‘What FGN Must Do to Attract FDI into The Gas Sub-Sector in Nigeria’ – Okoronkwo, Aiteo’s MD

In this interview given to Majorwaves Energy Report magazine recently in Lagos, the scholarly Managing Director of Aiteo and 1st Vice President of Nigeria Gas Association (NGA), Mr. Victor Okoronkwo highlights the prospects of gas development in Nigeria, its challenges and opportunities. Excerpts:
What kind of challenge does the seeking to attract investment to Nigeria gas sector face?
The Nigeria gas sector holds enormous investment potential from a resource perspective with over 180Tcf of discovered natural gas reserves. So, the gas sector in Nigeria is robust enough to support growth in both export and domestic markets. Despite numerous efforts, growth in the Nigeria’s gas market seems to have stagnated in both markets. However, recent policy initiatives and pronouncements from the Petroleum Ministry seem to reenergize the sector leading to the increasing hope for the Train7 of the NLNG, the ANOH project development, the transnational AKK pipeline, the Brass Fertiliser project, etc. The sector however, still faces challenges in attracting investments; these challenges can be categorized broadly as follows:
Low domestic market offtake due to inadequate infrastructure, high debt owed by the electricity sector impacting major domestic gas suppliers, quasi price control in the domestic gas market, multiplicity of policies and lack of clarity on the regulatory landscape occasioned by the non-passage of the Petroleum Industry Bill. Hopefully with the elections now over, government may take steps to help mitigate these challenges.

Where are the most attractive opportunities in the Nigerian gas sector at the moment?

Nigeria is resource rich in Natural gas with over 180Tcf of discovered reserves and over 600Tcf of upside potential. Therefore, from a resource perspective, there are lots of attractive opportunities. However due to some and all the factors I mentioned earlier, the most attractive opportunities for NG investment seem to tend towards export-oriented projects, this is mainly because of market uncertainties within the domestic gas sector which is not helped by the huge debt owed the sector by the electricity sector. Even existing market dynamics show that domestic supplies hover around 1.2bcf/d to 1.5bcf/d whereas the export supplies are in excess of 3bcf/d. In fact, new gas developments targeting existing LNG expansion far outstrip the development from ANOH which is being celebrated as the biggest domestic supply project in country. Several studies have shown that with the right environment, the domestic sector to grow to over 3bcf/d in the medium term. So, opportunities to triple the domestic sector exist under the right conditions of infrastructure expansion and downstream utilization projects bankability.
Opportunities also exist within the LPG and the virtual pipeline space. Nigerian LPG consumption at less than 2kg per capita is far below the regional average. This provides tremendous investment opportunities, but the government needs to step in to level the playing field amongst local producers and major IOC and NLNG producers, particularly with respect to taxes and infrastructure development like transportation, LPG cylinder manufacturing, jetty and storage construction that will aid market penetration.

The 10th annual international conference and exhibition of NGA late 2018 spoke to ’shift to gas economy-pace and scale of innovation in the West African Sub-Region’. What role can Nigeria and/or NGA play in helping to foster the economic revitalization and cooperation in the region using gas?

In fact, the terminology shift to gas economy sounds interesting; interesting because the economic recovery and growth plan (ERGP) of the government of Nigeria revolves around the utilization of Natural Gas. Look at the four priority areas enunciated in that plan – Energy Sufficiency, Transportation, Agriculture, Manufacturing/Industrialization, the common denominator in all these areas is natural gas. Natural gas is a major fuel for power generation, for transportation and key ingredient for manufacturing fertilizer which is required for Agriculture. Natural gas derivatives of petrochemical products aid manufacturing and industrialization, natural gas is also a preferred fuel choice for generating both electricity and steam required for manufacturing. Really natural gas has a key role to play in unlocking the potentials of the Nigerian economy. So, I think that the ERGP is government’s way of saying we are shifting to gas-based economy without necessarily saying so, but they should say so. The NGA is engaging with ERGP team with a view to reviewing the plan and highlighting the dependency on natural gas. This will therefore give the natural gas the attention it deserves in our journey to economic development. For the West African Sub Region, in this age of global energy transition, collaboration is required at the sub-regional levels for energy optimization particularly around natural gas. There is already a key infrastructure – the West African Gas Pipeline, the countries within the region can leverage this pipeline as enabler for collaboration to ensure the success of the West African Power Pool. Nigeria and indeed the NGA is very well positioned to lead this collaborative effort. This effort has indeed started as you saw at the last NGA conference that you referred to. You will recall that there was attendance from Ghana and a few other West African countries. We at the NGA will be working to embed and deepen these collaborations.

