Nigerian Gas – A Vanishing Opportunity?

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Highlights

• As the “cleanest” fossil fuel, natural gas will be a “bridge fuel” in the transition to a global energy system that is dominated by renewable sources. Global gas demand is forecasted to rise by 40% in the next two decades, with gas exporters like Nigeria well placed to reap a windfall.
• This “golden age of gas” is at risk of being overrun by renewables, due to cost declines in solar PV and wind over the past decade that has resulted in massive renewables capacity additions.
• Since 2010, battery costs have fallen by 80% and companies like Tesla have successfully delivered grid-scale battery storage systems, and many more storage projects are planned around the world that will diminish utilization rates of gas power assets.
• As global action to address climate change is expanded, the continuing fall in costs of both renewables and batteries will cause gas demand to peak earlier than anticipated.
• Nigeria recently introduced gas policies to compete in the global gas market and to exploit the enormous potential in its domestic and regional markets.
• To succeed in these objectives, the Nigerian government must enact legislation to provide a clear basis for private investment in the midstream and downstream of the gas sector and address the security challenges bedeviling the Niger Delta.
• Nigerian engineers must be engaged to deliver projects and operate assets.

A Golden Age of Gas?

A global transition from an energy system dominated by fossil fuels to one that relies on renewable sources is underway, as the world aims to rein in the greenhouse gas emissions fuelling a rise in global temperatures. As the “cleanest” fossil fuel, natural gas is expected to play the role of “bridge fuel” in this transition, replacing coal in power generation and providing an alternative to oil for transport. Gas has already surpassed coal to be the largest energy source on the grid in the world’s largest economy, with shale production supplying cheap gas to US utilities. A similar switch to gas is also underway in China as it seeks to curb severe air pollution in its cities. And a frigid winter in 2017 caused global gas demand to spike by 3.7%, with liquified natural gas (LNG) spot prices reaching a 3-year high.

Nigeria, like other gas exporters, is well placed to reap a windfall from this “golden age of gas”. As of 2016, Nigeria’s proven gas reserve stood at 187 trillion cubic feet, among the largest ten reserves in the world, and is enough gas to meet the current gas demand of all Europe for a decade. The trio of Russia, Iran and Qatar control half of all proven reserves, with Russia foremost in pipeline exports and Qatar the leader in LNG production. Nigeria is the fourth largest exporter of LNG, producing up to 22 million tonnes per annum (MTPA), with gas accounting for about 12% of its foreign earnings.

Nigerian gas has a low sulphur content and most of it is produced with oil as associated gas, hence it is typically saturated with petroleum liquids (i.e. high amount of LPG). Due to under-developed gas infrastructure, 313 million cubic feet of this gas was flared in 2016 (about 5% of the global total), though this is less than half of the 700 million cubic feet that was flared in 2008 when the country missed a self-imposed mandate to end gas flaring. Still, there remains an enormous untapped potential for growth, as Nigerian gas can supply underserved domestic and regional markets and compete for rising demand in global markets.

The Global Gas Market

The International Energy Agency (IEA) forecasts global gas demand to grow by over 40% in the next two decades. Gas consumption is rapidly rising in China, for both residential and industrial use, enough to make China the second largest importer of LNG in 2017, and along with Japan, South Korea and Taiwan accounted for 60% of global LNG imports.  China’s appetite for LNG, combined with rising oil prices, is keeping Asian LNG prices is at the highest seasonal level since 2014.

After years of decline, the last three years have seen gas demand grow by an annual average of 5% in Europe. Moreover, the number of countries importing LNG has doubled to reach 41 in the past decade, as floating storage and regasification units (FSRUs) has made LNG affordable in places like Bangladesh, Jordan and Colombia. There is more than enough gas to meet this rising demand, as global gas production on course to grow by 50% by 2021 compared to 2014, with large projects are coming online from both established and new suppliers.

Russia, for example, aims to start pumping gas to China by December 2019 after completion of the Power of Siberia gas pipeline. Russia also hopes to boost gas supplies to Europe via the Turkish Stream pipeline and Nord Stream 2 gas pipeline, the later facing fierce resistance from European nations concerned about Russia’s growing geopolitical leverage, as Russia’s share of the European market reached 35% last year. Russia has also ramped up LNG production, with the Yamal LNG facility coming online late last year.

