Nigerian gas market: Regulations, incentives and the way forward

Feb 26, 2002 01:00 AM

The worldwide proven gas reserve is about 5,365 tcf with Africa contributing 360 tcf of this. The worldwide demand for gas is 225 bn cfpd giving a reserve to production ratio of 60 years. Nigeria's estimated gas reserve is 159 tcf, which is over 44 % of the gas reserves in Africa. Nigeria's gas reserves, at current production rate, will last for over 100 years.
However, the level of gas utilization in the country for both domestic and industrial purposes is relatively low. Conservatively, about 60 % of gas produced is being flared. The government and the joint venture partners are determined to achieve zero gas flaring by the year 2008. In order to meet this deadline, the operators in particular have initiated so many gas projects targeting associated gas supply sources. Most of these projects are expected to come on stream within the next 5 years, a time in which the volume and percentage of gas flaring would have drastically reduced.

In realization of the need to curb the waste of natural gas through flaring and the desire to harness this for the economic benefit of the nation, and further diversify the revenue base of the country, a series of legislations were put in place. In addition, the government has put in place a number of incentives to encourage gas production, transmission and utilization.
A number of gas based projects in the country aimed at utilizing the huge gas resources include the Eleme Petrochemical Plant, NAFCON at Onne, the West African Gas Pipeline Project, the NLNG Project at Bonny, and the proposed Gas-to-Liquid Project, to mention a few.
Plans are also at advanced stage for the implementation of additional LNG projects such as the West Niger Delta LNG and the Brass LNG. Some of the existing regulations and incentives on gas include the Petroleum (Drilling and Production) Regulations Decree No. 51 of 1969, Associated Gas Re-injection Decree of 1979 and its amendment of 1985, the Nigerian LNG Fiscal Incentives, Guarantees and Assurances Decree of 1990, the 1991 and 1992 Associated Gas Framework Agreement (AGFA), and the Year 2000 Memorandum of Understanding, etc.

The nationwide gas demand for domestic and export uses can be evaluated by the aggregation and assessment of gas demand for all existing and prospective major customers in Nigeria. Apart from the export potential of the Nigerian gas, local demand opportunities are tremendous. Some of the demand centres are power generation, cement industry, fertilizer and iron and steel plants. Others are petrochemicals, aluminium smelting and distribution to industrial centres as source of energy supply.
However, it must be noted that in spite of the abundant gas resources available as a source of energy, domestic gas demand -- especially for power generation, cement industry, and fertilizer production -- is constrained by limited capacity utilization that currently exists in these plants. A factor considered desirable and important for the rapid utilization of gas and which may also boost the domestic consumption of gas is the construction of a national gas grid system.
This has the advantage of making natural gas available to a large area of the country from which prospective users can readily tap into to meet their needs. The largest single consumer of natural gas in Nigeria is NEPA and it accounts for about 70 % of the gas consumed domestically. NEPA currently operates electricity generating gas plants at Afam, Ughelli, Sapele, and Egbin. The combined daily requirement of these plants, at peak production, is about 1,500 mm cfpd.
However, the performance of these plants had hitherto been far from optimal. In order to fill the gap created, a number of proposals to establish independent power plants are presently receiving the serious attention of both the Federal and State governments. Private investors, which include some of the major oil producing companies such as Mobil, Shell and Agip, have also shown some interest.

Furthermore NEPA, in its long-term plan, intends to establish six additional thermal plants that will use natural gas as fuel. If and when these plants are built, the domestic gas demand is expected to increase considerably. Electricity consumption growth from 1993 to 1998 is approximately 0.5 % per year whereas the expected growth rate for a developing country such as Nigeria is estimated at 8 % per year.
An analysis of kWh use of electricity per capita in various countries correlated to Gross Domestic Product (GOP) per capita indicated an average 425 kWh/capita for developing countries like Nigeria. Therefore, there is considerable room for the growth of gas demand for power generation.
Using a growth factor of 2.5 as the base estimate would result in increased gas consumption by the power sector in Nigeria from the 1999 level of 270 mm cfpd, to 1,350 mm cfpd in 2010, to over 3,800 mm cfpd by 2020. Demand growth in the cement industry is usually limited by local production capability and capacity utilization rates.

