Gas in Nigeria:

“The quantity of gas flared in Nigeria exceeds over 40% of the gas flared annually across Africa, which amounts to about $7billion in waste” – Article by Aderonke Adejugbe & Bayo Onamade (Strachan Partners-Nigeria) 2014.

“Nigeria flares the second largest amount of natural gas in the world, following Russia”John Daly, Oilprice.com, Feb 2014.

Nigeria’s 187 TCFG of proven natural gas reserves makes her the country with the 9th largest gas reserves in the world” (BP Statistical Review of World Energy/EIA, 2010).

According to some industry analysts, there is potential to develop Nigeria;s gas reserves to 600TCFG and thereby become the country with the 4th largest gas reserves in the world.

  • The implementation of the 2008 legislated Gas Master- Plan is critical to the Nigerian Federal Government’s short and medium term strategies for power generation.
  • Recent negative fluctuations in the price of oil & shale oil decreasing dependence of the USA on imported light sweet crude are having a critical effect on Nigeria’s economy and the sustainability of its governance fiscal functionality.
  • The strength of the government’s commitment coupled with the abundant supplies of natural gas in Nigeria form a compelling economic imperative towards effective and profitable monetisation of gas.
  • The ongoing and accelerating sale of the generation companies and distribution firms by the Federal Nigerian government to private investors is creating room for more investors to participate in the power sector.
  • The US experience with abundant supplies of cheap gas & therefore power as the drivers of new industry and the rejuvenation of old manufacturing industries points the way to an eventual dramatic escalalation of existing industry in Nigeria & the establishment of new industries such as steel, plastics, fertiliser, chemicals, light & heavy industry manufacturing.
  • The $10 Bn. 34,000 BPD Escravos GTL plant coming on stream in 2014, although tarnished by unforeseen cost over-runs, is a shining light in the ongoing campaign by the government to harness the hitherto substantially wasted gas resources of Nigeria.

Whilst ambitious gas exports in the form of LNG or via pipeline infrastructure such as the West African Pipeline and the proposed $20 Bn. Trans- Sahara Pipeline are laudable and arguably an essential cornerstone of the Nigerian’s energy management strategy, fundamentally, in time, it is hoped that an increasingly higher proportion of gas will be utilised in the DOMGAS sector. Once established with robust cash flow base from oil production, PetroAfrique plans to be a part of this and will undertake to do all it can to participate in gas monetisation strategies within Nigeria.

Downstream : Power, Power, Power!

NNPC’s website, (http://www.nnpcgroup.com/), lists the following downstream opportunities in the Nigerian petroleum sector :

  1. Domestic Production and Marketing of Liquefied Natural Gas (LPG).
  2. Domestic Manufacturing of LPG cylinders, valves and regulators, installation of filling plants, retail distribution and development of simple, flexible and less expensive gas burners to encourage the use of gas instead of wood.
  3. Establishment of processing plants and industries for the production of:
    • Refined mineral oil, petroleum jelly and grease
    • Bituminous based water / damp proof building materials e.g. roofing sheets, floor tiles, tarpaulin, and
    • Building of asphalt storage, packaging and blending that may export these products.
  4. Establishment of chemical industries e.g. distillation units for the production of Naphtha and other special boiling point solvents used in food processing.
  5. Linear Alkyl Benzene, Carbon Black and Polypropylene producing industries.
  6. Development of Phase II (Phase III to commence later) in Nigeria’s Petrochemical Programme.
  7. The NLNG Projects.
  8. Small-scale production of chemicals and solvents e.g. chlorinated methane, Formaldehyde, Acetylene etc. from natural gas.
  9. Crude oil refining with efficient export facilities.
Companies with the technology can undertake turn around maintenance of refineries. There is a tremendous scope for small-scale joint venture manufacturing concerns with foreign technical partners. Such ventures can start warehousing arrangements that will ensure continuity of supply at competitive prices.
  10. Products Transportation and Marketing Associated with products distribution and marketing is a chain of manufacturing and maintenance businesses e.g. Lubricating Oil reprocessing, LPG bottles and accessories, oil cans reconditioning etc.
  11. Although the existing LNG industry in Nigeria exports some 20 million tonnes of LNG to Europe annually, there are plans to expand this.
  12. There are plans to build a Trans-Sahara pipeline for raw gas export ultimately to Europe to assist in assuring energy security in the face of Russian supply uncertainty given recent events in Ukraine.
  13. The 34,000 BPD Escravos GTL plant was commissioned in late 2014.
  14. The current financial incentives given to importers of finished petroleum products is in fact a dis-incentive for the downstream petroleum refining industry.
  15. Current nameplate refinery capacity is only approximately 50% utilised.

However, any reasonable analysis of investment opportunities in the Nigeria petroleum industry must conclude that until the paradoxical situation vis a vis refinery capacity versus the importation of finished petroleum products is resolved and until sufficient supplies of reliable electrical power for industry becomes available, by far the most compelling case for investment in the downstream sector can be made for gas fired turbine electrical generation.

The electrical power supply and infrastructure in Nigeria is plagued by blackouts and depends on backup (generally diesel powered) generators for home, office, shop, industrial and in particular UPS hospital supply when affected by the frequent outages. Nigeria, Africa’s most populous country, produces less grid electricity than the Republic of Ireland. South Africans consume 55 times more energy per head, and Americans 100 times more. Over 50% of Nigeria’s 160 million people receive no electricity at all.

The lack of a reliable supply and the constant blackouts cause severe economic damage. The cost of alternatives, mainly diesel generation, is at least four times the cost of a reliable power supply. In addition to this direct cost is the negative impact on people’s time — this can mean the time spent accessing alternatives, or the time lost because children cannot read in the evenings. The modern world is dependent on access to information, which in turn is only possible with a reliable and constant source of electricity.

