MAKE OR BREAK

Nigeria 2019 | GAS & POWER | ROUNDTABLE: GAS FOR DEVELOPMENT

Though pricing mechanisms can protect consumers in early stages and help certain parts of the sector off the ground, too often they turn to stone and create permanent (dis)incentive structures that prevent more effective long-term willing-buyer, willing-seller dynamics.

Gbite Adeniji
GBITE ADENIJI
former technical Adviser to the Minister of State for Petroleum Resources
Upstream and Gas
Austin Avuru
AUSTIN AVURU
CEO
Seplat Petroleum Development Company Plc
Tony Attah
TONY ATTAH
CEO
Nigeria LNG (NLNG)
Eddy van den Broeke
EDDY VAN DEN BROEKE
Chairman
Greenville Oil and Gas

The regulated gas-pricing regime has been a controversial issue in Nigeria's gas sector. What is the government's stance on this?

GBITE ADENIJI We have agreed that this pricing framework will change as the market develops. However, based on the understanding that this is a scaling business and that the Nigerian market is significantly underdeveloped, we must first ensure that we have a baseload volume of gas in the market before we can start thinking of a fully deregulated market. That is the rationale behind the government ensuring that the price of gas for the power sector is regulated, while that for the industrial sector is structured on the netback-pricing model. The goal is to develop local capacity in the power sector, which should be the driver of the economy. We also want to ensure that other industrial projects such as fertilizer, chemical, and other gas-related plants get off the ground. The intent of the pricing policy is to ensure that the upstream is profitable, the midstream works, and downstream off-takers can access gas at an affordable price, thus protecting consumers.

AUSTIN AVURU I do not like price regulation in any form. That said, price regulation as a transitional mechanism to introduce workable market pricing. My problem is that the transitional mechanisms in Nigeria become permanent regulations. When the Nigerian National Petroleum Corporation (NNPC) was created, the first efforts at transitional pricing decades ago were supposed to be a transitional fiscal regime to solve a fiscal problem. That lasted 20 years, and everyone forgot what it was supposed to address in the first place. The transitional regime for gas prices that is being discussed is over. All our supply agreements since 2013 have been willing-buyer, willing-seller agreements. The domestic supply obligation (DSO) agreements will lapse in 2023, and we as suppliers will not renew these agreements under the same terms, regardless of what the regulations say. This is because I cannot supply gas to Azura on a contract at a set price when the government asks me to supply gas to a competing power plant for 60% of the agreed-to price. Now, we are in a willing-buyer, willing-seller environment, and all the DSO regulation should just drop away. The purpose of the DSO was to compel producers of gas to supply gas to the domestic market. Today, all the 400 million scfd gas we produce at Seplat enters the domestic market, so what is the purpose of the DSO regulation?

What is your opinion on the current set price of gas, and how has this impacted business?

TONY ATTAH We are still looking for the best pathway to the optimal price for gas in Nigeria. The ultimate goal of everyone at this table is to lift Nigeria up; so we are all on the same side. I am a purchaser of gas and keen to find it at the best price possible. If we take a short-term view, then we want a government-regulated price that favors us. However, if we take a long-term view of gas as a platform to develop Nigeria, we must recognize that a credible price is best for all. In the end, we have to transition, as Austin said, to that pricing sweet spot that will enable investors to develop gas. Nigeria has potential, but it is a matter of agreeing on the proper price, and willing-buyer, willing-seller dynamics are essential.

Where do others stand on this regulated price issue?

EDDY VAN DEN BROEKE I would like to stand in contrast, a bit, to the earlier speakers. To date, few are thinking about the effects energy has on the broader nation. Poverty and the environment are two excellent examples. All over the country, the big industries are switching to coal, and many gas providers want higher prices. However, the rest of the world is simultaneously switching from coal to gas. Additionally, there are many items to be developed in this country. For example, we have imported the first 300 trucks fuelled on LNG, and we will transport all of our LNG on trucks fuelled by the very same fuel. We are also trying to develop LNG as a more widespread and viable fuel source. There needs to be a greater degree of coordination between the ministries to support these initiatives in a comprehensive way.

Where does the OB3 pipeline stand, and why is it so important to having a more developed market?

