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Why Investors Shun Nigeria’s Gas Sector

-By Gideon Osaka

Indications have emerged that the much-needed investment in Nigeria’s gas sector to enhance a holistic development may not be achieved unless there is a rejig of the nation’s gas policy. The National Gas Policy (NGP) as passed in June 2017 focuses on attracting investors into the gas industry and prioritising local gas demand requirements. It prescribes gas infrastructure ownership, operation and trading. However, since the adoption of the policy, the international oil companies, IOCs appear to be foot-dragging as regards investment. According to Chijioke Nwozuzu, a petroleum policy expert at the Emerald Energy Centre, University of Port Harcourt, a number of plausible reasons come to mind. “Gas infrastructure development generally costs substantially more than oil development (4-30 times as much) and takes much longer time. Gas infrastructure investments may leave international investors more exposed to politically-inspired violence or generally to the risk of expropriation. Most importantly, the IOCs may be averse to investments in gas infrastructure because gas is sold in a local market rather than an international market (except LNG). “Thus, investments in gas infrastructure are likely to be regulated by a national government as public utilities. This may result in a relatively low rate of return and income-generation in local currencies. So, the IOCs would rather invest in LNG projects.

“On the contrary, governments derive revenue from the sale of natural gas to domestic industries. For governments holding significant shares in some end-user plants, it also derives revenue from value-added associated with the export of the finished products. Governments and its citizens also benefit from increases in employment and the multiplier effects on their countries’ economies that come from increases in natural gas development. For example, a major project such as LNG, methanol or fertilizer plants mobilizes local labour for construction work and can create local businesses to provide services to the new projects (material suppliers, engineering contractors, hotels, restaurants, transport services, etc). Natural gas utilization for power generation can effectively transform a country and put it on the path of industrial revolution, social and economic stability.”

Making reference to the nation’s power sector which remains in a parlous situation, Nwozuzu stated that the government should use a win-win model that can attract various investors to the sector. “The Nigerian power sector will perform efficiently only to the extent that they have a secure supply of natural gas. Considering the high cost of natural gas pipelines, which entity should develop this infrastructure? Should the responsibility fall on the International Oil Companies (IOCs), or the Federal Government of Nigeria (FGN), or a Public-Private Partnership (PPP) Arrangement? The magnitude of costs involved would preclude the PPP- type option.

Valuechain gathered that costs as well as government regulation pose as much a hindrance to the development of the sector. For example, natural gas pipeline construction costs vary between US$ 800,000 per kilometre to US$ 2 million per kilometre (for large diameter projects over rugged terrain). Examples are: the 24 inch Yucatan Peninsula gas pipelines, completed in 1999 and running 432 miles from the Mexican State of Tabasco to power plants in the Yucatan province cost US$266 million. The 460 km line completed in 1996, from La Mora in Argentina to Santiago in Chile cost US$360 million. The 3,700 km pipeline from Bolivia to Sao Paulo in Brazil cost US$1.8 billion. A typical LNG project may require more than US$10 billion of investment and lead time of 6-10 years from conception to completion. LNG tanker ships cost about US$200 million.

Also, speaking on the gas issue, Olawoleola Ogunsola, of the Department of Gas Production and Flare Monitoring, Gas Division, Department of Petroleum Resources, DPR, stated that there is still gap in infrastructure which the government is working hard to eliminate. He said, “The pricing issue within the domestic market is still a challenge. Liquidity and payment of critical aspect such as power sector of the industry which consumes 75 percent of gas remains an issue. Nature of the market which includes legislative commercial term regarding access to gas and Production Sharing Contract (PSC) are challenges that need to be addressed. There is also need for the country to leverage its potentials to develop the Nigerian gas sector optimally to be able to attract much needed investment in the sector. “DPR has streamlined issues and way forward for optimum gas development having recognized the potentials of the country. “The first RoadMap is gas reserves growth with 200 trillion cubic feet, TCF, a day, the target has been achieved before 2020. However, the existing volume is because the country produced 8 billion cubic feet, BCF of gas a day with life index reserve for about 92 years. If the country doubles its production which it urgently needs, it can sustain the life index by being a major player in the export market in terms of LNG.”

Ogunsola also stated that high value gas export is another lever DPR intends to maintain so that the country can have a significant presence in the international gas market. He believes that the country needs to take opportunities of available demand in the LNG space which is key for sustainable gas development. According to him, to grow reserves, the DPR is driving and advocating for deep drilling. Deep drilling creates room for gas discovery. This has been proven from recent discoveries hence the regulatory agency enhances drive towards deep drilling. “In terms of domestic gas supply and its imperative, DPR is enforcing obligation that works with other elements in the mix. This needs infrastructure to deliver with a credible market ready to pay for gas and take it,” he added.