Non-gas fired cement is not cost competitive because this relies on relatively expensive, often unreliable liquid fuel supplies. Estimating that cement demand could potentially double every 10 years, the gas demand for this sector could increase to 85 mm cfpd by 2010 and 270 mm cfpd by 2020.
This demand in the cement industry would be met by a combination of plant expansions, new grassroots capacity additions, and conversion of liquid fuelled kilns to the more efficient, gas-fired kilns. The major gas consumer for cement production in Nigeria is the West African Portland Cement Company.
Other cement producing companies (Ashaka Cement, Benue Cement, Sokoto Cement and the others) are yet to avail themselves the use of gas as a source of energy to power their equipments and fire their kilns despite the relative cheapness of gas over other sources of energy. This is due to the lack of a Natural Gas Grid, which should have brought gas nearer the plants for ease of accessibility.

Nigeria's fertilizer application rate averaged about 13 kg/hectare, which is much lower than that of many other African countries including MaIawi and Ivory Coast, which range from 21 to 22 kg/hectare, respectively. There is considerable opportunity to expand fertilizer production beyond the approximate 800,000 tpy being consumed.
Fertilizer demand is projected to increase by 6 to 7 % per year over the next 20 years. This increase in fertilizer demand will result from increased land cultivation, and the improved fertilizer application rate. Gas demand in this sector could reach 110 mm cfpd by 2010 and 170 mm cfpd by 2020. Nigeria's per capita use of steel is also low relative to other developing countries.
Because of low production capacity utilization due to plant shut downs, demand is met through importation. Current capacity utilization rates are less than 1 % of Nigeria's total production capacity of roughly 2.3 mm tpy.

The situation with the iron and steel industry is dismal. Despite the fact that the gas infrastructure to the plant at Aladja and Ajaokuta has been in-place for a long time, the inactivity of the plants, has reduced the gas consumption to near zero.
However, with improved performance in the industry and the other sectors, it is estimated that gas demand may double every 10 years. Restarting the existing steel plants and revamping them to meet the estimated demand of 2.0 mm tpy by 2020 will result in total gas demand increase of 70 mm cfpd by 2010 and 130 mm cfpd by 2020 for this sector.
Gas is a major feedstock of the petrochemical industry and the gas demand for this industry is put at approximately 60 mm cfpd. The demand results from gas use by the petrochemical plants. The demand therefore increases in direct proportion to production output. The gas demand projection in this sector assumes that all facilities in the sector are operating.

The projection also takes into account the anticipated local demand for finished petroleum products, and assumes that new petrochemical plants would be built in 2010 and 2020. With the increased capacity, gas demand in the oil petrochemical sector could reach almost 80 mm cfpd by 2010 and 100 mm cfpd by 2020. Nigeria has only one aluminium smelter plant -- the Aluminium Smelter Company of Nigeria (ALSCON) -- with a capacity of 200,000 tpy.
ALSCON, which was built in the mid-1990s, operated briefly, and reached a capacity of about 22 % before it became idle in mid-1999. No new aluminium plant capacity additions are foreseen, but if re-activated, gas demand at ALSCON is projected to reach 85 mm cfpd by about 2005.
Extending gas supply to residential consumers and small industrial concerns is problematic. It should not be forgotten that Nigeria is a tropical country and does not have a need for space heating which is responsible mainly for gas development in the residential sector market in colder countries. Infrastructure and operating costs for supplying residential consumers are typically high, while aggregate volumes are low thus making natural gas business in this area uneconomic except where distribution network is available for easy tie-in.