GBITE ADENIJI The issue of infrastructure is one of the cornerstone problems in the gas sector. The OB3 project is a strategic national project in the sense that gas in eastern Nigeria is stranded in a market where the main demand for it is in the west. We need to bridge the existing networks with an interconnector, which is exactly what the OB3 pipeline does. It is hugely significant. It is also important because it creates the possibility of contact between those who hold reserves in the east and the broader market. This is how we can gradually make our way into a competitive gas supply situation. The OB3 line will be completed in 2018. If we can get OB3 to 70-80% capacity, we can start reaching the point where domestic gas supply would equal or even exceed exports, which is a key trigger for deregulation.

How can existing and legacy pipelines be better run?

AUSTIN AVURU We must give credit to the government, led by the NNPC, for developing the backbone gas supply infrastructure that it invested in so heavily in over the past 10 years. We will provide the first gas into the OB3 pipeline, and this is a conditional precedent for us to develop that supply. We hope to be able to put nearly 600 million scfd into this pipeline. The backbone infrastructure is also excellent. If we take OB3 and the loop-line and add these to the West African Pipeline, we need to ask ourselves what is keeping Nigeria from accelerating gas production and becoming a regional hub. The West African Pipeline has created some issues, for instance gas supplies to Ghana. I have spoken with the President of Ghana Gas, and if the West African Pipeline was a common carrier, we could supply the country's latest power plant with gas for less than half of what the Russians intend to supply it for. However, Ghana is too busy proving that it does not need Nigeria for gas. If we extended this pipeline through Ghana, we could make it all the way to the Ivory Coast and on to Senegal, thereby solving this region's energy generation problems in a few years. We have the resources to generate electricity, but have a pipeline that is not being used and people negotiating to buy gas from outside the continent at three times the price. There are three elements to this business: gas production, infrastructure to produce the gas, and infrastructure to deliver it. The government has done all it can by creating the backbone infrastructure. This infrastructure, however, is not being administered properly, because the West African Pipeline is functioning as an inefficient carrier of gas. Seplat could operate this pipeline profitably in a short period of time and would be willing to lease it for a fee.

Is a public-private JV structure, like the one NNPC is modeled on, viable for parts of the gas sector?

TONY ATTAH There should be two sides to this conversation. I am an interested party, and if gas is not developed then I have no business. Some have asked me what our interest is in whether domestic gas develops or not. It is more than simple location; it is about gas being enabled. Though current estimates put gas reserves in Nigeria at 195tcf, my focus would be on the 600-tcf figure we can achieve if the industry is truly expanded. We will be able to jump to the fourth-largest global reserves if we can expand the industry to this point. It is more about whether we can organize basic policy, regulation, market, infrastructure, and technology to make sure gas is enabled. Nigeria has been described as the “gas nation that has some oil," and it is about time the country recognizes this. We are the largest consumer of gas; we consume 3.5bcf of gas every day, and we will need an additional 2.5tcf in the near future as the Train 7 project comes online. NLNG can drive overall gas development in the country.

How would you assess the current pipeline infrastructure in comparison to gas demand?

EDDY VAN DEN BROEKE We need to build our own filling stations, storage tanks, and other infrastructure to be effective. As a foreign investor that has invested over USD500 million, we have to sell the gas at the enforced price, though we have to pay higher prices to repatriate our capital. We have also started the first negotiations with NNPC, which is the right way to partner with someone who has mega stations, allowing us to eventually install filling stations where trucks can come and where subsidies can eventually be done away with on the Premium Motor Spirit (PMS). However, there needs to be more willingness on the government's behalf in terms of supporting development. There is a limit in terms of what the private sector is able to do.

What forthcoming policies from the ministry might address some of the issues in the gas sector?

GBITE ADENIJI There are a number of policies set to come in the near term, such as a new gas pricing policy. Hopefully, we will end up with legislation around gas in order to better regulate the sector. Additionally, we are looking to get new regulators get off the ground and build their capacity. We would like to see gas-led energy security for this country. Given the abundance of resources, we need to be able to use gas to achieve development and security, which means fiscal and social development. Gas is an abundant natural resource, and we must use it sensibly to achieve these aspirations. We want to see gas used to get as many power projects off the ground in a manner that makes the entire chain work. We want to see many new players come into the midstream and a gas price that ensures that there are as many industrial projects as possible. We want as many petrochemical and fertilizer plants as we can have, because there is a large market out there for us. Finally, I would like to see fewer resources wasted. These resources create a great deal of social cost for certain people, especially those in the Niger Delta. We are determined to make sure that such waste is done away with in short order.