In response to the threat of new suppliers entering the market, Qatar plans to boost LNG production by 30% by 2024. Australia, the next largest LNG player, is also ramping up its exports, with the start of commercial operations at Australia Pacific LNG, the addition of trains at Gorgon, Gladstone and Queensland Curtis LNG, and gas field developments off its north-western coast with the Prelude Floating LNG and Ichthys LNG projects. And the US, which only began exporting LNG in February 2016 from the Sabine Pass facility, has delivered to more than 25 nations across the globe and is on track to compete with Qatar and Australia as one of the biggest LNG exporters by 2022.

LNG Expansions have also been announced in Canada, Papua New Guinea, Trinidad & Tobago and Indonesia. New entrants have sprung up in the Eastern Mediterranean, as production begun in December at Egypt’s Zohr field, Israel’s Leviathan gas field is scheduled to start producing next year, and Cyprus’ Aphrodite and Calypso gas fields are currently being appraised for development. In sub-Saharan Africa, operations commenced in March at Golar Floating LNG, Cameroon’s first LNG plant with a capacity of 1.2 MTPA. There are also LNG projects at different phases of development in Mozambique, Tanzania, Senegal and Mauritania, which will be firsts in these African nations.

Nigeria, the leading African LNG producer, presently has three stalled LNG projects with a combined capacity of 30 MTPA, enough to place Nigeria into the top three LNG exporting nations. These make up just over 3% of the estimated 900 MTPA of proposed LNG developments worldwide, a figure that is three times the volume of global LNG trade in 2017. In fact, a new LNG train begins operations every two to three months.

Consequently, the market has been oversupplied for the past three years, with the balance of power shifting from producers to consumers. Buyers now demand shorter and more flexible contracts in a more competitive market. Last year, India won a price cut on a 20-year LNG deal with ExxonMobil in a contract renegotiation. Nigeria LNG (NLNG), a joint venture (JV) between Nigerian National Petroleum Corporation (NNPC), Shell, Total and ENI (where private partners hold a combined majority stake) also struggled to find buyers when long-term contracts for three trains came up for renewal, and eventually settled on 5 – 10 years contracts for about 10 MTPA LNG production.

In recent months, concerns about a prolonged supply glut have eased largely due to China’s growing gas appetite and an expected surge in gas use for industry and transport. For example, gas is the chief source of industrial hydrogen and is used to manufacture fertiliser, petrochemicals and other commodities. Also, LNG can bunker fuel to enable ships to meet the UN-mandated (via the International Maritime Organization) reduced sulphur content for marine fuels, due to come into force in 2020. Plus, there are already 25 million natural gas vehicles on the road (67% in Asia), a number expected to rise as more projects like the 140K MTPA micro LNG plants, recently announced in Italy for heavy-duty road transport, are initiated.

Such developments have led to warnings of a looming gas supply shortfall by 2022, as few projects have achieved final investment decision (FID) since 2015. Thus, for gas exporters, the race is on to develop reserves, exploit assets and carve out a market share.

The Renewable Challenge & Energy Storage Disruption

This “golden age of gas” is at risk of being overrun by renewables – solar photovoltaic (PV) and wind in particular – owing to cost declines over the past decade (up to 85% for solar PV) that has resulted in renewables taking the lion’s share of global power capacity additions over the past three years. Last year, Saudi Arabia, the world’s leading oil exporter, received power supply offers (via solar PV) at the cheapest prices ever recorded. As costs continue to plummet, more countries are now turning to renewables, with Nigeria now targeting 30% power generation from renewables by 2030. Bloomberg New Energy Finance even predicts that solar and wind will provide half of the world’s power by 2050.

Presently, an energy system that is underpinned by renewables would struggle to provide continuous and reliable power, as the sun is not always shining, neither is the wind constantly blowing. A balancing energy source is required to flexibly ramp up and deliver power when demand on the grid exceeds supply. Gas-fired power plants are adept at performing this backup role and are increasingly paired with intermittent renewables, causing renewables and gas to account for 75% of net power capacity additions over the last three years.

Nevertheless, high renewable additions, along with the emergence of grid-scale energy storage, is starting to reduce the significance of the backup role for gas. The assault by renewables has seen sales for gas turbines plunge, contributing to the recent struggles of the power divisions of industrial titans GE and Siemens, with the former currently streamlining its business and the latter rumoured to be selling off its gas turbine business. A study by the Rocky Mountain Institute even goes as far as to predict that by 2026, it will be cheaper to develop new renewable assets than to continue to operate highly efficient gas-fired power plants in some parts of the US, leaving the plants economically stranded.

