With current estimated gas reserves of 185 trillion cubic feet, Nigeria holds the eighth largest gas reserves in the world and the largest in Africa. Despite these vast gas reserves, the domestic gas market is generally underdeveloped and a significant percentage of available natural gas is either exported as liquefied natural gas, re-injected to enhance oil recovery (where gas is found in association with oil) or simply flared.
There is dire need for infrastructural development. Most of the existing gas infrastructure is project-centric and there is lack of a robust transmission network and interconnectivity. Also, activities of insurgents in the Niger Delta and vandalisation of facilities have disrupted supply of the already low volume of gas being exploited and produced. These problems, coupled with the capital intensive nature of investments for gas production, artificially low prices at which gas producers are compelled to sell the product in the domestic market and the long lead time required to develop a commercially viable industry, have occasioned disincentives for investments and thereby hindered the growth of the domestic gas sector. Yet, domestic gas demand, especially in the power and manufacturing sectors, is increasing and far outstrips supply.
In 2008, the Federal Government of Nigeria (FGN) issued the Nigerian Gas Master Plan (the Plan) to address impediments to the development of the domestic gas sector, engender the monetisation of gas, reduce gas flaring and assure longterm gas security for Nigeria. The Plan seeks to achieve these objectives through a roadmap for transformation of the Nigerian domestic gas market into a full market driven industry by year 2015 through the overhaul of the regulatory regime, the development of sustainable commercial frameworks and the procurement of essential infrastructure.
As part of the Plan, the FGN issued the National Gas Supply and Pricing Policy (the Policy) and the National Domestic Gas Supply and Pricing Regulations (the Regulations). The Policy and the Regulations provide for the imposition of a domestic gas supply obligation (DSO) on all gas producers, requiring them to set aside a predetermined portion of their gas production for supply to the domestic market. The Policy categorises the domestic gas market into three broad groups requiring special regulated pricing regimes, to wit: (i) power sub-sector; (ii) strategic industrial sub-sector, that use gas as feedstock (eg, methanol and fertiliser producers); and (iii) strategic commercial sub-sector (eg, cement and steel manufacturers). Different regulated pricing frameworks apply to each of these categories, with the expectation that there will be eventual graduation to a pricing regime led by market forces.
The Policy and the Regulations also provide for the establishment of an aggregator responsible for determining aggregated gas prices to be paid to gas producers for gas supplied to the domestic market. The aggregator will also: manage the operationalisation of the DSOs by ensuring the allocation of gas supplied under the DSO regime to the various sectors of the domestic market and ensuring that a minimum aggregate domestic gas price that tracks the transition to export parity is achieved; serve as an intermediary between domestic offtakers and gas producers by managing the receipt of revenues from the various sectors receiving gas supplied and effecting the payment of the aggregate domestic gas price to the gas producers; and manage the implementation of all revenue securitisation arrangements.
The Plan also consists of a Gas Infrastructure Blueprint (the Blueprint), which details proposals for private sector participation in the development of infrastructure required to support the domestic market. Under the Blueprint, Nigeria is divided into three franchise areas, within which franchisees will establish central processing facilities (CPFs) and transmission and interconnection infrastructure for distribution of gas to offtakers in the domestic market.
Implementation of the Plan is in progress. DSOs imposed on gas producers have been in place since 2008, with a penalty of US$3.5/mcf for non-compliance. Also, a model Gas Sale and Aggregation Agreement (GSAA) has been developed for adoption in the domestic market, and the FGN has established the Gas Aggregation Company of Nigeria. Negotiations of GSAAs are currently ongoing between several buyers and gas producers. In 2010, the Power Holding Company of Nigeria signed a GSAA with the Nigerian National Petroleum Corporation and Pan Ocean Joint Venture. In addition, the FGN is evaluating bids received from prospective franchisees in 2009 (and revised in 2010) for the development of CPFs and gas transmission networks under the Blueprint.
Further, as part of the roadmap issued by the FGN in August 2010 for reforms in the decrepit power sector, the FGN intends to develop policies and provide incentives for the exploitation of stranded gas locked up in various fields and for the development of gas transportation infrastructure, thereby tackling bottlenecks in the fuel-to-power end of the electric power sector value chain.
On the whole, it appears that there are interesting times ahead for stakeholders in the Nigerian domestic gas sector.
Ken Etim is a Partner in the commercial law firm of Banwo Ighodalo and Kehinde Ojuawo a counsel in the firm.