Distribution and light industry demand to industrial estates is about 6.2 mm cfpd. Consumption in these sectors has the potential to expand significantly and could reach about 100 mm cfpd in 2010 and over 220 mm cfpd by 2020. Nigeria has the potential for a large market for LPG. At present, the domestic market could be a viable outlet for LPG. Nigeria imports about 20,000 t of LPG out of a total estimated market demand of 200,000 tpy.
There is therefore a considerable growth potential for domestic Nigerian LPG to displace other fuels used for cooking, if the local distribution logistics can be resolved. CNG constitutes a veritable source of fuel in the motor transportation sector which can positively improve the domestic consumption of gas. It has the advantage of being cheaper and environmentally friendlier than gasoline. However, the technology is fairly new and most vehicles in Nigeria are not designed to use CNG.
The Nigerian Gas Company is spearheading a project for the direct use of CNG as an automotive fuel. NAOC has also given indication for the use of CNG in all vehicles within its operational areas. The main problem against the widespread usage of CNG at this time is the non-availability of refuelling infrastructure and the large investment required to put this in-place.

The total current average domestic gas demand in Nigeria estimated at about 600 mm cfpd. Average domestic gas demand, from a recent study, has the potential to increase to 1,900 mm cfpd by 2010 and ultimately to over 4,800 mm cfpd by 2020. The existing laws and regulations covering natural gas include:
-- The Petroleum Drilling and Production Regulation No.51 of 1969 Section 42 of the Decree stipulates that not later than five years after the commencement of production from the relevant area, the licensee or lessee shall submit to the commissioner (in this case, the Minister) any feasibility study, programme or proposal that they may have for the utilization of any natural gas; whether associated with oil or not, which has been discovered in the area.
The regulation does not carry any penalty clause. This perhaps explains failure of operators to abide by the terms of the decree.
-- The Petroleum Amendment Decree of 1973 made provisions for the Federal Government to take natural gas produced with crude oil by the licensee or lessee free of cost at the flare or at an agreed cost and without payment of royalty.
Thus, flared gas, for which no project has been programmed by the licensee or lessee to the Department of Petroleum Resources(DPR), can be taken without payment to the producer for use by interested parties approved by the DPR. It is therefore necessary that the DPR be informed of company's AG utilization projects as soon as they are firmed up.
-- The Associated Gas Re-Injection Decree 99 of 1979 requires producing companies to submit proposals for utilization of AG produced in their operating areas and to stop flaring of gas from 1st January 1984 except by express permission of the Minister of Petroleum Resources. The consequence for violating the Decree included forfeiture of the acreage concerned.
-- The Associated Gas Re-Injection Amendment Decree 7 of 1985 introduced a charge of 2k/l000 cf of gas flared at the fields where authority to flare associated gas was not granted. At a point in time, the penalty was equivalent to 4 cents/l000 cf at a time when crude oil prices ranged $ 20-$ 28 /bbl.
In 1990, the penalty was increased to 50k/l000 cf in what was expected to reflect the effective weight of the penalty in relation to the exchange rate at the time. In the 1998 budget speech, the penalty was further raised to N 10/1000 cf.
-- Since the Associated Gas Framework Agreement (AGFA) legislation was put in place it was largely ignored, other incentives had to be found in order to encourage gas utilization and reduction in gas flaring.
-- The next bold step was embodied in the document entitled Associated Gas Framework Agreement (AGFA), which was introduced in1992 as a package of fiscal incentives for utilization of natural gas.
In addition to the above Decrees, DPR also has a policy of not allowing the development of non-associated gas where associated gas utilization is feasible, apart from the provision for back-up supply.

Existing incentives for gas in respect of domestic gas operations are:
1) Equipment and machinery meant for gas project development are exempted from VAT and import duty.
2) Applicable tax rate under the PPT Act to be at the same rate as Companies Income Tax Act (CITA) currently at 40 %.
3) Capital allowance at the rate 20 % per annum in the first four years, 19 % in the fifth year and remaining 1 % in the books.
4) Investment Tax Credit (ITC) at the current PPT rate of 50 % which was the same rate of credit granted to oil producing companies.
5) Royalty at the rate of 7 % on-shore and 5 % offshore
6) Pioneer status for companies engaged in gas production for a period of 5 years Gas Transmission andDistribution.
7) VAT and import duty are granted for on plant, equipment and machinery purchased for gas utilization.
8) Capital allowance at the present rate of 20 % per annum in the first four years, 19 % in the fifth year and 1 % in the books.
8) Tax rate at the rate of Companies Income Tax Act (CITA), which is at present 40 %.
10) Tax holiday under pioneer status, which shall be for a period five years.

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