Tackling Nigeria's Energy Crisis
By Dr. Emmanuel Egbogah,
Special Adviser to the President on Petroleum Matters
Power and gas supply challenges
Experts have forecast that the global energy needs will continue to grow despite the relative increase in crude oil and natural gas prices. These increases in prices are generally due to demand and supply balance, as well as other geo-political events. World energy demand has been forecast to grow by about 2.3 per cent annually, with most of this growth coming from non-OECD countries notably China and India. Africa and indeed Nigeria have their fair share of the growth. The rapid growth in non-OECD countries is driven mainly by the increase in electricity generation requirement and rapid industrialisation, compared to OECD nations where extensive infrastructure and strong economy already exist.
Fossil fuels, which include crude oil, natural gas and coal will continue to play a very significant role in the global energy supply mix in the long term. Natural gas consumption is expected to grow annually by about 2 per cent, thereby increasing the current world consumption from about 100 trillion cubic feet (tcf) in 2004 to 163 tcf in 2030. This rate of growth of natural gas further demonstrates the critical importance of this product in the fuel energy supply chain especially in the power and industrial sectors of world economy.
Following several years of low gas utilisation, that is, in the period before 1999, the Nigeria gas sector is set for unprecedented growth in demand from the current 5 billion cubic feet per day to over 20 billion cubic feet per day by 2011/12. This, compared with the global average, is by far the most aggressive forecast. This growth in domestic demand is based on projected 10 per cent growth in the power sector after achieving the current expansion in power, 5 per cent annual growth in the industrial sector in line with Nigeria's Gross Domestic Product (GDP) growth forecast, targeted increase in electricity generation capacity of which about 60 per cent is assumed to be gas-fired.The growth of the power sector demand in Nigeria is the most aggressive, with a number of power plants under construction or evaluation with potential to generate up to 16GW by 2010.
Consequently, the requirements for gas by the power sector is very significant compared to other sector. To conclude the introduction, the growth in demand is drive by three factors:
The rising of gas in key export markets as the reserves in these countries continue to decline thereby propelling the LNG export business in Nigeria; Aggressive growth in the domestic power sector occasioned by the power sector reform; and The successful campaign by the Federal Government to attract gas-based investors to Nigeria.
Five key factors underpin the gas supply challenges for Nigeria's domestic market:
Gas availability, characterised by the orientation of the international oil companies (OICS) to gas export, as well as availability and development of short/medium proven gas reserves.
- Commercial issues, bordering on domestic gas prices, revenue securitisation and gas agreements.
- Adequacy and flexibility of gas infrastructure, and costs
- Legal and regulatory framework, and
- Funding of gas developments and infrastructure.
These five factors have to be addressed holistically in order to achieve a sustainable supply growth.
The international oil companies which operate and control significant share of the gas resources and infrastructure, have a strong bias towards exports of the liqueified natural gas. This is mainly due to the security and guarantee of supplies as well as security of value at the end of downstream value chain, and lack of confidence in the domestic market. Key challenges are domestic markets, third party access to their infrastructure, transfer pricing and the impact of third party supplier without downstream interest, and sub-optimal infrastructure development.
Expansion in power, 5 per cent annual growth in the industrial sector in line with Nigeria's GDP growth forecast, targeted increase in electricity generation capacity of which about 60 per cent is assumed to be gas-fired. Although Nigeria's natural gas reserves is estimated to be about 184 TCF, almost 40 per cent of these reserves are not available in the short term as they are stranded in gas caps and not accessible until much after the production of oil. The remaining available reserves fall far short of the required reserves base to meet the outlined demand growth.
Consequently, non-associated gas reserves (NAG) will form the bedrock of short/medium term gas developments in Nigeria. Other commercial issues, such as lack of world-class agreements, unpaid debts, inability of buyers to pay and the perceived weakness of GSPAs, in terms of protection they offer the supplier, contribute to make the domestic gas market less attractive and prevent a sustained supply growth.
The diversity of the downstream gas portfolio creates opportunities and challenges alike. The most critical challenge is the varying capacities of the various sectors to afford gas. For example, the power sector is the singular largest buyer, but the least able to pay. A sector- based pricing intervention is, therefore, inevitable, particularly in the short/medium term.
Another factor affecting gas supply is the inadequacy of existing gas pipeline infrastructure (both in reach and)
Gas availability challenges
- Dominant resources/infrastructure control
- Highly diversified downstream interest but trend is towards LNG as core downstream
- Convergence across all of integrated suppliers in strategic focus and delivery approach
- Growth in global LNG market share.
- Secure and guaranteed supplier
- Secure value at end of downstream value chain.
- Balancing gas supply to own export with competing domestic supply
- Third party access to infrastructure
- Transfer pricing and impact on third party supplier without downstream interest
- Sub-optimal infrastructure development
Current demand growth is driven by three factors;
- Rising gas price in key export markets as reserves decline in these countries;
-Propelling a vibrant export LNG business in Nigeria
-Causing relocations of gas-based industries . For instance, methanol etc. to reserves rich
and low gas cost countries like Nigeria, Egypt, Trinidad etc.
- Aggressive domestic power sector reform
-Successful campaign by the Federal Government of Nigeria to attract gas-based investors
Making gas prices affordable.
