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How to maximise Nigerias huge gas resources

Published by The Nation on Thu, 16 Jan 2020

The Department of Petroleum Resources (DPR) says the countrys natural gas proven and unproven reserves stand at 200.79 trillion cubic feet (Tcf) and 600 Tcf, making it more of a gas province than oil. However, industry operators say until the right regulatory and fiscal policies are put in place, optimising the potentials of natural gas for development of the economy will remain a mirage, reports EMEKA UGWUANYI.The Nigerian Gas Association Workshop Report noted that Nigeria has large hydrocarbon resources, including natural gas, when compared to other producing countries.This resource, the report said, is of benefit as it has become and continues to be the fuel of choice in developed and developing countries.The distribution ratio of proven reserves between Associated Gas (AG) and Non-Associated Gas (NAG) is 50/50, the report said, adding that the natural gas industry is developing as the country is only consuming a fraction of it, especially in meeting its internal energy demand.According to the report, gas development is constrained by the absence of fiscal policies; gas pricing mechanism; legal and regulatory frameworks; and inadequate finance.These uncertainties have had deleterious effects on the industry. Creating an enabling and reliable legal and regulatory environment will ensure the successful and sustainable development of the industry.A research by the Facility for Oil Sector Transformation (FOSTER) with objectives of improving the performance of the oil and gas sector in terms of efficiency and productivity, the report said, identified gas regulatory and pricing and proposed recommendations to the impending problems.Gas pricing challengeAccording to FOSTER, The end user gas price of US$3.85 per million standard cubic feet (Mscf) directive by the Minister of Petroleum Resources for textile manufacturers based on a distribution tariff of US$1.15 and marketing margin of US$0.50 fails to cover the scope and cost of last mile distribution companies and does not take into account the capital that has been invested to develop the distribution network.The extension of a special pricing arrangement to any arm of the industry should be preceded by an extensive consultation, in-depth research and an assessment of the consequences of such arrangements for the manufacturing industry to ensure that no element of the value chain is broken in the process.The National Gas Policy 2017 also recognises the importance of stakeholders being carried along in regulatory decision making. For example, the regulated tariff for monopoly infrastructure is to be based on a tariff methodology and model developed by the petroleum regulatory authority with input from stakeholders.Consequences of the directiveAccording to players in the natural gas distribution chain, pursuant to the directive, the end user gas price of US$3.85/Mscf took effect from January 1, 2018.It is a retroactive price, which fails to take into account the cost of our services or the capital we have invested; therefore, it will have a crippling effect on our businesses and result in gross value erosion for local and foreign investors who have already committed funds; creation of unanticipated liabilities for Local Distribution Companies (LDCs) as other manufacturing customers will expect back payments at the LDCs expense based on policy-generated debts for 2018 (resulting from the US$3.77/Mscf difference between the US$7.62/Mscf price that was in effect during 2018 and the US$3.85/Mscf price in the Directive); and potential future tax complications, levies and penalties against LDCs.Others are making LDCs face significant difficulty in meeting up with financial obligations to lenders for facilities expended towards gas infrastructure deployment, which ability to meet up with financial obligations was under severe strain as a result of the significant currency devaluation; and negative effects for contracts executed before the release of the directive.Also on capital recovery, the gas players said: We have invested very significant capital to develop our extensive downstream distribution network.This capital is recovered through a portion of the end user gas price. The directive, however, does not make any provision for capital recovery.This would grossly erode already constrained margins, meaning that we would never be able to recover our prior investment and would be unable to carry out any further development of the distribution network to promote further industrialisation.This will compound our already pressured ability to conduct Operations and Maintenance (O&M) at the right quality and safety standards in the normal course of business.Additionally, the imperative to upgrade our distribution infrastructure as required from time to time demands fresh injection of significant capital.The provisions made for these at the initial investment decision phases have become grossly inadequate as a result of changes in macro and micro economic variablescurrency devaluation, foreign exchange constraints and inflation, among others.Our capacity to meet these obligations would be greatly diminished as a result of inadequate margins