May. 16, 2019
Since 2008, the twin broad objectives of gas policies in Nigeria have been to eliminate gas flaring and utilize gas to unlock latent economic activities in the country. The Nigerian Gas Master Plan, which was the implementation mechanism under the previous gas policy, helped to increase domestic gas utilization by approximately 33.5% from 709 billion standard cubic feet (bscf) in 2008 to 1,066 bscf in 2015. The new gas policy approved by the federal government in 2017 has the same objectives of eliminating gas flaring and using gas to unlock economic activities.
As for the 2017 National Gas Policy, the federal government approved the Nigerian Gas Flare Commercialization Program (NGFCP) in 2018. The legal framework for the NGFCP is contained in the Flare Gas (Prevention of Waste and Pollution) Regulations of 2018. NGFCP is premised on the federal government's right to take associated gas produced at flare points free of cost or at an agreed cost. Third-party investors are invited to bid for the gas in a competitive bidding process as outlined by the regulations. Successful bidders are granted permits to access flare gas. Potential investors have begun submitting expressions of interest for utilizing flare gas under the program. The successful implementation of the NGFCP is expected to inject about USD3 billion into the Nigerian economy, reduce Nigeria's CO2 emissions by 20 million tons per year, give 6 million households access to clean energy through the use of cooking gas, and make sufficient gas available to generate 2.5GW of power.
Although NGFCP is an important step toward achieving the federal government's goal to end gas flaring by 2020, a few concerns have been raised regarding its effectiveness. One is the commercial structure for the program, which is largely imposed by regulatory fiat. Investors are expected to enter into a number of agreements with oil producers on the one hand and with the government on the other. Oil producers are required by the Flare Gas Regulations to sign a Connection Agreement and a Deliver or Pay Agreement that comply with templates prepared by the Department of Petroleum Resources (DPR). Typically, agreements and commercial structures that are imposed by regulations take a long time to conclude and may not be viable. Even then, their implementation may stall.
Another issue that may pose a challenge to investors under NGFCP is the security of gas supply. Since gas is supplied from associated gas fields, it can be interrupted by activities that affect or disrupt oil production. The lack of interconnecting gas pipelines between the flare points means investors will have no easy means of keeping their operations afloat where their gas supply is disrupted. The remote locations and the difficult terrains of a number of flare points would require investors to make significant investments in building access roads and transmission/transportation infrastructure before the commercialization of certain flare points can be undertaken. The investment in infrastructure may make the commercialization of some flare points unviable.
Despite the challenges outlined, NGFCP presents unique opportunities to investors that are able to enter into agreements that gas producers consider commercial, deploy new technology for gas utilization and find ways of utilizing the gas as close to the flare point as possible. The other major objective of gas policies in Nigeria is the utilization of gas for economic activities in Nigeria. To this end, the National Gas Policy 2017 reiterated the government's commitment to implementing the Domestic Gas Supply Obligations, a major feature of the Nigerian Gas Master Plan in 2008.
The need for the Domestic Gas Supply and Pricing Policy and Regulations arose in the post-2005 period during which global and domestic demand for gas witnessed a sudden increase. The power sector utilizes 80% of gas supplied to the Nigerian domestic market, and any disruption in one sector affects the other. In this regard, the challenges faced by the power sector in Nigeria, including regulatory inconsistencies, political interference, suspension/unenforceability of contracts, power thefts, insufficient/aging infrastructure, and low revenue collection affect the viability of several gas projects. In addition, gas constraints arising from pipeline vandalism or gas producers' force majeure affect the ability of available power plants to operate at full capacity.
The government of Nigeria, recognizing the co-dependent relationship between the gas and power sector, has proposed a raft of solutions to improve commercial transactions in the power sector. The solutions range from legislative intervention to financial packages being put together to de-risk commercial transactions in their sectors. As far as legislative intervention goes, the National Assembly is considering the amendment of the Electric Power Sector Reform Act to deal with some constraints that have been identified in the sector. Some of the amendments being considered include insulating the Nigerian Electricity Regulatory Commission (NERC) from political interference, increasing license duration from 10 years to 20 or 25 years, and providing stringent penalties for electricity theft. The increase of license duration would go a long way in making power projects in Nigeria more bankable. An independent regulator would immediately translate to higher investor confidence in the sector.
Funding of Tariff Shortfalls: The government provided USD2.2 billion to fund historical and future deficits in the power sector. The goal of this intervention is for the government to reimburse revenue deficits accrued as a result of end users' tariffs not being cost reflective from 2013-2016. Since it will take about five years for current end users' tariffs to reach a cost-reflective level, the government plans to pay for revenue shortfall until 2021. In addition to paying for sector deficits, the government intends to work to restore cost-reflective tariffs over a period of five years. It is important to note that the World Bank Group has indicated potential support for the Nigerian power sector totaling up to USD2.5 billion, as well as IFC investment and Multilateral Investment Guarantee Agency (MIGA) support that will unlock an additional USD2.7-billion private investment. The World Bank Group's support is conditional upon the government of Nigeria implementing the Power Sector Recovery Program.
Contract Effectiveness: The intervention of the government to fund tariff shortfalls and return the power sector to cost-reflective tariffs will enable the relevant government agencies to sanction errant distribution companies that fail to meet performance commitments. It would also enable the activation of sector contracts. This will lead to the enforcement of contractual commitments and put the sector on the path to developing a competitive electricity market. The improvement of the power sector, a major consumer of gas, is expected to lead to an increase in gas utilization in Nigeria and make gas projects more viable.