- The success of the move will depend much on
- The diversity of the downstream gas portfolio creates opportunities and challenges alike.
- Perhaps the most critical challenges is the various capacities of the various sectors to afford gas.
- The power sector is the singular largest buyer, but the ┬ least able to pay.
- A sector-based gas pricing intervention is therefore inevitable particularly in the shot/medium term
Gas infrastructure capacity demand
- Existing gas pipeline infrastructure, inadequate in capacity and reach for the current and projected demand growth.
- Lack of connectivity between East and West, coupled with limited throughput capacity severely constrain supplies
- Whilst gas reserves are concentrated in the East, there is limited connectivity with the west where demand is concentrated.
- This infrastructure situation limits the flexibility of supply
Gas Supply Challenges Commercial Issues:
Significant portion of currently supplied domestic gas not backed standard GSPAAinvestment deepens in the sector, bankable GSPA As are required IOCs /NNPC are owed over N10 bn by the domestic market (largely PHCN) from supplies made historical over the last few years.
History of non payment for gas in domestic market-mainly from government parastatals such as PHCN, ALSCON,DSC etc. created a drag in IOC's willingness to invest heavily in supply unless adequate interventions on revenue securities are provided.
In view of the size of capital investment required to supply gas, agreements are critical and need to be enforceable Current domestic market is not mature and agreement needs to be improved to enable investor confidence. With the power sector, restruction has created lack of clarity on who the counterparties to an agreement are.
Fiscal and regulatory framework deficiencies.
The existing AGFA fiscal regime favours existing upstream investors and thereby acts as a barrier to non-oil investors and new errant into the sector. Giving tax tariff as an uplift of capital expenditure encourages upstream investor to investments
The Government share of economic rent is low as gas development is essentially being funded from existing oil tax revenue due to Government (PPT)
There is need to have a proper commercial regulatory framework for downstream gas sector, including the provision of third party access, pipeline ownership and tariff structure, gas transportation code etc.
Legislature delays in passage of fiscal and DGA.
Delay in the passage of critical legislature submissions are creating uncertainty in major project, further escalating the long term supply development and could also in the long run reduce the Government net proceed y $4.4-5.4 billion, if the relevant fiscal laws are not passed
- Downstream Gas Act submitted in 2005
- Both houses have had public hearings, etc
- However, bill not passed yet.
- Fiscal Reform Act submitted in 2005
- NASS hasn't reviewed this
- Potential revenue loss to government is about $4bn as a result of delays
Strategic interventions: The gas master plan infrastructure blueprint.
-Proposed infrastructure blueprint will ensure infrastructure access on most demand centers
-Ensure connectivity between major gas reserves sources and the demand centers
- Explore synergies across JVs and reduce overall cost of infrastructure development
-Reduce incremental infrastructure development cost by leveraging most of existing infrastructure
-Facilitates more flexibility in gas supply deliverability than currently exists
Central processing facilities
- Central processing facilities (CPF) will be strategically located within each cluster
-Accessible to most reserves
- Reasonably accessible┬ by other remote reserves possibly outside cluster e.g. small
- Open access to all players for standardised tolling fee
-CPFs will replace all incremental plant capacity upgrades
-Focus for capacity investment within cluster
- Allow critical mass of capacity growth to be consolidated rapidly in one plant, hence
accelerating capacity availability
- CPF will be modular, enabling steady capacity growth
-Consolidation within single CPTs will align capacity expansion with available executive
capacity within EPC sector
-Domestic gas supply obligation regulation.
-Stipulates that all operations in the country make a mandatory reserves allocation for
-Allocated reserves will be based on the domestic requirement and mitigate the supply
shortfall driven by focus on export by major suppliers
-Meeting domestic supply obligation as requirement for export
Oil and gas industry reforms.
Following concerns on the energy situation in the country, Mr. president set up a committee in august 2007 to look into the energy crisis and make recommendations. The committee's report to the President made recommendation that addressed the following.
-Funding and privatisation
-Gas linkage with power supply
-Role of the three tiers of government
The report also proposed the transformation of NNPC into a fully fledged integrated international oil company.
Ongoing discussions on the power sector .
- Power sector demand as it currently stands stretches the supply system beyond its limit
- The current electricity tariff does not support the long run sustainability of gas supply
- Domestic gas supply in the short/ medium term must take cognisance of both the power sector and industrial demand.
Given the above supply, planning in short term must be rationalised to cater for an ordered proportion of power and industries. A rationalisation of the power sector term generation aspiration is therefore recommended.
This will bring focus to a re-aligned and realised expectation for a generating capacity that is attainable in a specific period -one that recognises gas supply availability and electricity transmission capacity. It will refocus the use of all resources, viz funds, personnel etc on delivering what is realisable in the time frame.
It will also form the premises for gaining the confidence of the populace as to Federal Government's efforts in the power sector
Oil and gas industry reforms.
The primary objectives of the restructuring programm is to ensure that NNPC:
-Evolves into an integrated, international, commercial oil and gas corporation driven by
revenue generation and profit oriented motives;
-Is divorced of some the conflicting roles of policy regulation and national assets
management with right to raise fund for it projects and operations;
-NNPC restricting will further decentralise the industry making it more efficient and
-Operations are streamlined such that major task of policy regulation commercial operations
and national assets management are carried our by separate public entities.