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We Need Laws That Will Support Gas Exploration And Exploitation – Dan Kunle

We Need Laws That Will Support Gas Exploration And Exploitation – Kunle

In this interview, energy expert, Mr. Dan Kunle, lends his experience to throwing some light on niggling issues in the Oil and Gas sector, including power generation, the price of oil and Nigeria’s largely untapped gas potential.

With oil prices currently at $38 per barrel and predicted to fall even lower, do you think benchmarking the 2016 budget at that price is realistic?

Any budget must have a basis for you to run your numbers, particularly as the case with Nigeria budgeting system is related to crude oil sales proceeds. Whatever the Federal Government of Nigeria wants to put in the annual budget is derived largely from the daily oil production output and export. If the price of the oil export is hovering around $100 per barrel, it may be wise to benchmark your budget at $75/80, as the case was before. But today and in recent times, the international oil price has been hovering between $30 and $45 and since Nigeria is not sure whether the price will come to $30 or not, it is rational for now to benchmark the budget at between $35 and $45, which may be the reason why $38 was chosen.

The realities of the 2016 budget will start to unfold from January until September, that is, over the first nine months, when we would have seen all the vagaries of major oil commodity export by Nigeria. With the good budgeting tools and the capability of the spreadsheet software, the budget office can tinker with the benchmark on a monthly basis and still ensure that they work within the estimates, as may be passed by the National Assembly. If the price of oil goes below $30, the President may send a revised budget to the National Assembly for passage. He can do the same if the price goes above $40. This will imply that most of the projects in the budget will be re-aligned to reflect the new realities.

In mid-November last year, it was reported that power generation fell by 480mw. It hasn't picked up much since then. What needs to be done to rectify the situation, especially with the dry season still months from ending?

The up and down problem of power generation in Nigeria is due largely to the inability of the gas producers and the gas transmission company, Nigeria Gas Company Limited (NGC), to guarantee uninterrupted deliveries to the power plants across the country. Nigeria currently derives her 4000mw power output from hydroelectric plants and gas-fired power plants. The hydro power plants in Kainji, Jebba and Shiroro depend largely on water volumes and are easier to manage than the power generating plants that rely on natural gas supplies.

This is because natural gas must be transmitted from the wellheads to the gas processing plants and from the gas processing plants to the various power plants located in different parts of the Niger Delta province and Ajaokuta in Kogi State. The distance between Escravos and Otorogu in Delta State and Otorogu and Egbin in Lagos State runs to about 300km and the pipelines are exposed to all forms of attack, which disrupt the steady flow of natural gas to the generating plants that feed from them. Another major problem with gas supply has been the poor maintenance arrangement of the NGC, which derives all its financial power from the Nigerian National Petroleum Company (NNPC) and has limited autonomy to operate as a full-fledged commercial entity.

Gas supplied by international oil companies (IOCs) is transmitted through NGC-owned pipelines for delivery to the various power plants. It would be good for Nigerians to know that Afam Power Plant, operated by Shell is hardly interrupted, because Shell delivers gas directly on its own; also Okpai Power Plant, where AGIP delivers gas directly on its own. These are the two most efficient gas power plants in Nigeria, giving the National Power Grid an average of 800mw per day. These two gas-fired power plants are the major reason why the NGC should be privatised. It should be privatised, because the new private owners of the gas power plants rely on the NGC, which is controlled by the government and has no commercial autonomy to dynamically respond to the power plants owners’ day to day requirements. By extension, this scenario is the reason why Nigeria has not succeeded in delivering gas to Benin, Togo and Ghana seamlessly. If the NGC remains a government-owned subsidiary of the NNPC,

Nigeria may never get efficient natural gas deliveries to its privatised power plants and the new ones to be built. On the issue of hydro plants, you can calculate the volume of water in the lake and project into the dry season spell to adjust your daily turbine operations. It is not as problematic as gas supply. Until we are able to have relative balance between hydro, gas, coal and solar energy, Nigeria will not enjoy stable electricity supply. If Mambilla Hydro can come on stream with about 3000mw in the next four years and coal can be exploited for power generation of up to 2000mw in the next four to five years, plus about 1000 to 2000mw of solar energy in different locations in Nigeria, Nigeria may begin to see some stability in power supply.

