The President Nigerian Gas Association (NGA) Mrs Audrey Joe-Ezigbo who is also the Executive Director of Falcon Corporation in this interview with the Publisher/Editor-in-Chief Dr Samuel Ibiyemi speaks on Challenges of the gas sector, solutions and prospect for Nigeria among others. Excerpts:
As the President of Nigerian Gas Association, what are the challenges of growing supply and demand of Natural Gas in Nigeria?
Let me first say that I find it particularly disheartening that when it comes to the gas sector, the conversation opener is more often that of the challenges which the sector is bogged down with. For a country that as we all know is more of a gas country than an oil country, this narrative must necessarily change if we are to truly experience the extent of industrialization and economic development that Gas can bring to the nation. Nigeria is a country with about 202TCF of proven Natural Gas reserves and another estimated 600TCF unproven reserves. When you look at the challenges we face in the economy with housing, transportation, upscaling agriculture output and value-addition, etc. we see that the key is already in our hands. Whatever sector you consider, Natural Gas has potential to catalyze unprecedented developments therein if we get our act together.
This then brings me more specifically to your questions regarding the challenges on both the supply and demand sides. On the supply side, there are issues surrounding pricing and appropriate tariff structures to incentivize investments along every segment of the value chain;regulatory inconsistencies relating to forex in terms of the investment/income currency mismatch; there are constraints around the timing and quantum of payments of invoices; issues with sanctity of contracts which has been a longstanding challenge; there are challenges with security of lives and assets.There are challenges on the policy and legislative fronts. Financing is a key challenge investors face because of the structure and tenure of funding available within our domestic financial markets, as well as the increasing apathy of international lenders.This is not helped in any way by the issue of artificial pricing of the product through regulation at both the supply and consumer end. There are issues of securitization and payment assurance, and bankability of projects remains a major concern. Investment capital is thus moving towards more investor-friendly, less risky and uncertain climes; climes where the quality of guarantees available in the export markets is also much stronger than for the domestic market.
These and many more serve to increase the cost profiles of projects, lost time and value erosion. I could go on but suffice to say it is a difficult terrain indeed. The industry restructuring being championed by the Ministry of Petroleum Resources has yielded some good results in terms of the reduction of contracting cycles, but there is a lot more to be done to remove bureaucratic bottlenecks, streamline and drive efficiencies within the public sector.
On the demand side, the infrastructure deficit again has implications for delivery logistics, cost, project feasibility and bankability. The general state of the economy of course is impacting on the several sectors that would otherwise be able to offtake gas for use as fuel or feedstock in some productive capacity or the other. Common issues around regulatory and bureaucratic interfaces also come into play. The structure of domgas demand is a challenge as the power sector is the largest domestic consumer and likely to remain so for several years yet. The power sector is also that one sector that is bogged down with a severe liquidity crises and impending collapse of the value chain unless concerted action is taken in a timely manner. Unless something is done to address this and soon, what we will be seeing is largely ineffective demand.
Do you think we have adequate laws to encourage investment in Gas sector?
I believe the challenge is more around the fact that we have various policies relating to gas that are yet to be properly codified into law, and that some of the past laws necessarily need to be amended to reflect current realities. There are also concerns around some of the policy stances being adopted by the government today which send the wrong signals to potential investors. The key piece of legislation which the industry has been waiting for is of course the Petroleum Industry Bill. It is sad that the Petroleum Industry Bill is still an ongoing conversation. The gas policy was approved in June 2017 but as we all know, policy is not legislation. There are uncertainties around the proposed fiscal policy which impinge on the potential for aggressive development of gas infrastructure. This is a major concern in consideration of the huge infrastructure deficit that needs to be funded. We look forward to the appropriate legislation that will give clarity to the fiscal landscape being enacted and thus encourage increased investments into the gas industry.
Do you think we have adequate volumes of Gas for supply under the Domestic Gas Supply obligation? Why is it that the DPR is not enforcing the payment of penalty for companies not meeting with supply requirement?