How can the share of West and Central African gas in Europe’s energy mix be increased?

The paradox in Africa is that it is resource rich and yet energy deficient. Africa houses about 13% of global population and yet accounts for less than 4% of global energy demand, there is therefore massive potential for African gas to feed the African energy needs. The International Energy Agency in its African Energy Outlook Report estimate that more than 620 million people in Sub Saharan Africa have no access to electricity. In recent times however, there have been substantial discoveries of oil and gas in Africa signaling a global appetite for African energy. The huge gas discoveries in Mozambique and Tanzania coupled with emergence of small to mid-scale producer nations like Ghana, South Sudan, Niger, Kenya, etc. lend credence to this. African traditional major producers like Nigeria, Angola, etc. are also planning capacity additions to their existing LNG export. There is however a looming challenge as the European energy transition shifts more towards renewables, the question will be these African resource rich countries will they find investments capital in good time to develop these resources before the train leaves them behind.

Has the expectations of power privatization on the broader gas-to-power value chain be impactful? If and/or if not, please address the underlining fact?

At the current generation level in Nigeria, the average per capita electricity consumption is estimated at an abysmally low level of 120KWh. The Nigerian electricity grid generation hovers around 4500MW whereas suppressed grid demand is estimated to be over 23000MW, closing the gap, has remained the dilemma of the Nigeria Electricity Supply Industry (NESI). This is in spite all the attention and investment that has gone into that sector since the passage of the Electricity Power Sector Reform Act (EPSRA) in 2005. A recent report by the Nigeria Economic Round Table on Power estimates that Nigeria losses about $29.3bln annually due to lack of adequate electricity supply. This statistic therefore begs the question of the impact of the electricity power sector reform in the past 14years.
In fact, experts within the sector have identified liquidity issues creating a market shortfall of over one trillion naira as a key factor. Other challenges impacting the gas to power sector include foreign exchange challenges created by the slide of the naira from around 180 to a dollar down to nearly 500 to dollar and now stabilizing at about 360 to a dollar in recent times. The gap created by this slide has left a huge whole in the books of the industry players. This power sector liquidity challenges have led to huge debt owed to the fuel gas suppliers to the power sector, The NESG Power Roundtable sees the power sector liquidity issue as the most pervasive across the entire gas to power value chain. Facilities granted by money deposit banks to the power sector constitute significant portion of their non-performing loan portfolio, making it difficult for the sector to attract more loans. The other major factor is the MYTO tariff which has become non cost reflective occasioned by the foreign exchange gap. Some reports claim that the tariff gap is in excess of 1.3trillion naira and growing. These cocktail of liquidity issues make it difficult for the distribution companies to make the necessary investment to curtail losses and improve metering.

What is the biggest misconception fund manager have regarding investing in the gas segment of the economy and what will be your advice in other to change the narrative?

Natural gas is fundamentally different from oil, in that the components of the gas value chain are more interconnected, and each must be economically robust for a gas project to be bankable. For instance, the upstream, midstream and downstream components all must viable, as the gas value chain does not tolerate a weak link. Second fundamental difference is that natural gas must have a market before it is produced. Storage of natural gas is a very expensive venture. Therefore, the nature of the value chain creates challenges not only to the fund managers but also to project developers. Natural gas projects have a longer payback period than their oil counterparts and therefore need patient capital. I believe that if we start to see natural gas in its add value form like compressed natural gas (CNG), liquefied natural gas (LNG), gas to products like fertilizers, etc., then fund managers may begin to see the projects end to end and therefore more amenable to participating in gas development projects.

