Big gas fields, big gas market: Status of gas investments in Nigeria

*Chijioke Mama.

*Chijioke Mama.

Chijioke Mama

22 March 2016, Sweetcrude, Abuja –– Nigeria is set for a gas revolution. Huge investment opportunities that were dormant for years is now being activated. This revolution will open new doors of gas investment opportunities for private investors and the Nigerian government. Before now; negligence, weak policies and undue operator-focus on oil; saw Nigeria’s huge gas resources abandoned for too long. The status quo has now changed and markedly too.

Sector-based indicators point to an unfolding corridor of opportunities in Nigeria’s gas sector. Beyond the private sector investment opportunities are the macroeconomic buoy anticipated from gas-induced growth. The gas market and demand in Nigeria has greatly expanded; mostly driven by Gas-to-Power investments, as well as the industrial and manufacturing needs. Nigeria’s domestic gas demand forecast is very positive. From 1 bscf per day consumed today to about 5 bscf/d forecast for 2017 and about 10 bscf/d projected by 2020.

From well to burner, investment opportunities across the gas value chain remain viable and are expected to expand. Nigeria has the largest gas reserves in Africa and 7th largest reserves in the world. Proven reserves is reported at 187tcf and probable reserves estimated to be about 600tcf. When it’s considered that most of the produced gas in Nigeria is Associated Gas; it becomes imperative that production potential and utilization have been limited. This is a consequence of the historical absence of exclusive gas prospecting or production licenses. Here is the state of the Nigeria’s gas market;

One of the major deterrents of gas investment & monetization by International Oil Companies (IOCs), indigenous producers and other downstream gas companies has been the price of gas in Nigeria. This has originally been below $1 per mscf. It was reviewed from $1.5 per mscf before 2015 (equivalent to $1500 per mmscf or N300, 000 per mmscf) to $2.5 per mscf (equivalent to $2500 per mmscf or N500, 000 per mmscf). This upward review has increased gas investment appetite and spurred many gas infrastructure development. Stakeholders are expecting further review of the domestic gas price to about $3.5 per mscf in 2016; a price believed to be necessary and imminent for optimizing already growing investment in Nigeria.

Growing Infrastructure
Numerous projects are planned/ongoing for the improvement of gas infrastructure in Nigeria. Distribution pipelines and processing facilities being developed by the private sector and government will guarantee the availability and reliability of gas supply across diverse geographical regions in Nigeria. The Trans- Saharan Gas Pipeline (TSGP) which is currently being developed at different phases is a pipeline system that will move gas from Nigeria’s Niger Delta through Niger and Algeria into Europe, terminating at Hassi R’Mel in Algeria at 4,400km. Investors are already positioning strategic projects along its route to take advantage of gas-based opportunities around this network and its expected spur lines.

The main domestic gas distribution artery the Escravos-Lagos Pipeline System (ELPS) is currently being upgraded to double its capacity (presently 1.1 tscf per day). The new ELPS II is a 36 inch diameter, 342 Kilometer pipeline that will transverse the Nigerian states of Delta, Edo, Ogun and Lagos. It will ensure reliable gas supply to many power plants in its route and also spur new power plants. It will induce the growth of other gas-based opportunities.

Additionally, the Ogidigben Gas Revolution Industrial Park (OGRIP) is a gas park being developed to support gas-based projects with numerous government incentives. By mid-2017, Dangote groups’ (2) 550 kilometer subsea gas pipelines will be completed. The system will increase domestic gas supply from 1bscf today to 4 bscf according to the group’s chairman, Aliko Dangote. For insightful investors, these gas infrastructure projects hold multimillion dollar opportunities across the value chain, including; gas transport/distribution, gas processing, power generation, LPG, petrochemicals, Gas-to-Liquid (GTL), CNG, fertilizer plants, LPG autogas , and other industrial uses. The size of the market is really huge.

Incentives & Regulation
There are numerous incentives for gas-based investments in Nigeria. These incentives and development plans led by government provide the political risk assurance highly sought by investors. The frameworks as reported by The Nigerian Investment Promotion Council (NIPC) are extensive. Some of them include; ‘all gas developmental projects, including those engaged in power generation, liquid plants, fertilizer plants, gas distribution/transmission pipelines are taxed under the provisions of Companies Income Tax (CITA) and not the Petroleum Profit Tax; All fiscal incentives under the gas utilization downstream operations since 1997 are to be extended to industrial projects that use gas i.e. power plants, gas to liquids plants, fertilizer plants, gas distribution/transmission plants. (The initial tax holiday is to be extended from three years to five years; Gas is transferred at 0%PPT 0% Royalty; Investment capital allowances increased from 5% to 15%; Interests on loan on gas projects is to be tax deductible; dividends distributed during the tax holidays shall not be taxed)’

Some Risks
Pipeline Vandalism
Present day gas distribution infrastructures in Nigeria – both upstream and downstream – frequently come under attack. Pipeline vandalism constitute a serious risk element for gas producers, pipeline owners and off takers. All stakeholders are affected, since supply reliability is tied to profitability across board. The new infrastructure in Nigeria will require novel frameworks of gas pipeline security and safety; if the expected and incremental gains must be achieved and investor’s interests protected.

Agreements & Legal frameworks
In the domestic gas market, numerous types of legal agreements are required to secure investments, optimize operation, eliminate conflicts and enforce regulatory compliance. The limited availability of in-depth expertise in the domestic gas market and the use of poor negotiation/legal skills may see some investors executing problematic agreements. The risk of accepting profit-eroding conditions of gas investment and operation is palpable. The diverse forms of Gas Sale and Purchase Agreement (GSPA) such as; Take or Pay Agreement, Depletion Contracts, Supply Contracts, Gathering Agreement, Third party keep whole gas purchase; have their intricacies. If poorly executed they pose significant risk to both current and potential operators. Consequently, Nigeria is not just a gas field but also a huge gas market with very inviting investment potential. (Excerpts from the report; Nigeria: big gas field | big gas market)

*Chijioke Mama is a Senior Energy Research Analyst and a Syndicated Columnist with research interests spanning Sub-Saharan Africa. M: +2347061013333.

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