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Nigeria’s new petroleum law is forging a new trajectory for natural gas

Chijioke Mama
By Chijioke Mama

Managing Director of Meiracopp Nigeria Limited - an African-focused Energy and Infrastructure advisory company based in Lagos, Nigeria.

Posted on Monday, 1 November 2021 12:19

A view of the government-owned Nigerian National Petroleum Corporation in Abuja is seen in this January 14, 2010 file photo. REUTERS/Afolabi Sotunde/

Nigeria's 206.53 trillion cubic feet (tcf) of proven natural gas reserves are sufficient to conspicuously line its coasts with tens of gas-dependent chemical process plants. This is the desirable industrialisation move that has eluded Nigeria for a long time.

Now, however, the Nigerian government hopes to chart a new course for its gas sector, through a new initiative termed “The Decade of Gas”.

Similarly, a number of regulatory reforms are being pursued, chief of which is the recently enacted Petroleum Industry Act (PIA).

When natural gas was discovered in Mozambique, putting shovels on the ground wasn’t the first priority for the government and other private sector stakeholders.

The primary concern was the institution of the necessary legislative frameworks, required to attract and retain private capital, given the “zero”-gas development experience of that nation.

In contrast, Africa’s largest natural gas reserves holder – Nigeria – has been pushing its natural gas sector through obsolete legislation that doesn’t recognise natural gas as a resource in its own right.

This September, Nigeria’s President Muhammadu Buhari assented to the Petroleum Industry Act (PIA), which replaces the Petroleum Act of 1969.

What does the new Act say?

The new Act rightly provides for healthy and sustainable development of the country’s natural gas resources, rated as the ninth-largest in the world and hitherto seen as a product that is incidental to oil.

With respect to its vast energy resources and evident energy poverty, Nigeria exemplifies the paradoxical life of the “rich but hungry”.

However, the new legislation and the seemingly sincere 2020-2030 government “Decade of Gas” initiative are poised to change that narrative.

Firstly, the PIA in itself is not an elixir for the Nigerian oil and gas industry, which is bedevilled by serious operational, technical, commercial and even social challenges; however, it does represent a positive and significant shift in the status quo.

Secondly, several gas discoveries within awarded acreages have remained undeveloped, due to what many operators termed “unfriendly pricing” regime for produced natural gas, which specifies the arguably uncompetitive price of $2.50/mmbtu of gas, for thermal power generators and $1.50 for chemical process plants such as methanol, ammonia and urea.

When compared to the price of gas in the international market, these prices are largely considered uncompetitive. Upstream companies in Nigeria argue that these prices do not provide sufficient incentive for investing millions of dollars to bring undeveloped gas on stream.

However, in a remarkable shift, the new PIA provides that natural gas shall be supplied to power sector consumers at $3.20mmbtu, with further provision for annual price reviews. Similarly, gas-based industries will be supplied within a price band of $0.90-$3.20, which is significantly higher than the price in the pre-PIA era.

Beyond the “non-cost reflective” natural gas pricing regime, which was widely seen as a deterrent for upstream investments, many other acreage holders in Nigeria are simply limited by lack of finance, as well as, operational constraints relating to inadequate pipeline infrastructures for gas transmission.

To address funding challenges, which rank high among the numerous problems limiting the gas sector, the new Act provides for the establishment of a government-owned fund that can help finance private sector projects, through equity participation. The Midstream and Downstream Gas Infrastructure Fund (MDGIF) is both novel and essential as it could lower the funding barrier for private sector projects and equally provide some level of de-risking by virtue of sovereign equity participation.

The necessity of investment

In spite of all these, galvanising private sector interest and willingness to invest will be critical to the realisation of a well-developed natural gas sector in Nigeria. It is evident that gas could be transformational for the Nigerian economy – delivering the social and economic benefits that have already accrued to peer gas producers such as Qatar. Natural gas distribution has evident employment multiplier effects, which can directly ameliorate Nigeria’s expanding job crises.

It’s also poised to enhance government revenue and ameliorate Nigeria’s exacerbating foreign exchange crises, using export-focused natural gas utilisation plants such as LNG terminals, methanol plants and urea fertilizer plants.

Diversifying natural gas use

In spite of its abundance, natural gas utilisation within the domestic market in Nigeria is limited and of the volumes consumed in-country, the majority is consumed within the power sector alone – some by Independent Power Plants (IPPs) and others in commercial captive power generation.

A vibrant gas sector, that is consistent with Nigeria’s National Gas Policy, adopted in 2017, will require the diversified use of any produced natural gas beyond the power sector. In order to rally private sector participation in gas utilisation, the PIA provides up to ten years tax holiday for gas companies, which is incremental to the five years maximum, earlier provided by the replaced law.

Natural gas success in Nigeria so far

Natural gas development has delivered some benefits in Nigeria. For instance, a liquefied natural gas plant in the Island of Bonny co-developed by the state-owned Nigerian National Petroleum Company Limited and its Joint Venture (JV) partners, has been a significant source of revenue for the Nigerian government.

Similarly, a privately-owned ammonia-urea plant in the coastal state of Lagos, owned by the Dangote Group is poised to make Nigeria the largest urea manufacturer in Sub-Saharan Africa. If the aspiration of a booming gas sector is realised through significant new investments, Nigeria may be able to stay ahead of gas-producing peers in Sub-Saharan Africa. Angola, Cameroon, and Equatorial Guinea are all currently producing and exporting Liquefied Natural Gas, while Ghana, Senegal and Mauritania are poised to commence production and export in the coming years.

Bottom line

In spite of these market enablers put in place by the government and the inherent market opportunities, Nigerian companies, as well as, foreign investors will still function within the ambivalent reputation that trails natural gas within the global energy transition.

While gas is considered a cleaner fossil fuel (it emits 50% less carbon than other energy sources such as coal), clean energy advocates have no unanimous opinion on the role of natural gas in a rapidly decarbonising world.

Concerns about “fugitive methane” and nascent concerns about “demethanization” may continue to limit natural gas’ growth potential.

There is no doubt that natural gas will be critical to Nigeria’s development and industrialization going forward, especially now that there are evident enablers for future investments. However, the gas sector will have to surmount a number of domestic market challenges, as well as, global financing biases before it can deliver its full promises to Nigeria.

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