Creating a Gas Economy - The Supply Side

This is the second instalment on the issue of creating a viable and sustainable gas-based economy in Nigeria, a nation richer in gas than it is in oil. Last week’s contribution looked at the demand side of this resource for industrial and commercial use. The all-important role of gas power generation was also discussed. This was discussed with the country’s Gas Master Plan (GMP) as a main tapestry that forms the background of both the opportunities and challenges of using gas as the take off fuel of Nigeria’s industrialisation.

Today’s article looks at the supply side. Or, now that the potential use of the resource is identified how will it be sourced?

Whoever follows the Nigerian hydrocarbons industry has heard on time or another that Nigeria is blessed with more gas than oil. What sometimes befuddles the mind of those who see gas as a more desirable blessing than  oil is that almost all gas discoveries in Nigeria are ‘accidental’, that is, gas is discovered as we go about looking for oil. There is hardly an international or local exploration and production (E&P) company in Nigeria that has planned and executed a campaign to drill for and produce gas. So for the most part the 179.4 trillion cubic feet (tcf) of proven gas reserves that place Nigeria 9th in the world and first in Africa is composed of associated gas - or gas that is locked in by subsurface pressure within the proven oil reserves and which is released from suspension (and in Nigeria mostly flared) as the oil is produced and gas fields that were discovered when searching for oil.

From very poor and inadequate power generation capacity (think power plants) to industrialisation and small and medium enterprises, SMEs (think job creation), to cheaper and cleaner burning fuels for homes and vehicles (think kerosene substitution and natural gas vehicles); Nigeria can indeed do no better than to reverse its poor local gas consumption and harness its gas resources for the use of its people.

All one needs to do is cast one’s mind to the immigration employment scandal of last few months to see that there are over twenty million reasons why as a nation Nigeria has no choice but to tap into its gas resources for job creation. Every one of the twenty million young people pounding the streets with a CV in well worn manila envelop is a reason why Nigeria has to give gas both the respect it deserves as the nation’s fuel of choice and the path to its economic El Dorado.

Even, Saudi Arabia, a giant with the world’s most extensive hydrocarbon reserves has tied its future of becoming a global leader in petrochemicals to an ambitious shale and conventional gas exploration programme. The country is currently developing six additional ‘Economic Cities’ with focus on skills development and employment generation similar to Jubail and Yanbu; two cities that rose in the desert to service an export market in secondary petroleum products.

For once the country, which has the sixth largest gas reserves in the world,  has elevated gas development above that of oil to respond to demands both at home and abroad. The Karan non-associated gas field discovered in the Arabian Gulf in 2006 and opened for production in 2011 with a production capacity of 240 million cubic feet of gas per day (cf/d) is not typical of a Saudi hydrocarbon development - as it is the first non-associated gas development in the kingdom. The company has since developed the field to a production capacity of 18 billion cf/d. In 2013 Saudi Arabia also discovered two giant gas fields in their eastern core operating area in addition to their new focus on shale gas development, which a few years ago would be an anathema to Saudi oil and gas development focus.

Access to gas for existing industries and power plants, old and new, is nowhere near adequate. Spanking new power plants are starved while the country channels gas to LNG gasification plants to meets its export obligations. As the country starts work on its first Gas Industrial Park in Delta State and builds even more industries and power plants across length and breadth of the nation, the issue of access to gas to these industries and how much such gas is priced becomes a central issue for the incoming government.

Enter the gas supply obligation and pricing policy which has in it a proposal to create the Strategic Gas Aggregator (SGA). These are both contained in the Gas Master Plan (GMP) to facilitate easy and regulated access to gas for the industries that need it. While the gas supply obligation ensures a pricing framework based on whether the end user is a power, industrial or commercial concern while the SGA, which has already been created, manages demand and supply to the market in accordance with availability.

Third-party investors with feasible plans to use new technology in harvesting stranded gas (from flares) for monetisation must be empowered with a disciplined flare-out campaign. Medium industrial concerns and local power plants will find routes to profitability this way. Local communities can also be empowered to cooperatively develop this resource being wasted and convert the nuisance flares in their backyard to readily usable gas for domestic use and to power small scale industries and mini/micro power plants. According to the U.S. National Oceanic and Atmospheric Administration (NOAA), natural gas flared in Nigeria accounted for 10% of the total amount flared globally.

