Nigerian Gas Revolution: The EVOLUTION of an Inevitable REVOLUTION

HOW WILL UPSTREAM NATURAL GAS CONTRACTS ENHANCE EFFICIENCY?

As it is the obvious intention of the Federal Government to maximize the productive efficiency and commercial productivity of the domestic gas industry, one of the most important conditions for the realization of this objective is and still remains contractual sanctity and the right operational incentive required to foster domestic growth in the gas economy. Tied to this however is the existence of long-term up gas production and supply contracts that is based on the Dutch Groningen model.

Groningen is the large gas-producing province in the Netherlands that gave rise to the concept of the “dutch disease”, an apt description of the tendency for oil-producing or resource-rich states to neglect the other productive sectors of the economy at the expense of such high value resource, thereby leading to waste, inflation and de-prioritization of the real sectors of the economy. It should be pointed out that Nigeria has unarguably been in the unenviable category of countries plagued with the dutch syndrome. However, the concept of long-term gas contract is built in to stabilize the market for gas, both for investors and the need to specifically create a market for it! The inherent benefit here is in encouraging systematic investments in the gas fields overtime (even by indigenous players) as contemplated by the Local Content Act. The most similar example of these long-term contracts is found in the “locked-in” contracts between the Nigerian LNG and its European Offtakers! The same contract model is also used in the gas supply contracts between Algeria in the Maghreb region, and its European market, notably Belgium, Spain, Portugal and Greece, as well as from Libya to Italy.

WHY LONG-TERM?

The essence of long-term gas contracts is essential to the parties and for quite distinct reasons; for the buyer, it’s the need for security of supply (in other words, a reliable, and stable supply of gas over a period of time) whilst for the producer, it gives him the sufficient incentive necessary to engage in that critical investments in the development of gas fields. This is because the existence of a long-term contract guarantees the needed revenue that is critical to keeping the producer on the oil fields. This is particularly important especially where the gas production is project – financed. This is because project financiers often require that the purchaser would commit to a long-term purchase contract. Secondly, the contracts must necessarily be strong enough, in terms of volume, price and time, to attract upfront funding of the producer or franchisee’s gas fields. 

There are other mechanisms that are often built into these varied GSAs (Gas Supply Contracts) in terms of take-or-pay clauses, profit-sharing clauses (where they arise), or with some bordering on anti-competitiveness. It is however the author’s opinion that the demand of a stable and reliable supply of natural gas to a strong and evolving Nigerian market far outstrips the need for anti-competitiveness in the immediate term.  The Lagos State Governor, Babatunde Raji Fashola recently commissioned a 114 Megawatt (MWs)Island  Power Plant, and he was quoted as saying that the only impediment to the full realisation of the plant’s optimum capacity within 24 months would be the challenge of transporting gas from  Ijora to the Lagos Island, where the plant is, incidentally located.

GAS PRICING REVOLUTION? 

It is not in doubt that the biggest incentive to the development of a domestic gas market and meeting the demands of the nation’s industrial quest is gas pricing. It determines a number of economic indicators, from the proposed fertilizer plants output to the petro-chemical companies and also, most significantly, the power plants. The challenge before the Government is firstly to strike the critical balance between economically-stimulating pricing and investor-friendly pricing. The pricing must reflect two equally important factors; a gas pricing policy that will not stifle the economy, particularly, the gas-to-power pricing and secondly, a gas-pricing policy that will send encouraging signals to foreign investors and for them to secure bankable agreements for their investments. It is the writer’s belief that the government can conveniently get round this situation by setting priorities, established in tier-forms. 

Whilst the author acknowledges that there is no hard and fast policy approach towards striking a critical balance, setting a three-tier pricing system. For instance, a tier-one gas pricing policy may be created for the investments in power sector investments to reflect its position as a critical national priority, the tier-two pricing policy may be made applicable to investments in the fertilizer, petro-chemical and ethanol plants while tier-three pricing may be made applicable to the LPG market. Again, there is no absolute way of setting the pricing policies in tiers, but the government does need to evolve a systemic pricing approach to reflect these sectors in order of national priorities and their general economic benefits. The Minister of Petroleum, Mrs Diezieni Allison-Madueke was quoted to have noted, in the course of explaining the newly-approved gas pricing policy , that the current gas to power price which stoods at two cents ($0.2)/mmbtu of gas (N3.06) in November 2010 or so further expressed hope that the price would have increased to $1.00 / mmbtu of gas (N153) by the end of the year!