In my view, the conversation around DSO gas is not so much one of whether the volumes are sufficient or not. Gas production as of 2018 was in the region of 8.4bcfd out of which approximately 47% (about 3.7bcf was export gas, 16% about 1.3bcf was domgas consumed by power and industry, and we flared approximately 0.7bcf (9%). Looking at the disparity between the levels of export and domestic gas supplies, it is easier to ask the questions around why we are not seeing more gas used by the domestic market and what is constraining free supply into the domestic market. However, perhaps we should go back and look at what led to the introduction of the DSO regime in the first place and whether it is still a requirement. The objective of the DSO was to assure gas supply into the domestic market to feed priority projects, primarily power, as well as to enable GBIs’s to thrive and thereby enhance national economic development. However, over a decade later we are still having arguments around DSO gas.
For where the industry is today and where it needs to go, the question is what is the future of the DSO framework? Government has insisted over the years on keeping the DSO Gas-to-Power baseline price well below the market spot price which is in the region of $3.50/Mcf to $4.00/Mcf. It was supposed to be that the DSO price would attain export parity by 2016 such that there would be no more need for pricing regulation, but we are nowhere near that. We are not seeing a shifting of ground on the power tariff even though clearly many of the fundamentals based on which the pricing was set have shifted. We are still dealing with MYTO I within which the benchmark exchange rate is about N194/$1 whereas our official exchange rate is N306/$1. It does not make any sense. DSO gas goes largely to feed the power sector and it is increasingly unsustainable to supply gas to the sector within the ambit of a severe and growing illiquidity situation.
Let me also add that our members have been operating for several years based on non-existent agreements and contracts that were never signed. Payments for supplies already made are delayed for years and months, yet it is hard for them to implement the default clauses and other terms as the agreements are effectively non-binding; so effectively they are recognizing revenues they have been unable to actualize. Our members are in pain already and there is no need to exacerbate this. What we should be discussing is how best to reward DSO compliance within an appropriate pricing frameworkand incentivize compliance such that suppliers willingly move gas into the domestic market.
Recently, the federal government approved the licensing of companies to collect Gas by third party on oil fields of companies. Do you think this policy will end flaring and boost Gas monetization effort of the federal government? Your opinion in details Ma.
I believe we have to first and foremost acknowledge that we have done quite well in bringing down the volume of gas being flared in
Nigeria from about 2Bscf/d ten years ago to its current levels of about 0.7Bscf/d.That said, 700mscf/d of flared gas, equivalent to a loss of N860m per day, is still a colossal waste of resources. Gas flare reduction was encapsulated within the Gas Revolution agenda of the 7 Big Wins and the 2017 National Gas Policy. The National Gas Flare Commercialization Program was subsequently launched in 2016 and so far, we have seen a lot of traction from investors interested in taking on and monetizing the flared gas. The NGFCP certainly makes sense as climate change and environmental sustainability are front-burner considerations globally, as well as in view of Nigeria having signed on to the Paris Climate Agreement.
While we see it as a laudable program, NGA and our members within the industry however have a few concerns about the workability of some of the provisions of the regulation and these are issues that must necessarily be addressed to ensure the sustainability of the programme. Our members are questioning why they should be penalized for safety flares which are an international HSE mandate. We believe there should have been segmentation of the penalties to address the specific operations of IOC’s, as distinct from those of the indigenous oil companies as well as the marginal field players, rather than the one-size-fits-all approach. There is the question of how penalties will be dealt with when gas might not be available everyday due to deliberate shutdowns mandated by the government themselves, say when they want to give preference to hydropower over thermal.
There are questions as to when the actual flares out implementation date is and when the penalty regime should kick in. Again, we also feel a consideration, by way of fiscal incentives, could be given on measured flare gas that has been monetized, as this could serve to further stimulate investments in various flare-elimination projects. As NGA we have had robust consultation with our members, and we are now engaging with government in the hope of getting these addressed from a practical standpoint. Our view is that it is not too late to effect necessary reviews that would only serve to enhance the success of the NGFCP.
The successful implementation of the program has immense potential to change the narrative around gas flaring in Nigeria but there are several elements that must be resolved for this to happen. Estimations are that the NGFCP will require about $3.5 billion in investment if we are to achieve the gas flare commercialization targets by 2020. This quantum investment can only come from private capital. Ultimately, while the NGFCP is a specific program around flare gas, it is not removed from the broader gas industry and factors militating against investments therein. Potential investors in the program will be paying close attention to whatever the government is signaling to investors in the broader domgas market. If we handle the gas industry well, the chances of success and sustainability over the medium to long-term certainly improve. By their estimations also, the NGFCP has potential to generate a GDP impact in the region of $1billion per annum. This is significant and should form the impetus for a collaborative approach to addressing any unresolved concerns around the program implementation.
