Nigeria is one of the top ten nations in the world with huge natural gas reserves. Nigeria’s gas reserves was estimated at 187 trillion standard cubic feet of gas (tscf), with current production estimated at 8.24 billion standard cubic feet of gas per day (scfd) as of 2012. This is made up of 98 tscf of associated gas (AG) and 89 tscf of non-associated gas. The combined total of proved, probable and possible reserves is estimated at 300 tscf.
The current gas supply is enough to support about 5 giga watts (GW) of power generating capacity. Nigeria’s gas reserves are about three times the value of her crude oil reserves. The largest natural gas initiative in Nigeria is the Nigerian Liquefied Natural Gas project which is operated by several foreign oil companies and the Nigerian National Petroleum Corporation (NNPC). Another major natural gas project is the West African Gas Pipeline which has encountered several bottle-necks. However, when completed the pipeline would transport natural gas from Nigeria to Ghana, Togo, Benin Republic and Cote d’Ivoire. Bulk of the AG is flared off and Nigeria loses an estimated $18.2 million daily from the loss of revenue from flared gas. In recent years, the volume of gas flared has been significantly reduced and plans have been initiated to put an end to gas flaring in the coming years.
National Natural Gas Policy & the Gas Master Plan
Gas development in Nigeria has been constrained by the absence of clear fiscal terms; gas pricing mechanism; legal and regulatory frameworks; and inadequate financing. Consequently, government introduced a natural gas policy and a gas master plan. The natural gas policy was targeted at promoting a public – private sector partnership for an orderly and speedy commercialization of the nation’s gas reserves, and so contributes to the development and diversification of the domestic economy. Similarly, the gas master plan was developed as a framework for maximizing the value inherent in the nation’s gas reserves, and thus ensures the multiplier effect of gas usage in the economy and enhances the high- value gas export market.
The gas master plan has three main components: the national domestic gas supply; pricing policy and regulations; and the gas infrastructure blueprint. The domestic gas supply obligation is meant to deal with the issue of improvements in domestic gas supply by imposing supply obligations on petroleum upstream operators. The gas pricing policy is predicated on a pricing framework that segregates the demand sector into three categories (domestic, industrial, and commercial), to which the different pricing regimes apply. The domestic category consists of the use of natural gas for domestic cooking and for power generation. This category has direct multiplier effect on the economy. The industrial category comprises of industries that consume natural gas as a raw material (feedstock) for the production of secondary products, such as methanol, fertilizer, gas– to- liquids (GTL). The commercial category consumes natural gas as an industrial fuel for manufacturing firms. The gas infrastructure blueprint was developed as an integrated infrastructure strategy to support domestic, regional, and export LNG markets.
The key challenge to realizing the objectives of the gas master plan is ensuring the availability of gas for power generation and domestic consumption. Oil and gas resources are internationally traded products, and domestic pricing formula for these has been an issue in this country. Therefore, pricing these resources below their international prices for domestic consumption is considered in certain quarters as providing subsidy and so, unacceptable. As a result, the core international oil companies (IOCs) have developed a strong portfolio interest that is biased towards export of liquefied natural gas (LNG). The gas market (AG) is controlled by the few oil majors, and so their bias towards the export market creates a major conflict with, and resistance to, plans for a significant boost in domestic usage of natural gas. Furthermore, this bias impedes plans to put a stop to gas flaring.
The joint UNDP/World Bank Energy Sector Management Assistance Programme, commissioned a study on the strategic gas plan for Nigeria in 2004. The report indicated that the gross monetary value of Nigeria’s natural gas reserves is roughly US $2.5 billion per year and the environmental impact of gas flaring was highly significant (70 million metric tons of CO2 emissions per year).
In response to these findings, the Nigerian Government developed strategies for curtailing the financial loss and environmental impact of gas flaring, and to encourage the oil companies to develop programs for gas storage, processing and utilization. For example, the Petroleum Act (Cap 350 Laws of the Federation of Nigeria, 1990) specified under Regulation 42 (Petroleum Drilling & Production Regulations) that oil producing companies are required to submit work programs for the utilization of associated gas in oil fields within five (5) years from the commencement of production. Similarly, the Associated Gas Reinjection Act (Cap 26, Laws of the Federation of Nigeria 1990 as amended) also stipulates that oil producing companies should provide detailed plans for gas processing and utilization. It also prohibits gas flaring without the written consent of the Petroleum Minister.
However, the initiation of new export projects (GTL plants) from 1999 began an era of steady decline in flares. These projects were the NLNG project in Bonny, the Brass LNG (US $3.5 bn) and OKLNG (US $7.0 bn). Government has since then put in place a ‘flare-out’ policy, as encapsulated in the provisions of Section 3 of the Associated Gas Reinjection Act. Flare-out targets has been set for oil producing companies, but these have not been strictly monitored. For instance, the initial target was set for 1st January, 1994 and was subsequently shifted to 31st December, 2008. Now the current zero gas flare directive is being expected.
