A Review of the Nigerian Energy Industry

Oil slump, PIB threaten gas-to-power project

29 March 2015, Lagos – The steep decline in global crude oil prices, regulatory uncertainty and vandalism of gas infrastructure constitute major threats to gas development for the growing need in the power sector, industry players and analysts have said.

Prior to the plunge in oil prices, International Oil Companies had raised concerns that the gas provisions in the Petroleum Industry Bill put an already challenged Nigeria’s gas potential further at risk.

The IOCs, under the aegis of Oil Producers’ Trade Section, said the PIB gas fiscals would make Nigerian gas sector extremely uncompetitive and could significantly reduce the number of viable gas projects.

The Federal Government had recently increased the price of domestic gas for power generation from $1.5 per thousand cubic feet to $2.5 per mcf and $0.80 per mcf as transportation costs for new capacity.

The move was meant to encourage investment in gas for power, as gas producers continued to complain about low pricing.

“The increase in the gas price is an incentive for the development of stranded gas deposits in order to boost gas availability for alternative markets such as power plants and petrochemical plants,” a senior industry professional, Mr. Emmanuel Usanga, said.

But the plunge in the global oil prices since June last year is said to be dampening the optimism that greeted the recent hike in domestic gas price, as oil and gas companies grapple with reduced earnings.

The Managing Director, Frontier Oil Limited, Mr. Dada Thomas, whose company operates the Uquo marginal field, told our correspondent that companies using a lot of their oil income to fund or part-fund gas projects would see their ability to fund the projects substantially curtailed by the fall in oil prices.

According to him, most of the companies involved in gas development in the country are integrated firms, with both oil and gas operations.

“In the past, most people preferred to develop only oil and ignored gas, but now it makes sense to develop both oil and gas because there is a huge need for gas.”

Thomas said the PIB posed a big threat to oil and gas investments, noting, “Within the PIB, the intention to increase gas taxation from 30 per cent CIT to 80 per cent in line with oil is a major blocker to investment in gas projects.”

According to the Head of Energy Research, Ecobank Capital, Mr. Dolapo Oni, the low oil prices raise the issue of appropriate gas pricing, adding that elsewhere in the world (such as Europe and Asia), gas prices are linked to oil prices or set by gas hubs such as the Henry Hubs in the US.

“The ideal way is via hubs. Nigeria has yet to develop an effective framework for gas pricing, thus most transactions are on an availability basis. The current environment gives an opportunity to develop the right pricing framework. Edo and Delta states have potential to be major hubs for gas with a lot of gas pipeline infrastructure in place. And I think there is a strong effort in that direction by the NNPC.”

Noting that the power sector alone requires over 3.5 billion cubic feet of gas per day to achieve 10GW of power, Oni said, “The key threats to the gas for power development remain low and uneconomic gas prices on the one end and low electricity tariffs, forcing power generators to default on payments for gas on the other hand.

Nigeria is estimated to have at least 185 trillion cubic feet in natural gas reserves, making it the most endowed African country in terms of gas reserves (ahead of Algeria, Egypt and Libya).

Analysts at FBN Capital Limited in a report on Wednesday said a number of indigenous players such as Seplat and Seven Energy had been prominent in gas development, adding that the general sentiment was that additional domestic players would enter this space.

“There are several obstacles to the much needed investment to expand the aged gas pipeline network. We will highlight pipeline vandalism as the main deterrent,” they added.

A significant amount of Nigeria’s gross natural gas production is flared because some of the oil fields lack the infrastructure needed to capture the natural gas produced with oil, known as associated gas.

The country requires investments of between $1bn and $2bn annually in gas pipelines and processing plants, especially as it looks to drive monetisation of its gas reserves through the production of power or fuel, the Energy Information Administration has said.



– Punch

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