In the downstream of Gas industry, infrastructure remains a major challenge of supply, what strategies do you think will help to address and solve infrastructure challenge?
Indeed infrastructure, or I should say the inadequacy thereof, is one of the key constraints mitigating against the growth of the gas industry today. We know that gas is a key propellant for industrialization of any economy as there is a clear established correlation between the volume of domestic gas consumption and the level of economic development of any nation, with an estimation that for every $1 invested in gas there is a resultant $3 increase in GDP.Historically, we were more focused on our export gas market over the years and this is a contributory factor to the infrastructure dearth. We clearly missed the fact that when we export gas, it really goes out to support the industrialization of other economies at our own expense. That said, we find ourselves today faced with the need to aggressively grow our domestic gas consumption to catalyze economic development. We are at a phase where we must as a country, work in a determined manner to bring on board more gas-to-power projects, more gas-based industries such as fertilizer plants, methanol and other petrochemical plants, and other heavy industries that require gas as feedstock. We must build in-country capacity for gas value addition and export-oriented end-products. With the attendant multiplier effects of increased foreign exchange revenues, employment generation, etc.
We cannot however achieve this easily without a robust gas infrastructure backbone. An infrastructure requirement immediately translates to a significant investment requirement. The NNPC GMD has spoken severally of an existing infrastructure gap which they estimate requires an investment of over $50billionover the next 5years. An independent study carried out by the Independent Petroleum Producers Group IPPG has it that if we are to see additional production of 2.5bcfd of gas, we will need to invest $24bn over a 4-year period and another $3bn annually in production infrastructure. I repeat that only private capital can handle this quantum of investments, especially because by the nature of gas projects they have much longer payback periods. All the issues which I have spoken of earlier which militate against investments in the industry must then be looked at critically.
When you examine our national Economic Recovery and Growth Plan (ERGP) priorities, the one constant that underpins the attainment of these objectives is gas, but the dire state of our gas infrastructure militates against the potentials and pace of their attainment. In terms of what needs to be in place to address the infrastructure challenges therefore, this is centered around incentivization, market liberalization, policy certainty, sanctity of contacts, securitization of revenues. We need to ensure that appropriate fiscal frameworks and incentives are in place. We need to provision tax holidays for gas infrastructure investors. Indeed, as NGA, we have long posited that We need to be sure we have bankable commercial framework reforms in pricing. If GSA’s are not bankable, investments will not come in.
We must necessarily press for a fully deregulated gas market, where commercial transactions are market-driven. We will not see the kind of levels of investments we need to see if the economics do not pan out for every investor along the value chain who must be able to make appreciable returns on his investments. We understand the anxieties of the government and the concern that a Willing buyer-Willing seller market will lead to increased prices of gas-dependent production outputs, including and especially power. The reality however, is that in a market-driven environment, whilst there may be a short-term spike in prices, as more investors come in and the competitive landscape heats up, competition will necessarily drive down the margins and the market will become more focused on cost-competitiveness, differentiation and efficiencies which ultimately benefit the end consumers. We constrain our gas development by over-regulation in a situation where we do not have a robust enough gas infrastructure backbone.
The current push to price domgas at export parity will serve as a major disincentive to investments flows into the country. As NGA we have continued to draw government’s attention to the fact that export parity pricing to NLNG is for unprocessed gas, whereas the domestic gas requires significant additional capital investment for processing, transportation, distribution, etc. Any domestic gas pricing framework that does not take cognizance of the realities on ground is set to create further market distortions and therefore stifle investments further.
There has been a conflict between LPG Marketers with bottling plants and companies installing LPG skids in filling stations following advancement in technology, what should be the solution to avert supply crisis? LPG supply through cylinders continued to contribute highest casualty incident and explosion. What is the solution?
Technological advancements are disrupting the traditional ways of doing business across almost every sector so quite frankly, it is not surprising that the skid model has gained the kind of traction that it has. Indeed, skids and bob-tail delivery trucks are welcome technological developments because they are quicker, less capital intensive means to facilitate ease of access to areas already being served, as well as to deepen LPG penetration to areas otherwise unserved. Ideally, the bottling plants should work in collaboration with these other players within a multi-channel framework. However, the limitations of the market as currently sized means that they are competing in what looks like confined space, though it really isn’t. There is generally much more focus on serving the existing market than there is on building newer credible offtake markets and we must change this.