Advances in lithium-ion battery technology have enabled companies like Tesla to deliver grid-scale battery storage systems. At the end of 2017, Tesla delivered the then world’s largest battery storage system (100 MW/129 MWh) to provide flexibility and resiliency to South Australia’s grid, a grid made up of 50% renewables and plagued by infrequent blackouts. The system successfully handled the increased power demand over the Australian summer, easily dealt with temporary fluctuations and caused a fall in energy prices. Consequently, more grid-scale storage projects are emerging around the world, which will further reduce utilization rates of gas-fired power plants.

Since 2010, battery costs have fallen by 80%, a trend expected to continue as standardisation, technological improvements and economies-of-scale take hold over the next five years. A battery storage system also has enviable advantages over gas-fired power plants such as speed of deployment (months as opposed to years), the ease of obtaining permits and the fact that such facilities can easily slip into urban areas. Consequently, gas-fired power plants will struggle to compete with battery systems for demand fluctuations lasting seconds, minutes and hours.

But for longer demand fluctuations lasting days, weeks and even months, gas still retains a significant edge and will be crucial for dealing with seasonal variations in demand, especially in colder climes. With coal in retreat and the high cost of nuclear derailing projects, gas remains the preferred fuel for reliable power and heating during frigid winters. However, this may be a temporary advantage, as the growing range and capacity of energy storage technologies such as pumped hydro and liquid air energy storage point to the erosion of the role of gas in meeting seasonal demand fluctuations.

Along with the threat of renewables and energy storage, there is the intensifying urgency to curb CO₂ emissions. Data from the Mauna Loa Observatory indicate that atmospheric CO₂ concentration increases by 3 ppm annually and crossed the 410-ppm mark in April. If warming is to remain below the targeted 2 ^oC, then CO₂ concentration must be kept below 450-ppm, which implies that there is a 2-decade window left to make steep emissions cuts. The Carbon Brief has even estimated that to keep warming below 2 ^oC, 50% of gas reserves (along with 80% of coal and 30% of oil) will have to remain in the ground. Rising global temperatures recently put the spotlight on the Antarctic, where scientists have discovered that the rate of ice melt has tripled since 2007, a development that has devastating sea level rise implications for the world’s coastal cities.

There are many forecasts, like the IEA’s, that predict gas demand growing into 2040. Such forecasts have also been notoriously guilty of underestimating the rise of renewables. This June, China moved to limit subsidies for solar PV, a development that should cause the first annual slowdown in global PV deployment. Nonetheless, the continuing fall in costs of both renewables and batteries, along with policies to address climate change, will cause gas demand to peak earlier than anticipated. This implies that delays in execution of gas projects greatly increases the risks of developing assets that later become economically stranded.

Nigerian Gas Industry

Historically, gas has played second fiddle to oil in Nigeria, the nation’s top export that provides about 80% of its foreign earnings. The Nigerian Gas Company (NGC), a subsidiary of NNPC, owned and operated most of the gas transmission pipelines. NGC also acted as a gas merchant, enabling it to dominate the domestic market for wholesale gas and set domestic gas prices at low and unprofitable levels. This, combined with a national petroleum policy fixated on oil production, inconsistent taxation on associated and dry gas production, and paltry penalties for gas flaring, led to under-investment in the domestic gas market, with companies preferring to either export gas (via LNG) or flare unutilised gas.

In 2008, a gas master plan was put in place to address structural problems like the pricing regime. Domestic gas supply obligations were imposed on exporting companies, with the aim of expanding gas-fired power generation to address Nigeria’s power deficit. A power sector reform also highlighted the necessity of a good gas pipeline network, as 80% of domestic gas was used for power generation. In the decade since the plan was approved, the domestic gas market has grown by 35% and 590 km of pipelines have been built to supply gas to existing power plants, a modest return but nowhere close to the targeted outcome.

In 2017, a national gas policy was introduced to eliminate barriers – legal, regulatory and commercial – still impeding investment. NGC was split up into an operational arm and a marketing arm, to promote growth and competition, with the operational arm empowered to seek out partnerships. Yet, critics point out that the policy favours oil producers, who can recover their gas investment costs against their oil income, giving them undue advantages over investors seeking to only develop gas assets. Another criticism is that the policy focuses excessively on gas production (i.e. upstream) and provides little clarity on gas transmission (i.e. midstream) and utilisation (i.e. downstream).

