Article Summary
- Although Nigeria has lots of natural gas resources, the sector is not yet fully harnessed.
- This is a result of the gas pricing and policy in the country, which prevents investors from taking full advantage of the sector.
- Once pricing and policy are fixed, investors will feel more at ease and invest in the sector.
In a recent report for the G7, the International Energy Agency (IEA) said that natural gas demand will depend on pricing and policy as various countries respond to the gas market differently. The IEA believes that there is no single global story about the future of natural gas, as countries and regions respond to market and policy pressures in different ways, based on their national circumstances and stages of development.
The IEA stated further that these pricing and policy conditions could either ensure a fully harnessed gas sector or the opposite.
Natural gas as a fuel has some value propositions; it acts as a backup for intermittent renewable energy sources like solar and wind. Natural gas plays a role in decarbonizing the global power generation mix. Natural gas has also been touted to replace coal in the global power generation mix.
The Nigerian context
Nigeria is one of the largest natural gas producers in the world and in Africa, Nigeria is the largest LNG supplier. However, the country has not seen a lot of natural gas utilization because of the gas pricing framework, says Kayode Oluwadare, a natural gas analyst. He says that the country’s incoming president should fix gas pricing and gas policy, to guarantee more investments in Nigeria’s natural gas sector.
Gas pricing
Kayode Oluwadare told Nairametrics that the domestic price for natural gas in Nigeria is far lower than the international benchmarks like Henry Hub in the United States and the Japan/Korea Marker in Asia. As a result of this, investors tend not to take full advantage of the country’s natural gas resources. He said:
“When any investor intends to do a natural gas project, it is purely for profit and when they consider the Nigerian domestic price that is far lower than their breakeven price, or operating costs, there is no incentive to produce a domestic-oriented gas project. So, investors in the Nigerian natural gas space have three options; they either continue to flare available gas or leave them unexplored or continue to sell them as LNG to the export market.
“Nigeria’s domestic gas pricing framework is divided into three – natural gas sold to the power generation plants at the lowest band, gas sold to industries that add value to the resource like fertilizer and methanol production industries, and LNG production, and gas sold to industries that use the resource to generate their own power.
“Even the band that has the highest price in Nigeria’s domestic market is still lower than the international price for natural gas, so investors would rather export the natural gas in form of LNG or even as fertilizer or methanol or keep flaring the gas instead of spending billions of dollars to build assets and infrastructure to process and transmit this gas to the domestic market and not be able to recoup their return on investments. This has been the factor behind the low domestic utilization of natural gas.”
Gas policy
Oluwadare also told Nairametrics that Nigeria’s gas policy also plays a role in holding the sector back. According to him, the National Domestic Gas Obligation pricing policy of 2008 under the Nigerian Gas Master Plan formulated a framework that mandates natural gas operators (producers and suppliers) to sell at regulated prices. Meanwhile, no private investor wants to establish expensive natural gas projects around regulated pricing, they want a liberal market where the government does not regulate prices. He said:
“They want a market that is in line with the forces of demand and supply. They do not get their equipment and funding for the projects under regulated agreements. So, the policy regime in Nigeria still needs to be looked into, if investments must come into the domestic natural gas sector.
“The development of the natural gas domestic market is important because the power, commercial, households, and industrial sectors need the resource. Gas investments are a direct function of pricing and policy. with the wrong pricing and policy in place, there can be no rise in local and foreign investments as is the case of Nigeria.”
What you should know
Oluwadare noted that the Nigerian Gas Flare Commercialization Program (NGFCP) has done a lot to encourage operators to trap and process gas to either sell to the domestic market or export, but the policy has not had a grip on operations because a lot of upstream producers will still prefer to flare gas because of the low gas pricing framework.
