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World Bank Says NGFCP Profitable but IOCs Reject Third Parties

-By Yange Ikyaa

The Programme Manager for the Nigeria Gas Flare Commercialization Programme (NGFCP), Mr. Justice Derefaka, recently disclosed that a market analysis carried on the NGFCP by the International Finance Corporation (IFC) of the World Bank showed that the programme would be profitable if implemented.

Derefaka, stated this in a recent presentation he made at the third edition of the ‘lawyers in oil and gas conference,’ in Lagos.

He emphasized that based on the market studies of the IFC, it was discovered that a realistic pricing range for flare gas to market (FG2M) would incentivize off-takers to participate in the project.

He noted that apart from the cost-benefit analysis and net back pricing that was done in the process, the market survey also covered areas such as risk and sensitivity analysis, market sounding and challenges that could derail the project, with all showing that implementing the NGFCP would be beneficial to all parties.

However, flare capture is expensive, therefore it is often only done at production sites where there are economies of scale, and there had been no teeth in the flare payment structure that was set in 1998 at N10/million standard cubic feet, which was approximately $0.50 in 1998

Currently, this flare payment sum had been eroded by inflation, as “the value of that flare payment today is approximately $0.028/mscf.”

This has equated to a total of about $8m in flare payments for 2017. The moral hazard is that these are tax-deductible which, at 85 per cent tax rate, means that the Federal Government received net $1.2m (gross export revenue of crude oil in 2017 was $33bn).

“This net figure expressed as an average cost per barrel of crude oil produced is less than $0.002 (one fifth of a US cent).”

The 2018 regulations required a higher flare payment, expressed in $/mscf, adding that a legislative change was being developed to make the flare payment non-tax-deductible.

The Flare Gas (Prevention of Waste and Pollution) Regulations 2018 has been approved by Mr. President and gazetted to underpin the implementation of the NGFCP. It was approved on July 5, 2018, and gazetted on July 9, 2018.

“The primary focus of the market study is on the off-takers (market) inputs and the total value chain economics and each of its corresponding links to determine whether and under what conditions flare gas can be taken to market based on sound economic and market criteria,” Derefaka explained.

According to him, focus was equally on current market conditions and potential adverse changes in market conditions within the next five to ten years.

He explained “this is premised on the fact that the flare gas-to-market projects will mainly provide services and products to unaddressed markets (e.g. supply electric power where today communities have no electricity, fertilizers where there are none.), generate savings by substituting a higher-cost with a lower-cost energy source (e.g. providing lower-cost power, substituting diesel or HFO with CNG, LNG or pipeline gas.)”

Derefaka further stated that the main objectives of the market study were to determine the feasibility, attractiveness and sustainability of flare gas to market projects which includes the transformation of flare gas to end products and the delivery and sale of these ‘end products to the off-taker.

International oil companies that are involved in the flaring of gas in Nigeria are said to be showing increasing reluctance in selling the commodity to third parties under commercially viable arrangements, according to the Federal Government.

Instead, the oil producers preferred to pay the tiny penalty cost incurred in gas flaring than to deal with a third-party investor that might be interested in off-taking the commodity.

Flare gas is essentially associated gas that is produced with oil, as they both come out of the ground, but pollutes the environment, causing sickness and other environmental hazards, particularly in locations where these IOCs operate, like in the Niger Delta region of the country.

“Although the Federal Government owns the flare gas and has the power to take it, oil producers have, up till now, treated flare gas as if it is their own, to sell or to flare as they choose,” the Programme Manager, Nigeria Gas Flare Commercialisation Programme, Justice Derefaka, said.

He made the assertions during the 3rd Lawyers in Oil and Gas conference in Lagos, explaining that IOCs were reluctant to sell flare gas because the cost of gas flaring to a producer had been tiny and tax deductible.

The presentation was entitled, “The Impact of Government Regulatory Policy and the Road to Sustainable Economic Growth through the Lens of the NGFCP.”

Typically, producers have been reluctant to sell to third parties, preferring to make the miniscule flare payment than have the operational hassles of dealing with third parties, the poor technical gas evacuation system and the poor gas payment record.

“The result is that the low hanging fruit has been fully picked for producers’ own projects, and the higher hanging fruit, i.e. the 178 flare sites left, have been ignored.”

However, under the new regulations approved in 2018, the Federal Government has asserted its right to take gas free at the flare site and auction it off to third parties. Those third parties will have surety of title from the Federal Government.

Under the regulations flare payments have been increased substantially.

Historically, associated gas used to be regarded as a waste product, as the commodity was separated from the oil and flared in site.

Meanwhile, oil was piped to local refineries or for export and progressively associated gas has been captured or harnessed and used for power generation, in industry for fertilizer, methanol and petrochemical plants, and for production of liquefied petroleum gas and liquefied natural gas.