Previous focus on producing natural gas mainly for export (LNG) is gradually being replaced with one that also accommodates gas production for domestic use (i.e. for cooking and for power generation and manufacturing sectors). There have been modest achievements in gas production so far. Total average gas production increased from 7.7 billion standard cubic feet of gas per day (scfd) in 2011 to 8.24 billion scfd in 2012, which translates to a 7% increase. There is also a decrease in gas flare to about 10% compared to 30% in 2010.
The Petroleum Minister’s Emergency Gas Supply Plan (2012) has contributed over 230 million scfd for power generation and thus increased national power generating capacity by 30% (4.2 GW of power). The planned addition of 450 million scfd of gas supply for power generation will boost generating capacity by an additional 40% (i.e. to 6 GW of power). Domestic gas supply has peaked at 1.5 billion scfd currently, and a significant proportion is being channeled to the power sector. The current gas supply should support about 5 GW of power generating capacity. Based on realistic projections this is expected to increase to 10 GW by 2015 / 16. Nigerian Petroleum Development Company (NPDC), a subsidiary of NNPC is being positioned as a dominant gas supplier to the domestic market. NPDC has a producibility of 450 million scfd in the Western Niger Delta. In 2012, the Oredo Integrated Gas Handling Facility contributed 65 mscfd to the gas network.
Domestic gas supply to household and manufacturing sector almost doubled from 185 million scfd to 357 million scfd, and thus has provided feedstock for growth in the nation’s cement sector and over 200 manufacturing companies. This figure continues to grow as the Nigerian Gas Company (NGC), a subsidiary of NNPC constructs additional pipeline infrastructure. Consequently, gas sales have risen to about 4 billion scfd in 2012 (an increase of about 70%).
A contract has been awarded for the construction of a 120km East-West Gas Pipeline crossing the Niger River, and is expected to be completed by 2015. This pipeline creates a major linkage between the huge gas reserves in the Eastern Niger Delta and other parts of the country. On completion this critical gas pipeline could mitigate the shortfalls in gas supply to the power sector in the Western Region.The Okapi Power Plant in Delta State, developed by NNPC, is about to become operational. This development represents the largest gas-to-power initiative in Africa. The two phases of the project would on completion generate a combined 1000 mega watts (MW) of power. This project falls under the ‘Clean Development Mechanism (CDM) Protocol of the UN Framework Convention on Climate Change’. On the basis of this power plant, NNPC will generate its first carbon credit in compliance with the Kyoto Protocol and related UN resolutions.
Another important development is the Calabar-Ajaokuta-Abuja-Kano gas pipeline infrastructure expansion. This pipeline will open up gas access to the East and Northern part of Nigeria. A major engineering review of the 1000km pipeline has been conducted and plans are in place to commence execution of the project by early 2014. The Ministry of Finance has committed to issuing Eurobonds of over $600 million to fund this project. By 2015 ending, this project would have established gas access to Abuja, and subsequently Kaduna / Kano, thereby opening up the Northern half of the nation for aggressive industrial revolution.
Major Constraints to Further Improvements in Gas Supply
The absence of a clear monitoring system for the legal and regulatory frameworks has been a serious obstacle to achieving the objectives of the gas master plan and the national gas policy. The second impediment is the lack of a negotiated agreement with the oil majors on a mutually acceptable pricing regime for domestic gas consumption. The penalties for gas flaring are very mild, and the right policy should be to incentivize natural gas storage, processing and distribution.
The Downstream Gas Act and the Fiscal Reform Act were developed in 2005 to deal with the issue of gas availability. Subsequently, their provisions were subsumed under the Petroleum Industry Bill (PIB). The National Assembly has had numerous public hearings on the PIB, but there is no clear signal on an early passage of the Bill. The potential loss in revenue to the government, owing to prevarications on the PIB, is estimated at $5-$6 bn. The passage of the PIB still holds the key to unlocking the potentials inherent in the national gas policy and reserves. The new fiscal terms for gas production, as contained in the PIB will likely encourage further investments in the gas sector.
Going forward, a number of issues have to be addressed; particularly the issue of appropriate pricing of gas for domestic consumption still sticks out and affects independent power initiatives. The choice is between continuing with the current subsidy regime to power plants and industrial firms and permitting the oil companies to produce and sell at market-driven rates. Resolving this matter would ensure that most of the power plants being constructed would be able to obtain gas feedstock for their operations.
In the near future, Nigerians would like to see further progress in the execution of the ambitious West African Gas Pipeline Project (launched by NNPC in 2004) to supply Nigerians with more gas for domestic consumption and to several neighboring countries. On completion, this project will increase government’s earnings from natural gas production. NNPC is also expected to establish strategic partnerships with global gas-producing companies to secure presence in international markets; expand gas-based industries through partnerships to ensure Nigeria becomes a regional hub for natural gas-based products; enhance access to capital and technology for natural gas production; and to promote independent control of joint-venture operations.
Dr Chijioke Nwaozuzu, a petroleum policy expert wrote from Port Harcourt, Nigeria. Email: [email protected]. Tel, 070 6874 3617 (SMS Only)