According to the information obtained fro the US Energy Information Agency on gas development in Nigeria the three main IOCs in the country, Chevron SPDC and ExxonMobil, together have eight gas projects in the pipeline totalling nearly 1.5 tcf per day that are scheduled to start between 2016 and sometime after 2020. Some of these, such as Shell’s Forcados Yokri Integrated and Southern Swamp Gas Gathering projects are linked to a flare out programme.

There are also many gas fields discovered decades ago lying undeveloped in the Niger Delta. Some were earmarked to service an export market which never took off, such as the fields designated by the governments of Obasanjo and Jonathan to feed the Olukola Liquefied Natural Gas (OKLNG) the Brass Liquefied Natural Gas (Brass LNG) projects respectively. What makes this situation unfortunate and untenable is that final investment decision (FID) on both of these two proposed politically-motivated projects has not even been taken which means their gas requirement is way into the future. What concerns this column is that the gas assets dedicated to supply these projects can easily be diverted to feed local demand, such as the Lagos Free Trade Zone or additional Gas Industrial Parks in the Niger Delta, but no one is even talking about that.

But it is not all bad news. Nigerian indigenous operators, such as Frontier Oil, and Seplat Petroleum Development Company are rising to the plate venturing into the very lucrative world of gas monetisation.

Uquo field located in OML 13 in the eastern Niger delta is owned, developed  and operated by Frontier Oil. The company acquired it from Shell Petroleum Development Company (SPDC) as a marginal oil field in 2004 but it turned out to have no oil but gas. They took that in their stride and it became the first and largest non-associated gas development by an indigenous operator in Nigeria, boasting of a 200 million standard cubic feet of gas processing facility and an 18” pipeline that runs 62Km from Uquo to Ikot Abasi. It currently has a contract to supply over one trillion cubic feet of gas to the Ibom and Calabar independent power plants. The company now has plans  in the pipeline for similar acquisitions.

Another good story in the making is the Ohaji South gas and condensate field in OML 53. The 40% equity held by Chevron in the OML has recently been acquired by Seplat. While the produced condensate is sold off to the international market, Seplat will coordinate the development of the gas production with Shell’s plans for the Assa North project located in nearby OML 21 which is targeted to supply the domestic gas market.

More positive E & P stories featuring indigenous Nigerian concerns can be written and there are still many undeveloped gas fields held by IOCs that are waiting to be central characters in such stories. From the two examples above and with a supportive government providing the right regulatory tools and incentives, the development of non-associated gas fields can easily be the forte of Nigeria’s indigenous operators.

Incentives that include the right pricing structure for their production. An impediment that creates shortage in the supply of natural gas for power generation in Nigeria is because it competes with exports which is more profitable for producers of gas than selling it to the domestic market. A generation capacity of over ten thousand megawatts is required to meet the  current power demands of the country and presently not even half of that is generated. That demand cannot be met as long as the IPPs and the other generating companies (GenCos) are struggling to access the required gas to be operational. Because price is the major bottleneck is the pricing structure the Nigerian authorities are now working to approach price parity between what the domestic power producing companies pay for the gas and the export price. Price of gas for power generation in Nigeria is currently $2 per million British thermal units (MMBtu) up from $1 a year ago while industrial user pay $3/MMBtu. Gas users in the US pay about $1.38 - $2.89 per MMBtu in the United States depending on trading location. How this play out with the economics of the IPPs already constructed and for which the investment decision was based on lower gas prices remains to be seen.

Finally, the regulatory uncertainty has also slowed the development of natural gas projects as the Petroleum Industry Bill, PIB, is expected to introduce new fiscal terms to govern the natural gas sector. And as we all know, it is still debatable if the proposed bill will pass as is, go through some further modifications or be jettisoned all together. Many proven gas fields are being held strategically by their owners, as you would a chess piece, waiting for the right regulatory and commercialisation environment to manifest.