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DEPARTMENT OF ECONOMICS
PETROLEUM AND ENERGY ECONOMICS
(ECO 723)
TERM PAPER
TOPIC:
Natural Gas Market Development in Nigeria: Pricing,
Planning, & Policy Options.
Prepared by group 7:
1.
2.
3.
4.
5.
-------------------------------
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December 2015
ABSTRACT
One of the major realities with natural gas is that it does not have a global
market like its counterpart, oil. For gas to be produced there must be a
waiting buyer. Gas production requires huge upfront investment. The huge
investment risks need a viable market to be mitigated. And since there is
scarcely one, the international oil companies (IOCs) have over the years
been reluctant to develop natural gas, having viewed it as uneconomic. Thus
they prefer to flare it at the wellhead rather than expend so much to get it to
the city-gate.
Over the years, several pricing related laws have been enacted and policies
made by successive government in a bid to create a market in Nigeria. Yet, a
domestic market barely exists. In this work, we adopt a step by step review
of relevant existing literatures, highlighting their major policies on the
downstream gas market. The policies contained in the Gas Master Plan (GMP)
are given pride of place. This is because they represent the downstream
market policies that would soon take the Centre stage in the country.
TABLE OF CONTENTS
ABBREVIATIONS
AND
..
ACRONYMS
iv
1.0 INTRODUCTION
. 1
2.0 AN OVERVIEW OF THE NIGERIAN
. 2
1.1
GAS
SECTOR
.. 2
1.2
The Nigerian Downstream Gas Market
3.0
.. 5
THE NIGERIAN GAS MASTER PLAN
.. 6
3.1 Current Gas Utilization projects and Plans
9
4.0
10
4.1 Policy Options For Nigeria
. 10
5.0
.. 14
6.0
.. 17
..
REFERENCES
. 18
Associated Gas
Bcf
BG
British Gas
Bpd
Bscf
CITA
CNL
DGO
DPR
EGL
Escravos Gas-to-Liquid
GMP
GSA
IOC
IPA
JV
Joint Venture
LNG
LPG
Mcf.
Mmcfd
Mmbtu
MOE
Ministry of Environment
MYT
NERC
NGC
NNPC
NLNG
NOAA
PA
Petroleum Act
PIB
PPTA
SPDC
SNG
SGPP
SA
Strategic Aggregator
Tcf
TPA
TPY
WAGP
1.0 INTRODUCTION
Exploration for oil and gas in Nigeria began in 1908, with the first
discovery being made in the Niger Delta in 1956. Nigerias first refinery
began operations in 1965, with a capacity of 38,000 bbl. /day; enough to
meet domestic requirements at the time. The demand and production of oil
in Nigeria has since increased tremendously, such that Nigerias current daily
production is estimated at about 2.5m bbl. /day, with a domestic
consumption level of 279,000 bbl. /day. At the end of 2010, Nigerias proved
oil reserves were estimated to be 37.2bn barrels, which amounts to 2.68 per
cent of the worlds reserves.
Nigeria has an estimated 182 TCF of proven natural gas reserves, the
seventh largest natural gas reserve holder in the world; High grade quality:
0% sulphur & rich in NGLs. Most gas discoveries have been made in the
process of exploring for oil; Nigeria is globally the No. 1 gas flarer : 40% of
Nigerias annual production is flared, the country accounts for 12.5% of the
gas flared in the world (Source: World Bank). The current legal and fiscal
framework for the petroleum industry is geared towards oil production and
utilization with very little focus on gas.
trying to stop gas flaring since the discovery of natural gas. Studies show
6
that without a viable domestic market this would remain elusive. Over the
years, several policies had been formulated by the government with a view
to creating a domestic market. Notwithstanding that the greatest need for
natural gas is in Nigeria, these policies failed; the domestic market barely
exists. Nigeria remains acutely short in energy capacity in the face of
abundant resources. Is something wrong somewhere?