What I mean by this is the fact that for a country that has the kind of volumes of gas reserves that we have, Nigeria has barely scratched the surface when it comes to in-country LPG consumption.Nigeria is a net exporter of LPG in Africa yet we are barely at an annual LPG consumption level of 2.3kg per capita. We produce over 2 MTPA but consume barely 15% of this production volume, significantly less than the consumption in other West African countries. The regional average for West Africa is 3.5kg, and Sub-Saharan African averages 2.5kg per capita consumption of LPG. Our neighbor Ghana has an LPG per capita consumption of 9.45kg and Senegal which is a fraction of the size of Nigeria has6.88kg per capita.
The kerosene subsidy which was in play for so many years did nothing to facilitate LPG penetration in urban areas and much less so in the rural areas. It boggles the mind to think that we were spending well over $1bn annually on kerosene subsidy. Again, a major bottleneck has been infrastructure. It makes no sense that we produce a product in the Niger Delta region, move it to Lagos on vessels and then truck it right back to the region from which it was sourced in the first place, and this has been the situation for years. We have come full circle to where we now have distinct policy provisions targeted at deepening LPG penetration and utilization in the country and this is a very welcome development. Nigeria has the potential to consume significantly more than current levels which are in the region of about 450,000 metric tonnes a year, most of which is supplied by NLNG.
Enhancing consumption will need us to expand our storage capabilities and we see this is already happening with investments by companies like Stockgap, Falcon, Dozzy, Techno and some other newcomers. We are seeing added investments in LPG vessels to increase shipping capacity, in-country LPG cylinder production is also coming on stream with the Techno plant. We must also look at the use of our rail lines to transport LPG across the nation. In addition to all these, there is also a need for massive education, orientation and re-orientation of Nigerians to increase the adoption of LPG. Given our teeming population, rapid adoption of LPG utilization will ramp up domestic consumption significantly. That said, we must also encourage the use of LPG for various industrial and commercial applications, as well as applications in the transportation sector, all of which will combine to deepen the offtake levels within our domestic market and this will significantly open up the market and make for healthier, more robust competition among the different types of suppliers.
About a decade ago, certain investors launched Gas supply for domestic purpose in certain Estates like MKO Garden but the project died, what can we blame for the inability to have Gas supply directly to homes by pipeline?
There are several issues surrounding this, a few of which stand out primarily. First is the infrastructure issue again. We do not have an extensive network of gas pipelines traversing the nation. Even within those states where we have gas distribution networks in place, the focus is on delivery to industrial end-users and the rationale behind this cannot be faulted as the volumes that can be consumed by a single industry on a daily basis far exceeds what can reasonably be expected to be consumed by entire estates over extended periods. Were the infrastructure readily available, the investment decisions to extend investment decisions to extend distribution lines to homes have been more economical. As I have said severally, gas projects are highly capital intensive.
Speaking about economics however brings to the fore the issue of artificially low cost of grid power and non-recognition of the true cost of self-generation by consumers. Part of the failure of these residential projects is the unwillingness of people to pay for the true cost of power because they are benchmarking on the cost of grid power which the government has intentionally kept low for political reasons. From an investor viewpoint, the tariffs are not market reflective, the volumes do not support the expenditure, and the economics just don’t tend to make sense. Newer virtual pipeline technologies are changing this narrative though. However, what we see unfolding more readily is that adoption is higher in planned residential estates with central management where the cost of power is embedded in agreed service charges.
What is Falcon Corporation doing to take leadership position in Gas supply by pipelines and the Gas sector after over two decades of operation?