What tangible impacts do you want to see happen with the gas flare commercialization program championing from Ministry of Petroleum?

The Gas Flare Commercialisation program is the plan set out by the Ministry of Petroleum Resources to implement provisions of the gas policy on Prevention of Waste and Pollution. It is a laudable initiative in that it will provide avenues to commercialize hitherto uneconomic associated gas flares. The model of allowing mid-stream entities into the scheme is a game changer that will allow upstream companies segregate their investment but the risk of reservoir performance and the vagaries of oil production in our clime persist. This is a challenge, and it will be interesting to see how investors will mitigate these risks. It will be advisable that midstream players fully understand these risks as they are largely dependent the projections of the upstream producers for the economics of their projects. In a success case, this program lends itself to encouraging the virtual pipeline strategy that will help in bridging the gap in the natural gas infrastructure domain. Another issue of clarification will be how this fit into the mandate of the gas aggregation of Nigeria (GACN) and whether this will help the upstream companies meet their domestic supply obligations.

How transparent and sustainable do you feel the current gas policy is in Nigeria?

What is creating the buzz now is the implementation of the flare gas regulations pursuant to the gas policy on Prevention of Waste and Pollution. This implementation is otherwise known as the Gas Flare Commercialization Program (GFCP). Transparency is no longer an issue as the policy has been issued and there has been quite an impressive press and advocacy generated around it. GFCP has been a subject of discussion at several professional fora, so whether enough industry engagement was under taken prior to its enactment is now water under bridge. Commercialization of associated gas which is the focus of the policy has been treacherous for upstream companies particularly when the associated gas is in remote areas without access to market. The cost of processing and delivering the ‘stranded’ associated to market has always been way outside the envelope of domestic gas prices as declared by the government. The sustainability therefore of the implementation program will depend on how the subsurface risks, the above ground risks and the processing and transportation costs are accommodated in the ultimate pricing of the associated gas to the end user. One point to note however is the limited volumes of these associated gas pockets which lend themselves to small scale individual projects. These projects must prove independently economically robust to attract investments and their sustainability will be based on the risk management, market ability to pay economic prices and the stability of the associated oil production.

Over the long term, could the further emergence of non-carbon renewables weaken the position of gas in the global market?

This is an interesting point in that in recent times, there is more investment going into electricity globally than into Oil and Gas. Electricity demand is growing faster than demand for oil and gas consumption. It is estimated that over 1 billion people globally have no access to electricity, so there is still a huge demand gap that can disrupt the dominance of oil and gas as primary energy source. The world is moving towards less carbon intensive fuels that will ultimately alter the global energy mix. This means that renewables like wind, solar, hydro, geothermal, biomass etc. as primary energy sources will gain more market share against fossil fuels like oil and coal. Advancements in technology is also helping to bring down costs particularly in the solar energy domain for PV cells and batteries. The advancement in battery technology is giving impetus to the growth in the electric vehicle (EV) domain. With increasing penetration of EVs, component fossil fuel transportation will decrease. However, whether this emerging trend will weaken the position of natural gas in the global market will depend on the scenario under consideration. But there are certain ‘knowns’: 1. the global demand for energy will continue to increase with increasing human prosperity aided by technology. 2. As the emerging economies continue to industrialize their demand for electric energy will increase. 3. Electricity generation will constitute the large chunk of the energy demand, so the world will continue to electrify, 4. The global challenge therefore will be to balance within a world of more energy and less carbon. Consequently, soon the world will experience displacement of liquid fossil fuels in favour of natural gas which has relatively low carbon emission intensity, more abundant and relatively cheaper on value basis. So, in my opinion, natural gas will remain strong in the global energy market and indeed fill some of the gap left by liquid fuels as the global energy mix continues to achieve that balance of more energy and less carbon.

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