Due to the lack of gas infrastructure and the widespread flaring of associated
gas, the Nigerian gas sector has been relatively underdeveloped. In a bid to
tackle this underdevelopment, the federal government prepared a Gas
Master Plan in 2008, the implementation of which is currently underway. The
initiative is geared at promoting natural gas production, and encouraging the
supply of natural gas to domestic power stations so as to alleviate the
countrys energy shortage. As part of the Gas Master Plan, the National Gas
Supply and Pricing Policy (Gas Pricing Policy) and the National Domestic Gas
Supply and Pricing Regulations (Policy Regulations) have been issued by the
government and both instruments impose obligations on gas producers to
set aside a predetermined portion of their gas production for supply to the
domestic market.
The Department of Gas Resources is established under the National Gas
Supply and Pricing Regulations and it is expected to ensure the availability of
gas supply to the domestic market.
Crude oil was discovered in Nigeria in 1956 by the Shell DArchy at Oloibiri,
Bayelsa State. Geologically, since most crude oil is found in association with
natural gas, Nigerias natural gas was discovered at the same time as oil.
However, due to the fact that there was no use for it, until recently, most of it
was flared. As from 2007 till date, Nigeria is ranked second to Russia as
country with the highest amount of gas flared.
Apart
from
the
greenhouse
effect
of
gas
flaring
and
other
bonfires has been killing human beings and the natural environment since it
was lit. The National Oceanic and Atmospheric Administration (NOAA)
claimed that Nigeria flared 596Bcf of natural gas in 2007 and consequently
lost US$1.46 billion and for IHS Global Insight, Nigeria loses US$15 million/d.
However, the Nigerian National Petroleum Corporation (NNPC) reported that
a total volume of 2,282.44Bscf of natural gas was produced in 2008 out of
which 631.19Bscf was flared. At least, if the report is anything to go by, it
means that the 40 year old bonfires are abating.
rationalize their asset portfolios, and shift strategic development focus to the
deep offshore operations in Nigeria. These blocks are being disposed under
negotiated bid arrangements.
Most of the blocks are recognized oil fields, while others are gas fields. Since
most of the blocks are in the onshore and shallow-water areas of the Niger
Delta regions, the fiscal regimes applicable to joint venture operations are
applicable to these blocks.
Sale of marginal fields by the Federal Government of Nigeria (FGN)
The FGN has commenced the marginal fields licensing aimed at increasing
the participation of indigenous operators in the upstream sector of the oil
and gas industry.
The bidding process for 31 marginal fields commenced in 2013. Out of the 31
marginal fields being allocated, 16 are located onshore, while the remaining
15 are located in the continental shelf of Nigeria.
Only indigenous operators are eligible for bidding for the marginal fields.
However, some of the successful bidders would require various levels of
financial and technical support. Therefore, potential investors can partner
with these (successful) indigenous companies to provide the requisite
technical and financial support.
10
engage in
limited
transmission
and
sector
Make gas available at commercial and affordable prices to local
markets
Widen the availability of gas to more of Nigerias underserved regions
Store gas for load balance and future use when markets or contracts
possible
Ensure continuity of supply to meet major existing and future contracts
Formulate a strategy that adds value for all parties and encourages
beneficial gas usage both domestically and/or through capture and,
The domestic gas supply obligation is meant to deal with the issue of
improvements in domestic gas supply by imposing supply obligations on
petroleum upstream operators.
The gas pricing policy is predicated on a pricing framework that
segregates the demand sector into three categories (domestic, industrial and
commercial), to which the different pricing regimes apply. The domestic
category consists of the use of natural gas for domestic cooking and for
power generation. This category has direct multiplier effect on the economy.
The industrial category comprises of industries that consume natural gas as
a raw material for the production of secondary product, such as methanol,
fertilizer, gas-to-liquids (GTL). The commercial category consumes natural
gas as an industrial fuel for manufacturing firms.
13
Export oriented,
Domestic oriented, and
14
Field utilization.
The main natural gas projects on stream, by some of the major operators,
are:
The Gas Re-injection/Field Use projects.
The Natural Gas Liquids (NGLs) project of Mobil Producing.
The Gas-to-Liquid (GTL).
The Liquefied Natural Gas (NLNG) project of Shell/Elf/Agip.