Electricity transmission infrastructure will also have to follow in a corresponding manner, to balance power transmission across the country. It is by this, appropriate energy supply mix that Nigerians will no longer have to complain about the dry or rainy season, or gas pipeline vandalism.

The Nigerian Electricity Regulatory Commission (NERC) has announced a review in tariffs. In a supposedly deregulated system, is it the duty of the commission to announce price changes?

Yes, the NERC was established by law to babysit the electricity industry in Nigeria, which is in its infancy. The issues of tariff and a deregulated market are not as straightforward as people may think. It is true the electricity industry is deregulated, but the industry in Nigeria is so young that if the tariff is left for the market forces to determine, you and I would be able to pay for electricity services. The paradox of this situation may appear very uneconomical to many, since electricity is in short supply to the Nigerian market and therefore, the price ought to be high.

The scarcity of an essential commodity such as electricity naturally warrants a high tariff or high cost, but the Nigerian government is guided by the spirit of social responsibility, which stipulates that electricity should be given to the populace as a social and not an economic commodity. This situation has compelled the government and NERC to try to set a Multi-Year Tariff Order (MYTO), to mechanically adjust the tariff of electricity on a yearly basis, as the case may warrant. On the average, public electricity is cheap in Nigeria and not attractive to investors, but with a good regulatory framework, the industry can be nurtured to become very profitable in the next three to five years.

All the investors in the electricity distribution segment in Nigeria today are operating at a loss, yet they need to procure capital at a very high interest rate to upgrade infrastructure and expand their distribution networks in their various zones. This was the case with the telecommunication industry when it started in 2001/2002. The issue is not the same with respect to power generating investors, but they also have their teething problems where the quantity and quality of gas supplies is concerned, as well as appropriate pricing for gas supplies. NERC, by statute, is to play a midwifery role for new investors in the deregulated electricity industry and government’s social responsibility, which can be said to be a very delicate balancing act to have to handle. But it is a doable programme and we must patiently follow through with it, if we are to develop our electricity industry as has been done in other, mature markets.

The government appears confused over what to do about petrol prices. Will 2016 be the year when fuel subsidy will finally be removed?

The issue of fuel subsidy removal has been a recurring decimal in our national life, but it is now time to free the downstream oil market, while the Federal Government refocuses its energy and resources on how to develop the gas sector. This would be more rewarding for the economy, if you take a critical valuation of all the gas value chains. Gas has multiple value and more applications than Premium Motor Spirit (PMS). PMS, Automotive Gas Oil (AGO) and Dual Purpose Kerosene (DPK) are products that our local refineries can produce in large volumes and any excess could be exported. But because Nigeria lacks domestic refining capacity, today, we have to import all our daily requirement of about 40 million litres, which we lack infrastructure to effectively handle and deliver to the retail stations. Given the vast territory called Nigeria, there is no way we could sell petrol and kerosene at uniform prices. It is time to free these commodities and allow market behaviours to determine their prices. Natural gas should and must be Nigeria’s new focus, if we are to industrialise and take proper advantage of our huge natural gas endowment and its potential.

There are refineries in Niger, Morocco and elsewhere that could sell refined petrol to us at a cheaper price. Why are NNPC agents stuck on Europe?

Most of the refineries in Europe have high refining capacity and they operate at optimal level, which gives them the advantage of economy of scale. They also have good shipping infrastructure, because most European refineries are located within their deep-sea port areas and cannot be compared to the 20-25,000 barrels per day refineries in Niger and Chad. Most of the traditional ‘Big Six’ in Nigeria –Shell, Mobil, Chevron, AGIP, Total and BP-AP (now Forte) – had their traditional home bases in Europe and America, with their parent companies owning majority shares in those refineries.

Until the Nigerian government, by law or by moral suasion or commercial agreement condition the six majors to own or co-own refineries in Nigeria, we may never have efficient fuel supply and delivery systems. The private refinery being proposed by the Dangote Group, once on stream, may not give the Nigerian market more than 15 million litres per day, which may still leave the Nigerian fuel supply gap at about 25 million litres, going by the current rate of our daily consumption of about 40 million litres. It is for this reason that we cannot hinge our fuel import requirements on small refineries such as those in Niger, Chad, Sierra Leone and Ivory Coast. For Nigeria to be self-sufficient, we need an in-country refining capacity of about 1.2 million barrels. This ambitious projection will take the next six years to materialise and will cost Nigeria about US$15-20billion. It is better the government opens up the entire downstream sector of the oil and gas industry, if it is to attract foreign direct investment, with some local risk takers such as Dangote.