The reliable provision of affordable electricity has the potential to tackle both the symptoms and the causes of poverty. Electricity enables hospitals to function more efficiently and people to cook without suffering from wood-smoke pollution. It reduces CO2 emissions by removing the need for highly polluting diesel generators. Most importantly, it would remove the greatest obstacle to doing business in Nigeria and enable manufacturing and other industries to compete internationally. According to the president of the Manufacturers Association of Nigeria (MAN), Chief Kola Jamodu, 40% of the production cost of manufacturers goes into the provision of electricity, compared to 5-10% in other similar economies.

In somewhat horrific contrast, South Africa, by no means a first world nation, currently has electrical generation capacity of 45,000 MW equating to 860 Watts per head of population while Nigeria’s equivalent figures equate to only 34 Watts per head of population! South Africa plans to double its generation capacity by 2025 to approximately 87,000 MW.

This shortage of reliable power is throttling Nigeria’s industrial expansion. As the most populous nation with the highest GDP per capita in Africa, the metrics of the power industry are truly amazing.

To put Nigeria on a par with South Africa as a benchmark comparator state in the African context, the current generation capacity in Nigeria would have to be lifted by a factor of 25 times to a total of 150,000 MW. The USA bears no meaningful comparison of course at this stage of Nigeria’s transformation into a modern industrialised economy but total capacity there equates to c.3,300 Watts per head of population, a staggering 100 times that of Nigeria on the same metric. Lifting Nigeria’s output to the same benchmark per head of population would require total capacity in Nigeria to increase to some 600,000 MW.

As part of Nigeria’s resolve to become a major international player in the international gas market as well as to lay a solid framework gas infrastructure expansion within the domestic market, the Nigerian Gas Master Plan was approved on February 13, 2008.

The Master-Plan is a guide for the commercial exploitation and management of Nigeria’s gas sector.
It aims at growing the Nigerian economy with gas by pursuing three key strategies ie to stimulate the multiplier effect of gas in the domestic economy, to position Nigeria competitively in the high value export markets and to guarantee the long term energy security of Nigeria.

Based on the urgent and rapid privatisation of the hitherto State owned and operated Nigerian electricity generation capacity, the Presidential Task Force on Power was established by the President Goodluck Jonathan administration, in June 2010, to drive the implementation of the reform of Nigeria’s power sector. It brings together all the agencies that have a role to play in removing legal and regulatory obstacles to private sector investment in the power industry. It also has the mandate to monitor the planning and execution of various short-term projects in generation, transmission, distribution and fuel-to-power that are critical to meeting the stated service delivery targets of the power reform roadmap.

Given the politically mandated push for power station privatization coupled with the absolute demand for new power generation capacity, investment in this sector surely must be one of the most amazing growth opportunities in an African country ever.

“Progress in Privatisation: Nigeria’s President Goodluck Jonathan announced in 2010 that the government-owned Power Holding Company of Nigeria (PHCN), which had responsibility for the generation, transmission and distribution of electricity, would be sold to the private sector to increase efficiency and profitability.

The first phase of the privatisation was concluded in November 2013. This was a landmark US$2.5 billion transaction that saw PHCN unbundled into six generation companies (Gencos)—(four for thermal power and two for hydro)—and 11 distribution companies (Discos), and sold to new private owners.

The transaction has been regarded as landmark for many reasons, not least because it is one of the world’s largest privatisations, and also because 70 per cent of the transaction was debt financed solely by local banks, a first of its kind.

Other interesting features of the transaction were that the government sold 100 per cent of its equity stake in some of the successor companies and the African Development Bank supported the process with the provision of a partial risk guarantee of up to US$180 million to guarantee the obligations of the Nigerian Bulk Electricity Trading (NBET) under its power purchase agreements with selected independent power projects.

Local debt financing available for the first phase of the privatisation was relatively expensive. It was expected at the time that this debt would be refinanced within 1½ to two years as internal governance and restructuring processes were adopted in the successor companies. However, due to increased appetite from international banks, it now appears that such refinancing might take place as early as 2015. Whether this refinancing from international markets will be across the board remains to be seen.

The Gencos have now been in operation for about eight months, with varying degrees of success. One of the more successful Gencos, Transcorp Ughelli Power, has already increased generating capacity from 160 MW to 453 MW within the first six months of operation due to close proximity to gas pipelines. According to Transcorp CEO Deoye Fadeyibi, the company is set to reach 750 MW by the end of the year. However, not all Gencos have been as successful in increasing capacity or reducing losses. The first refinancings are likely to be for more successful Gencos.

The second phase of privatisation, which is currently underway, relates to the sale of 10 government-owned independent power projects, called National Integrated Power Projects (NIPPs). In 2004, the Nigerian government set up a special purpose vehicle to build and own these assets using private sector best practices, in order to address Nigeria’s persistent power shortage. However, the output of these NIPPs fell considerably short of expectations, generating only 600 MW of power compared with the 2,500 MW that was planned.

The privatisation of the NIPPs has attracted interest from the international investor community and, unlike for the Gencos, it appears likely that international banks will participate in the financing of this phase of the privatisation process.

Gas Supply Challenges : One of the main challenges currently faced by thermal Gencos is insufficient gas supply. Despite holding the ninth largest gas reserves in the world, domestic gas supply in Nigeria has always been a challenge due to poor gas infrastructure. Energy companies are reluctant to incur large investment costs unless a cost-reflective tariff is put in place.”

Extracted from : “Nigeria: Power Sector Privatisation In Nigeria: Opportunities And Challenges 6 January 2015

Article by Misi Oni of Mayer Brown JSM.”