Still, the policy is already bearing fruit. In April, the $2.8 billion Ajaokuta – Kaduna – Kano project was awarded under a public-private partnership scheme to build a 614 km gas pipeline that will extend supplies to markets in the North of the country. There is also the ongoing Greenville project, a phased build out of a 1.8 MTPA LNG plant and a series of LNG fuelling stations, that will provide fuel to LNG-powered trucks. And the East-West Offshore Gas Gathering Pipeline System (EWOGGS), a pair of 550 km Deepsea pipelines owned by the Dangote Group, connecting stranded gas fields in the East of the country to domestic gas demand in the West, is scheduled for completion this year at the cost of $3 billion. The number of such projects must swell to adequately supply gas to a neglected domestic market.

A couple of initiatives have been launched to boost gas utilisation in the country. First, the Nigerian Gas Flare Commercialisation Program (NGFCP) aims to achieve a nation-wide flare-out in 2020 by redirecting gas that is currently flared, about 9% of production at the end of 2017, to gas engines that generate power for the domestic market and to modular LNG plants that liquefy the gas for export. Then the LPG policy (part of the national gas policy) aims to promote LPG use in domestic activities like cooking and expand its use to power generation, transport (autogas) and industrial sectors.

There also exists enormous potential in the West African regional market. The West African Gas Pipeline (WAGP), owned by a consortium that includes Chevron, NNPC & Shell, was built to supply Nigerian gas to its neighbours Benin, Togo and Ghana, with planned extensions to Cote d’Ivoire and as far as Senegal. Since deliveries began in 2011, insecurity and pipeline vandalism in Niger Delta, along with poor-quality gas, have caused frequent supply shortages and triggered shutdowns, obstructing operations of the 678 km pipeline. Also, the gas supply contract has remained under force majeure, as contracted volumes have never been attained. In the intervening period, Ghana, a major WAGP customer, has discovered and produced its own gas for domestic consumption, reducing the importance of the WAGP.

Recently, discussions have turned to extending WAGP around Africa’s Atlantic coast all the way to Morocco, a 5660 km extension that will be called the Nigeria Morocco Gas Pipeline (NMGP). The NMGP will then be connected to the Iberian Peninsula across Strait of Gibraltar and to provide direct access to Europe. On a state visit to Morocco this June, Nigeria’s President Muhammadu Buhari signed a Memorandum of Understanding with King Mohammed VI of Morocco for the establishment of the NMGP, with plans indicating a phased construction over 25 years at a rumoured cost of $20 Billion.

If the NMGP does go ahead, it will likely supersede the 4400km Trans-Saharan Gas Pipeline (TSGP), that was meant to connect Nigeria gas fields to European markets through Niger and then Algeria on its northern border. Initiated in 2002, TSGP was hampered by security conditions in Niger and the Algerian south, as well as by geopolitical gamesmanship from Russia, but ultimately the inability of the Algerian and Nigerian governments to secure financing stalled the project.

Like the TSGP, the NMGP has the potential to catalyse the development of the Nigerian gas industry and unlock gas volumes to reliably meet domestic demands to avoid the situation, where the failure of one supplier leads to nationwide blackouts that deny millions of Nigerians the chance to see their beloved Super Eagles in action at the 2018 FIFA World Cup. Along with providing access to regional markets, the route of the NMGP holds the tantalising prospect of providing newly discovered gas fields (off the coasts of Ghana, Senegal and Mauritania) the option of a direct connection to the European market. The NMGP is truly a project with a lot of upside for Africa, Europe and interested investors.

Stalled LNG projects have also stymied Nigeria’s ambitions in the global LNG market. NLNG has been hugely successful but has also been regrettably hamstrung by legislative uncertainty. The decade-old non-passage of Nigeria’s Petroleum Industry Bill (PIB), along with contentious provisions it contained, spooked investors who then delayed the final investment decision (FID) on NLNG’s 8 MTPA Train 7+. For similar reasons, Brass LNG and Olokola LNG, two other private majority-owned JVs, struggled to move forward with building a combined 22 MTPA of LNG production, causing core investors like ConocoPhillips and Chevron to pull out of the partnerships. Also, the Nigerian government’s alternating focus between the two projects, which were competing for funding, dampened investor enthusiasm.