Falcon is counting down to our 25th anniversary of operations by June 2019. In this time, we cut our teeth and gained expertise in the downstream gas distribution space first as a pipeline contractor that also provided modification of equipment to fire on gas, as well as provider of industrial gas equipment such as boilers, gas trains, gas detection and fire alarm systems, gas project management and training services. Over the past 13years we have designed, built and operated the Ikorodu Natural Gas franchise zone, while also carrying out pipeline construction and other EPC services to the industry. We are in the process of expanding our distribution into new zones, replicating our successes in Ikorodu across the country. In addition, however, Falcon has positioned herself as an integrated energy player. We have investments in the midstream gas sector and are working to consolidate an investment into upstream gas development. We are a company that is committed totally to gas development, commercialization and optimization as a tool for ensuring Nigeria’s economic prosperity. Our corporate credo is ‘Think Gas, Think Falcon’ which is simply our way of saying that ultimately the conversations around gas development in Nigeria cannot happen without an acknowledgement of our investments in the industry.
What legacy will you like to be remembered for as the National President of NGA?
The presidency of NGA has for me been the culmination of a long journey on my part of tenacity, consistency and unwavering commitment to the very ideals for which the NGA was formed. NGA turned 20 years under my leadership and that is itself significant. I am able to look back and see how we have grown and evolved, and the tangible impact that we have made on the Nigerian economy and indeed globally. I am clear on the fact that there is a huge task ahead of the Council under my leadership, but I am not daunted, and neither are the strong committed industry experts on my team who are working with me to ensure NGA contributes significantly to elevating the profile of gas development, commercialization, and utilization across various sectors in Nigeria.
As an association, our four core pillars are Advocacy – the anticipation & driving of policy and legislation; investment promotions – being the leading promoter of investment opportunities in the Nigerian Gas Industry to both local and international investors; standing as the authoritative resource for industry data; and encouraging industry best practices/standards for safety and quality.
As a nation we are facing so many headwinds on the domestic as well as on the global front, many of which have specific implications for our industry because of the strategic importance of gas to the country. These are in addition to what I earlier spoke about the legacy and evolving challenges and constraints. In such a clime, the key challenge NGA faces is how best to achieve a harmonization of what are many times divergent interests, to arrive at propositions that will ensure value creation across the industry and for the nation as a whole. We are increasingly strategic and innovative around our role as a non-partisan arbiter on industry issues. I am championing more robust stakeholder engagements and ensuring increased collaboration between the various industry groups, providing the platform where these various groups can distil systemic and structural industry issues, articulate them in a logical manner and engage government with a unified,solution-oriented voice. I look forward to seeing tangible positive outcomes from these collaborative efforts.
NGA believes we should be looking at gas from a regional resource perspective and we are therefore pushing for the government to begin to position Nigeria as the gas hub for the region. I am working with my Council to ensure we gain traction with the government on this. In this same regard, we are already working towards the concretization of cross-border and regional linkages between NGA and other gas associations across the continent. We are increasing our level of engagement with other country gas associations through the International Gas Union of which NGA is a chartered member. Our investment promotions value proposition is important in this regard. Again, by the end of my tenure, I want to see increased local contracting capacity, cross-border trade, partnerships and alliances that have been enabled by the investment promotions work we have done.
NGA is also very focused on capacity building. We recognize the need to upskill the industry, provide up-to-date data, knowledge and information around industry developments locally and globally, technological advancements and the like. We do this through our trademark ‘Learning Solutions’ programs which we run through each year. We are currently working to build this up to fully certified programs that have recognition across the region. I have also sanctioned the restructuring of our study groups, streamlining them from five down to three. Our Study Group 1 looks at the Gas Network Code & Infrastructure, Study Group 2 is focused on the Gas-To-Power Value Chain, and our Study Group 3 is focused on the Legal, Regulatory & Policy environment. Each of these Study Groups is charged with the mandate to spearhead research and explore viable methods to further develop the nation’s vast and untapped gas resources for domestic utilization. I look forward to seeing the restructured Study Groups significantly enhance NGA’s advocacy capacity, enabling better synergies with the government, our members, and other important institutions, to promote technical, regulatory, and contractual best practices for our industry.
One thing that is dear to my heart is the engagement of the next generation, so I have initiated the building of a framework for engagement of student chapters across our universities. Under my leadership, NGA will create learning, networking and internship opportunities for our student members so that they are more hands-on with industry realities when they transit out of the academic environment.
There is a lot of work ahead as I said earlier and I am forging ahead with the various assignments under my care. It is my intention that in 2020 when I hand over the reins of the NGA to my current 1st Vice President, the gas industry in Nigeria would be able to point to clear outcomes across each of these parameters and programs, that are in place because of specific engagements championed by the NGA under my leadership.