The government appears to be looking very seriously at solar energy to supplement power supply. Are we likely to see the first fruits of this in 2016?

Solar power use is growing very rapidly in China and some other locations around the world, but it is not for ‘heavy’ industries. Nigeria can embrace solar for its organised housing estates, streetlights and university campuses, as well as hospitals. It is technology that is not as formidable for mass production as hydro, thermal or coal is. You need a huge parcel of land to build the solar cell sites for any reasonable capacity, starting from 10mw. But Nigeria must key into solar energy supply in order to work towards reducing the electricity deficit in our country and to comply with the Zero Carbon Emission Agreement.

Why is there still such ambivalence about what to do with – even negligence of – the country's gas?

The simple explanation about our attitude to gas in Nigeria is that since 1957, there has been no gas mining law; there are the Oil Prospecting Licence (OPL) and Oil Mining Licence (OML). Take the Nigeria Liquefied Natural Gas Company Limited (NLNG) in Bonny. It was established by a decree during the military era in Nigeria and today, it is the most successful project in Africa, as it currently produces 22 million metric tonnes of liquefied natural gas per annum, all for the export market. If you can draw from this situation, all previous administrations and leaderships in Nigeria never took gas as seriously as oil. But today, gas is the oxygen that drives the economies of Canada, America, Britain, Western Europe, Australia, Qatar, China, Dubai and Saudi Arabia etc., because all ‘heavy’ industries and petrochemical and fertiliser plants derive their energy and feedstock from gas. Even to flow back part of the natural gas from the Bonny LNG to feed our power plants or petrochemical industry has been impossible since 1999, not to talk of having re-gasification plants in Nigeria.

Some people may ask why Nigeria that produces so much natural gas should ever contemplate having a re-gasification plant. It is because a re-gasification terminal would allow Nigeria to take LNG cargo from Bonny, the Suez Canal, Algeria or Qatar and re-gasify it for power generation at any location between Badagry and Bakassi. Unfortunately, we send our natural gas to support the comfort of overseas buyers, while we remain in darkness and our industries pay prohibitive prices to generate power for their daily manufacturing operations, which has kept them uncompetitive and thus not contributing in real time to our gross domestic product (GDP). Not even do the huge dividends that the Nigerian government receives annually from Bonny LNG compensate for the losses we suffer from ‘darkness’ and uncompetitive manufacturing industries. Nigeria’s 49% equity in Bonny LNG may as well be privatised for cash, so that the cash proceeds can be invested in gas infrastructure to feed Nigeria’s domestic economy. All the oil companies in Nigeria prospect for oil, because that is the licence they got from Department of Petroleum Resources (DPR). We need a new law that would focus on gas exploration and exploitation.

What three things need to be done to get the power sector back on track this year?

First, the Federal Government should privatise the Nigeria Gas Company, whose primary responsibility is to build gas pipelines and distribute gas to end users. Second, the Federal Government should take the domestic gas supply obligation as a priority and fix the price at a reasonable level for all domestic users, that is, power and petrochemicals, if they are to be competitive, as the case is in Saudi Arabia, Kuwait, Dubai and Qatar. Our domestic gas pricing mechanism must be fixed to protect our local industries and the power sector, which means we should use what we have to get what we want, and what we want is a competitive, industrialised Nigeria. Third, the Federal Government should invest in electricity transmission infrastructure across Nigeria, in order to evacuate electricity produced by and from new power plants and new Investors.

The NNPC has opted for open, transparent bids. Will this make any difference to how the sector is managed?

Yes, it’s good to do transparent bidding for all major procurements, because that will allow the NNPC to have the advantage of world class competitive companies participating in such open processes.

Where do you think the power sector will be by the end of 2016?

One year is too short a period within which to assess the electricity industry in Nigeria. But given the right regulatory support from NERC, it should be more stable by the end of 2016. The reason for this is not far removed from the likely stable supply of gas and prompt settlement of the market operators’ bills. It is also likely that the electricity distribution companies’ incremental investments in distribution infrastructure would have begun to mature and record positive impact on the consumers.

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