espoused by the directive, and inability to accommodate all ongoing negotiations with small industries requiring marginal gas volumes.Investment protection and sanctity of contractsThe supply of gas to customers in the textile and manufacturing sectors is based on commercially negotiated, legally binding contracts.The implementation of the directive would ignore the commercial agreement between parties and send a wrong signal to the private sector and foreign investors that contracts do not need to be respected or can be interfered with by the Federal Government.This will hinder further investment in the industry and other sectors given that policy risk is a first consideration during the investment appraisals.The report noted that the LDCs are already feeling a strain on their investments as a result of the currency devaluation and the fact that any overseas costs, which the LDCs incur would be at NAFEX rate (about $1:N365) while the end user gas price is converted from US dollars to Naira at the CBN rate ($1:N306). A $3.85 end user gas price will compound this situation.The directive also creates the risk of disputes and litigation between commercial parties in the gas industry. Gas pricing in the gas value chain is based on investments made on established economics (as recognised by the Gas Policy) and the erosion of margins, which underpinned the investments would mean that there is the significant risk that suppliers or distributors of gas would be unable to continue to meet their contractual obligations on a sustainable basis.Directive at variance with Gas Policy and hinders development of the gas industry.Read Also:Shift to gas will knock out petroleum subsidySylvaAccording to the report, the Gas Policy is clear that to fully develop the industry, there is a need to move towards a deregulated market allowing for willing buyer-willing seller arrangements.This would help incentivise private sector investment in the various aspects of the gas value chain. The Gas Policy also recognises that cost of service has to be taken into account in regulatory decision making. The directive, however, fails to note the cost required to develop, operate and maintain gas infrastructure.A strict regulation of the gas price for the entire gas value chain is at variance to the spirit of the National Domestic Gas Supply and Pricing Policy 2008 and the Gas Policy, which enshrine the governments position on achievement of a market-led pricing approach and incentivising private sector investment in the gas industry.It would also deter much needed private sector and foreign investment in the Domestic Gas industry given that investors will be unwilling to invest in an industry where there is no certainty as to viability of the investment if the Federal Government can unilaterally make significant reductions to the pricing, which was used to assess the economic viability of the investment.Such directive shows there is no sanctity of contracts as commercial terms of commercially negotiated contracts can be significantly adjusted by the Federal Government at any time.The US$3.85/Mscf end user gas price for the whole manufacturing industry would also mean the distribution companies would be unable to expand their networks (which would further promote industrial development) given that there would be no way to recover the investment.The positive impact LDCs have had on the development of our nation through our significant investments in the downstream gas sector must be emphasised.Since the LDCs commenced commercial operations we have enabled the creation of hundreds of thousands of jobs (directly and indirectly); enabled contribution of over N565billion to Nigerias gross domestic product; developed over 250 megawatts (Mw) power generation capacity; displaced over 1,980kt of CO2 emissions through customers we have enabled to switch from diesel to natural gas; provided education-focused initiatives to several thousand students; and provided entrepreneurial training, capacity development and empowerment programmes and provided medical interventions for several thousand indigenes, it said.The report continued: All these significant contributions would not have been possible without gas pricing, which supports the cost of service and enables the recovery of capital invested.The LDCs have also made a significant contribution to industrial development by being able to supply gas at a price which is at a discount of 30 per cent plus to the price of alternative fuels.Without an end user gas price that took into account cost of services and enabled recovery of capital invested we would have been unable to develop the gas infrastructure, which has enabled this industrial development.In facilitating industrial development, we have even gone as far as incurring the costs required to connect some customers to our network that did not pass the economics required for new connections (achieved through cross-subsidising with customers that passed the economics).The overall effect of this strict regulation of the gas price in the manner set out in the directive is that the development of the gas industry would be significantly hampered when there is a need for our nation to move towards a gas-based economy.
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