develop a pricing regime or some form of modulation to ensure a workable pricing template which particularly encourages the virtual pipeline model as this stands a good chance of improving natural gas supply for economic growth in Nigeria”

Domestic Gas projects will become more profitable if indigenous companies are given access, Dada Thomas, managing director, Frontier Oil Limited observes.

According to him “the only incentive for indigenous companies willing to continue to invest in gas for domestic use is if government provides an enabling environment”.

Thomas opines that freeing gas for local investors is the first step towards  encouraging willing investors to develop gas for the domestic market.

“In a gas project, 70 percent of it is in dollars because of the technology, the equipment is not resident in Nigeria. You have to spend dollars to get a gas project going. So if government does not address this investment and income currency mis-match, there will be no future investment in gas project in Nigeria” he said.

KELECHI EWUZIE