As global gas demand is currently robust, ample commercial justification remains for salvaging these projects to unleash the large volumes of LNG that will give Nigeria an edge in a competitive global market. After eight years, NLNG has stated that there’s a good chance of its Train 7+ achieving FID later this year. Thereafter, the Nigerian government has indicated that focus will shift to the execution of Brass LNG project.

Unlocking the Potential

But first, the Nigerian government must take steps that signal to investors that its gas industry is open for business. Of huge importance is a swift passage of legislation and there’s progress on this front. The PIB, which has languished in the National Assembly for a decade, has now been split into a series of separate bills to facilitate passage. The section defining the petroleum industry governance has been passed and is currently awaiting assent on the President’s desk. The rest of the bill, focused on issues like fiscal regime and host communities, requires expedited passage.

Specifically, legislation is required to address midstream and downstream activities in the gas sector and provide a clear basis for investment that will encourage private participation. Lessons from Nigeria’s successful mobile rollout of 17 years ago, which has resulted in 147 million mobile subscribers today, should be applied. Like the fibre optics lines and masts installed by private mobile operators, gas gathering pipelines and processing plants are required on a grand scale. Private interests can be empowered to work out their own gas supply agreements, using a shared infrastructure where pipeline standards and gas quality specifications are robustly enforced, to promote competition and reliable operation of the network.

Emulating the apparent dichotomy between Gazprom (gas-focused) and Rosneft (oil-focused) in Russia, the two arms of the NGC should be spun out of NNPC and given gas-focused mandates. Some shares of the new entities should be publicly listed, with government participation limited to the role of an investor, the collection of taxes and royalties for revenue, and enforcement of regulation to level the playing field. Tax exemption (such as pioneer status) can be extended to midstream and downstream investors to counter undue advantages that existing oil exporters may enjoy. Companies should also be able to retain gas reserves on balance sheets, to enable them to access debt finance under favourable terms.

Beyond legislative clarity, a resolution to the security challenges bedevilling the Niger Delta is another critical element. Alongside ongoing police operations, amnesty payments and environmental clean-up, initiatives like community development and local employment must be included for a holistic approach. The recently unveiled Niger Delta Development Compact provides a framework to deliver measurable outcomes that will drive a coherent social and Infrastructural development strategy needed across the Niger Delta and alleviate the security challenges. Therefore, its implementation should be expedited. Likewise, engagement of Nigerian engineers to deliver projects and operate assets will enhance security and lead to the proliferation of projects and growth of local engineering capacity.

Without such concrete steps, investors will continue to shun the Nigerian gas sector. Consider that Chevron recently delivered Australian LNG projects that totalled $88 billion, and that the Power of Siberia project (Russia-China link), scheduled for completion next year, is projected to cost $55 billion. Compare these to the TSGP whose last estimate came in at $12 billion, to NLNG’s Train 7+ projected as $10 Billion and to Brass LNG estimated to cost $15 Billion. Individually, the Nigerian projects cost a fraction of what the Australian and Russian projects cost, but all three have still struggled to either move forward or secure financing. And this trend will linger until Nigeria implements practices that have been successfully applied by others and overcome the special interests that are holding back its gas industry.

Ultimately, Nigeria cannot continue to rely on oil to sustain its economy, as global oil demand is expected to peak soon, which will lead to a terminal oil price decline as supplies outstrip demand. Some analysts even predict that this will occur within a decade. Already, companies like Shell and Exxon produce more gas than oil. In fact, while divesting from Nigerian onshore oil production, Shell chose to retain its onshore gas reserves, most of which were discovered as a by-product of oil exploration. Thus, it is probable that a gas-focused drive will unearth a lot more reserves.

In a competitive global gas market, combining calculated risks with decisiveness and rapid execution leads to massive benefits as illustrated by Egypt’s dwindling LNG imports resulting from ENI’s swift development of the Zohr gas field. In a changing global energy landscape, the proliferation of renewables and energy storage will soon cause gas assets to shrink in value the longer they remain undeveloped. So, in a carbon-constrained world, where whispers of peak gas demand are beginning to emerge, the Nigerian gas industry has arrived at a fork in the road – to soar or to fade away. The actions or inaction of Nigerian government in the next couple of years will reveal the chosen path.