Mirroring gas commercialisation challenges through Falcon Corporation
Nigeria’s economic growth is hinged on the development of its abundant natural gas resources. Without any doubt, harnessing the country’s gas resources will be the real stimulant for economic growth and development and bring about an unquantifiable value to the economy which include achieving our power aspirations, job creation, entrepreneurship and massive industrialization.
Nigeria is said to be a gas country with little drops of oil. It is estimated that Nigeria has about 187 trillion cubic feet (tcf) of gas making it the seventh in the world in terms proven gas reserves. It is noteworthy that the gas reserves being touted are associated gas (AG), found while drilling for oil. The country has not actually given the required focus towards the actual drilling for gas. Experts believe that as a country, we do not really know the volume of gas resources the country is endowed with, and it is not improbable that dedicated gas exploration will unveil non-associated natural gas (NAG) reserves in the region ofabout 600 to 700 tcf. Despite the huge gas reserves, associated and non-associated, Nigeria has not been able to develop a robust gas industry.
“If government directs attention backed by appropriate action to gas, there will be an industrial explosion in Nigeria and we will become self-dependent. If we are able to take gas to every part of Nigeria, providing the necessary energy that drives production and industrialization in a cost-effective and sustainable manner, there is nothing this country cannot achieve”, said Joseph Ezigbo, Managing Director of Falcon Corporation Limited.
To grow Nigeria’s gas sector, particularly in the face of the huge infrastructural deficits facing the country and sector, the investment required is huge. With the power sector consuming over 75 per cent of the planned domestic gas supply, and considering that historically, power sector customers have a tradition of non-payment of bills for gas supply, it is essential to get the commercial framework right.
“Historically, the national focus was strictly on the drilling for oil. Any gas found was as a result of the drilling activities, associated gas. As a result, there was temptation tendency to think that there was no cost to the associated gas. It was viewed almost as a waste, and flared accordingly as a commodity that has no economic value. Despite the huge gas reserves, Nigeria has not been able to develop a robust gas industry. This was also reflected in the pricing levels which when put in place, were at levels far below the minimum price needed to incentivize gas investment”, said Ezigbo.
Nigeria’s Roadmap for Power Sector Reform sets a goal of 20 GW of generation capacity by 2020 and most of this capacity will be gas-fired. Meeting this ambitious target will require domestic gas supply of about 5 BCF per day. Experts believe that a commercial gas pricing framework that would enable investment in sustaining and growing gas supply, especially in power generation is what is needed to trigger growth in the industry.
Nigeria continues to face a serious energy crisis due to declining electricity generation from domestic power plants. Nigeria electricity consumption per capita is one of the lowest in sub-Saharan Africa. This low level of consumption is a result of suppressed demand caused by deteriorated electricity supply infrastructure.
To meet up with its 5,900 MW of generation capacity Nigeria needs gas to fuel its power generation growth plans. However, commercializing gas is exceedingly challenging. As a result, oil companies have done very little exploration specifically targeted at gas until quite recently.
The gas commercialization challenges are profound even though large gas resources are present. In some instances, there are large distances between production areas and major market centers. Gas production and transportation are capital intensive and exhibit strong economies of scale and this poses quite a big challenge.
Developing the abundant gas reserves requires huge amounts of capital and most of this investment will need to come from the private sector. To attract such an amount of capital to the gas sector, Nigeria will need to develop a bankable commercial framework for gas that includes price reforms, improvements in regulatory arrangements, a redefinition of the role of public companies in the gas sector, and an alternative to the current NNPC JV financing model.
“We have to recognize that gas projects are long term, high cost and gestations period for recovering of cost is usually 10, 15, 25 years. The issue is more of creating an opportunity for private sector to engage in the gas sector”, said Emeka Ene, chairman, Society of Petroleum Engineers (SPE), Nigeria Council.
No doubt, government is making great efforts to grow the gas sector. The main drivers of gas utilization projects had been the government’s desire to create more wealth and diversify the economy of the country. A combination of incentives and pressure from the environment ministry to end flaring, coupled with rising domestic industrial demand for gas have now encouraged operators to go into gas projects even with all the daunting challenges.
As one of Nigeria’s growing number of domestic independent operators working in line with government’s agenda of driving gas utilization, Falcon Corporation Limited supplies about 10 – 12 million standard cubic feet per day (mmscfpd) of natural gas; about 3,650 million scfpd per year, and roughly 25 billion scf since its inception as the operator of the Ikorodu Natural Gas Distribution Franchise.
According to Ezigbo, “We have maintained concerted efforts to increase our gas supply capacity within the Ikorodu franchise zone. We have recently concluded a pipeline capacity expansion project to ensure we grow our supply and meet the growing needs of our customer base, as well as achieve additional capacity to meet new demand. We are also working assiduously to deliver natural gas for industrial and commercial utilization across other parts of the country. The challenges surrounding this are innumerable but certainly not insurmountable, and we are committed to growing gas utilization across Nigeria. ”. The Falcon gas network and City Gate Station which has a supply capacity is 25 MMScf per day. is currently being fed by the Escravos-Lagos Pipeline System (ELPS)
The menace of vandalism has however negatively impacted on gas delivery to various assets and distribution platforms across the country. Ezigbo however also highlights pricing as beinganother major challenge facing effective gas commercialization in Nigeria.
“ Ifas a nation we get our pricing right and then set sound and appropriate policies that will guide the pricing framework and the industry as a whole, the rest will fall in place. There are two major challenges – policies and pricing. Infrastructure will come once we get those two right”, said Ezigbo.
Government has also come up with a policy option which has been used in many countries to introduce a domestic supply obligation (DSO) into petroleum contracts or regulations. A DSO obliges producers to make a defined portion of gas production available for domestic sale. In some cases, a DSO will specify that the gas be sold at export-equivalent prices, while in other cases a discounted price is defined. There are costs and benefits associated with a policy of pricing domestic gas below export parity.
“I think the DSO is a welcome policy. It puts imposition on international oil companies (IOCs) to deliver known volumes for domestic use, which is an imperative for this country to attain our infrastructure development and industrialization aspirations. But putting the DSO requirement is not the end of it. The policy must be backed by an equivalent commitment and action to deliver on the infrastructure that will be used to deliver the gas accrued out of DSO compliances to the endusers that need to use the gas. Minus distribution infrastructure, the DSO will not achieve the purpose for which it was put in place. ”, said Ezigbo.
Falcon Corporation is a privately held, wholly indigenous company and member of the Falcon conglomerate which today holds a diverse portfolio of prime investments in oil and gas, energy and infrastructure, real estate and construction.
FRANK UZUEGBUNAM