The West Africa Gas Pipeline, and
Independent Power Plants (IPP).
Other major natural gas projects being planned by the major companies are:
15
A lack of clearly stated, long-term "vision" for the sector and realistic
of gas
A lack of a clear gas sector development strategy and implementation
plan, covering both policy directions and integrated investment
priorities
A lack of capacity to evaluate, correlate, and prioritize proposals
received from the private sector, together with growing reservations
i.
Structural Restructuring
16
Institutional reforms
17
Investors will measure the potential of regulatory risk from the key
benchmarks of good regulatory design: independence, expertise and
accountability. Hence, the instruments providing for the establishment of a
sector regulator must be drafted with these elements in mind.
Capacity building - The lack of institutional capacity in conducting bid
assessment procedures and in conducting effective negotiations for major
infrastructure projects with sophisticated multinational entities is apparent
throughout the Nigerian public sector. These limitations are even more
apparent in the DPR. The weakness of the DPR as a regulatory institution can
however be addressed by a focused technical assistance and institutional
capacity building program. Such a program, geared towards developing
expertise on infrastructure procurement and on how to react to and
undertake an informed assessment of project proposals cannot be over
emphasized given the focus of the government on power generation.
iii.
19
b.
terms
for
distribution
companies,
infrastructure
gas
providers,
marketers
and
transmission
downstream
and
project
developers.
d. A code of conduct for all participants regarding market behavior
e.
v. Introduce Market Competition
The expected benefits that can result in a competitive market can only be
achieved if the market is functioning properly. The sector regulator can
ensure this through effective antitrust and economic regulation of sector
participants. In order to protect the competitive environment that should
develop in consequence of the reforms, an open access regime for pipelines
and associated facilities should be introduced. If buyers and sellers were to
allowed to have access to one another over spare capacity in transportation
facilities, including upstream facilities, more sellers of natural gas will be
encouraged to enter the market.
5.0
NATIONAL
GAS
PRICING
FRAMEWORK
IN
NIGERIA
As earlier noted, natural gas pricing forms one of the factors upon which the
realization of the Nigerian dream of developing both domestic and
export/regional markets is based. The challenge is primarily determining an
appropriate gas pricing framework that encourages efficiency in production
and consumption. The complexity of this challenge is worsened by the widely
divergent interests of major players in the industry. While the growth of the
economy through new gas based industries and consequent employment
generation would be attractive to government, other industrial players
20
particularly the IOCs are driven mostly by profit maximization. The scope and
space of domestic gas market development in Nigeria depend significantly
on the signals the underlying pricing mechanism sends to both prospective
suppliers and consumers. Hence, the core of gas pricing in Nigeria revolves
around achieving economic pricing such that it provides sufficient incentive
for the efficient producer to remain in business.
The need for a pricing strategy that recognizes the diversity in the
ability of the various industrial subsectors to bear gas price cannot be
overstated. Apart from enabling and sustain diversity of the demand sectors,
thereby enabling Nigeria to benefit from the industrialization potential that is
inherent in natural gas, the pricing strategy is also aimed at enabling the
selective maximization of net revenues for Nigerian gas from sectors that are
most able to deliver that direct economic benefit. From a gas pricing strategy
perspective, government has grouped the entire domestic demand into three
broad groupings. This grouping is in recognition of the fact that the different
demand sectors have different strategic benefits to the country and different
pricing considerations.
The objective of this Pricing Policy as stated by the government is to
create structures and a transparent framework for gas pricing that supports
the governments aspiration for accelerated domestic economic growth via
rapid gas based industrialization and maximizing value from high value LNG
and pipeline exports. It should be noted that the government does not fix gas
prices, but provides a framework for establishing the minimum gas price
The pricing policy establishes 3 broad categories for buyers of gas as
follows:
i.
21
ensure low cost gas access to these sectors in order to stimulate rapid
ii.
iii.
buyers.
Strategic Commercial Sectors: This refers to sectors that use gas
as
fuel
as
opposed
to
feedstock.
Unlike
the
two
previous
22
REFERENCES
24
at
25