      

Indeed, it is agreed that for Nigeria to join the elite club of major gas trading and exporting companies, especially within the sub-region, the pricing template must reflect the willingness and political will on the part of the state to facilitate this. Unlike Oil, which pricing indicators are affected more by  externally or internally-induced shocks(remember Niger-Delta Militancy) in the international market or otherwise, the gas pricing policy will point clearly the disposition of our government to elevate the position of natural gas in the scheme of things, as a driver of renewed economic growth and industrialization. With a self-sustaining domestic market of gas, it would certainly be in the nation’s interest to have a commercial pricing policy so as to enhance overall sector efficiency, and stimulate its other ancillaries.  As indicated by the Minister, with the Final Investment Decision being awaited on the Brass LNG, only then can we begin to prepare for the country’s emergence as  a global gas player in line with stated government objectives. A refocus on the Olokola LNG project would also help to position the country as a fully-evolving gas region.

GAS DEVELOPMENT AGENDA: THE UNITED STATES APPROACH OR AN INDIGENOUS GAS MARKET EVOLUTION?

Like Nigeria, the United States has several areas with proven and potentially significant natural gas reserves. The main gas producing states are Texas, Oklahoma, Louisiana, Arkansas and Kansas, most of which are states concentrated in the South-central part of the country. This region, coincidentally, like the Nigeria’s Niger-Delta, accounts for approximately a little over half of US’s total gas production and reserves. The surplus gas produced are often transported to other parts of the country via a sophisticated network of pipelines to the other parts of the country, often running into thousands of kilometers of network pipelines. The US gas market had so evolved to an extent where hundreds of players have vast interests in production, pipeline ownership and management, as well as large-scale producers who subsequently sell to an equally large consuming market. Therefore, major hubs are created along the regional routes where the gas prices are set. Some of these large hubs include the famous Henry hub and some other along the fringes of the west coast, notable the Transco zones.    

The growth of the US gas market has further created a situation whereby there is a pronounced division of regulatory competence between the federal authorities and states; while the federal regulator(Federal Energy Regulatory Commission ) is primarily concerned with the transportation of gas within the inter-state pipelines networks and the re-gasification LNG terminals; the intra-state regulatory agencies concern themselves with the internal market distribution, supply and consumption pricing in their various local states.  This extremely large complex network of gas market, is essentially a product of the resolve of Americans to develop the gas market at all cost, and was built overtime, often with protracted litigations between  gas producing firms with historical interests in producing under a largely unregulated period (1889-1937) until the federal  regulator began an oversight function over the industry.

Coming home, it is apparent that Nigeria cannot and could not, have afforded to have traveled the Gas-Market evolution story of the US! However, we can indeed borrow one or two lessons from the US story, especially as it relates to gas-pricing when the market becomes fully developed. The US Supreme Court gave its opinion in Phillips Petroleum v Wisconsin(1954) , that congress has shown through its legislative history that federal regulators were not only empowered to regulate inter-state pipelines, but also the rates (prices) of all wholesale of natural gas commerce between the states. The meaning of this therefore, was to the effect that the ex-wellhead prices (price sold by gas producers to pipeline companies) were to be administered by federal regulators! 

This is however in contrast to our own peculiar position in Nigeria has been sufficiently taken care of under the salient provision in Part 1 Schedule II, of the Constitution, Federal Republic of Nigeria, 1999,  which vests  mines, minerals, oil fields, oil mining, geological surveys and NATURAL GAS, within the exclusive legislative competence of the Federal Government. One may not be able to rule out totally, the anticipated market explosion that may evolve from the Gas Revolution initiative, coupled with the earlier mentioned commissioning by the Lagos State Government of a 114 MWs Independent Power Plant in the state, and the recently signed MOU between the Cross-Rivers State Government and ESSAR African Holdings Limited on the establishment of a 600 MWs Power Plant in Calabar among other intra-states  gas markets that may follow in states like Delta, Kaduna, Anambra, Kano, Ogun, Rivers etc! Equally, one may not also rule out the possibilities of intra-regional gas markets for power, petrochemical or ethanol plants; for example in the Southwest (with the exception of Lagos),or the North East, South East or North Central in 2 to 3 decades from now. Will the Federal Government under such circumstances allow a quasi-independent gas market in the states? If it does, will it also allow for individual state-controlled regulatory authorities and focus more on providing the general framework of operations in the internal gas markets of states and regions?   

Whatever the Federal Government decides at that time, one thing is quite clear; one must commend the current administration  for this GAS REVOLUTION INITIATIVE. One can only say at this point therefore that- LET THE EVOLUTION OF THE REVOLUTION BEGIN!

Nutshell

This is the final installment of this article by the author on "Nigeria Gas Revolution: Rebirth of Nigeria's Industrialization". Ademola discusses further the Gas Revolution Initiative of the present administration in Nigeria and examines various salient issues in the light of various circumstances in the country and around the world . Read, Learn, Share and Discuss!!!