Right framework will derisk Nigeria’s gas flare commercialisation program – Mama
Chijioke MAMA, co-founder & senior project advisor at Meiracopp Nigeria Limited (MNL), a doctoral researcher in Business Management and a consultant with the Sustainability Policy Commission of the Nigerian Economic Summit Group (NESG), in this interview with ISAAC ANYOGU speaks on how Nigeria can succeed in its plan to monetize gas flares.
The proposed commercialisation of gas flares has been lauded as a great program but some elements of the initiative remain hazy, why?
In the simplest sense, monetization of flared gas is a response to an environmental hazard that simultaneously delivers economic benefits. Technologies, projects and programs around the monetization of flared gas constitute an emerging industry around the world and are of utmost importance to countries that flare a significant portion of Associated Gas (AG) from oil fields.
The announced Nigerian Gas Flare Commercialization Program (NGFCP) is the Nigerian government’s new response to decades of hazardous gas flaring which has negative environmental and economic implications. Full detail on the program structure is still awaited by the industry, but it will help Nigeria provide a structured, de-risked and streamlined access to flared gas for monitization. It’s a new framework which may explain the perceived haziness, but it holds some investment promises.
A bid process is planned to start soon, what are the promises and concerns for a potential project developer?
A project developer will be looking to gain access to flared gas under terms and condition which the NGFCP will define in the awaited bid process. Beyond that, developers will need to model the use-case for specific gas flare sites and then deploy a desired/suitable technology from a wide range of available options. Some of the use-cases are Gas to Power, Gas to Liquid (GTL) and Gas to Chemical (GTC) most of which are promising from an investment perspective. A wide range of products are also possible depending on the technology deployed and the production environment, including; methanol, ammonia, diesel, gasoline (PMS), LNG, CNG and other products. The business case is procuring and monetizing flared gas, in-between which there are unique operational, technological, finance and political concerns which could be complicated by the nascency of this business area/program.
How will you characterize the potential risks inherent in gas monetization projects/NGFCP program for investors?
The overriding risk statement on flared gas monetization at this stage – from a global perspective – is that most of the technologies for small scale gas conversion (1-25MMscfd) are relatively new.
In addition, the number of commissioned, commercial-scale, flared gas monetization project around the world is statistically insufficient for the purpose of generating a long term, reliable, project performance forecasts/models. While this is a technical constraint, there is a finance dimension to it, since midlife and late phase plant behavior and economics cannot be confidently modeled. That adds a layer of risk to any investment in flared gas projects.
Though large scale GTL and GTC plants have been successfully deployed for decades around the world; the necessity for modularization and other necessary technical adaptions in the case of small GTL capacities (1-25MMscf/d), changes the discus. This includes integration and operation on an FPSO for example. In addition to the technology risks, there are product demand risks and operational risks too, but it might be safe to say that technology risks will dominate.
How bankable then are these projects and what could be the financing constraints, given these risks?
This kind of project has unique dynamics, especially when you place them in Nigeria. With the amount of loan provisioning we have seen recently in Nigerian upstream projects, by some debt capital providers; you may expect some financing apathy for these projects, which should not really be so, in my opinion.
If I am a debt capital provider looking to put about USD 10M in a GTL plant/project for example; I will focus on the future cash flows of the project in structuring the loan as opposed to the value of the asset or the borrower securing it. I will model the plant performance and technical risks for 8-10 years and haircut any estimation of future cash flows accordingly to reflect that.
I will also look at the reserves report of the asset producing the feedstock gas, for evidence of reliable/sufficient feedstock supply for the life of the gas conversion plant. I will seek smart ways of transferring the reserves risks and the commodity price risks to the promoter (which may otherwise lie with the debt capital provider). I will demand credit security over the plant and the project company’s shares and not the borrower’s properties. Providing debt capital to this kind of project may not fit the traditional Corporate or Project finance model so some insightful innovation may be required to protect lender’s interest in structuring the loan.
The numbers may look good in terms of revenues, since the potential plant outputs are in fairly good demand in Nigeria and moderately well priced. The conspicuous lag is that each flare site can only produce a limited volume which hinders the needed economies of scale.
Consequently, promoters may need to hold sufficient number of flare sites (if the bid guidelines permit) with sufficient gas yield as well, in order to deliver good financial returns. From a macro-economic perspective, since the flare conversion plants are relatively expensive, the governing fiscal regime (taxes and royalties) that envelops the projects within the NGFCP will either hurt or enhance the IRR.
As a new initiative how does the core project economics of running a mini flared gas monitization plant in Nigeria appear at this moment?
The technologies and plants available for flared gas commercialization are diverse with distinct dynamics and risk profile. So from a Nigerian perspective, the profitability of the venture will depend on the nexus between a developers preferred technology, the technology cost, plant output and the demand side considerations for the product(s).
For example, you have the gasoline (PMS) – high demand nexus, the fertilizer high demand nexus, the CNG-low demand nexus and the LNG-moderate demand nexus. Profitability will trail the capacity of the plant installed, which will range from mini system with 1 – 2MMscfd capacity to bigger ones with 10 – 25 MMscfd.
One report from the World Bank Global Gas Flaring Reduction (GGFR) program, suggests that a gas feedstock price of $4/MMBTU will require a minimum 10MMscf/d plant capacity to be bankable on a double digit return. That begs the question of what price monitizers will procure the feedstock; since that can distort the delicate economics of flare monetization projects. I think the core economics and numbers will have to be modeled on case by case basis.
How optimistic are you that Nigeria can deliver on NGFCP management and coordination?
I think it’s too early to evaluate the performance of the NGFCP management. You would naturally want to wait for the bid to be announced, conducted and concluded before evaluation. At that point we would look at core implementation and short term performance of the project (say 1 – 3 years).
At the moment it appears the program is run by very a competent team and will be driven on a reliable framework. For example the development and designation of a resilient online portal as the one stop shop for information and participation in the program could help provide the needed clarity and bid process streamlining.
There is now a strong regulatory framework for the NGFCP in the form of the Flare Gas (Prevention of Waste and Pollution) Regulation 2018. Remember the transactional framework and other details remain unannounced so you cannot do much of scoring at this stage. However, participants will anticipate a clear and transparent bid process, as well as a post bid regulatory and market support framework that sufficiently attend to gas producers and monitizers interests.