Nigeria needs new strategy for a changing global gas market
A new report by Paris-based energy think tank, the International Energy Association, highlights an evolving global gas market landscape which has implications for Nigeria writes ISAAC ANYAOGU.
Three major issues stand out in the 2018 Gas Market report released by the International Energy Association which has grave implications for Nigeria: the bulk of demand growth will come from China, US supplies will flood the market and Industries will need more gas than power plants.
Global demand for natural gas is forecast to increase at an average 1.6% over the next 5 years with emerging Asian markets as the main engine for demand. Global gas demand will grow at an average rate of 1.6% a year, reaching just over 4,100 billion cubic meters (bcm) in 2023, up from 3,740 bcm in 2017, according to the IEA’s latest annual gas market report, Gas 2018, which was released today
China alone accounts for a third of global demand growth to 2022 thanks in part to the country’s “Blue Skies” policy and the strong drive to improve air quality, says the IEA.
Chinese gas demand is forecast to grow by 60 % between 2017-2023, underpinned by policies aimed at reducing local air pollution by switching from coal to gas.
China alone accounts for 37% of the growth in global demand in the next five years and becomes the largest natural gas importer by 2019, overtaking Japan. The IEA also forecasts strong growth in gas use in other parts of Asia, including in South and Southeast Asia, driven by strong economic growth and efforts to improve air quality.
The bulk of these supplies could be met with rising production in the United States. The country is expected to lead gas production growth worldwide to 2023, thanks to the on-going US shale revolution.
Most new US supplies will be geared to export markets as LNG or through pipelines. The development of destination-free and gas-indexed US LNG exports will provide additional flexibility to the expanding global water-borne traded market.
The IEA says industry takes the leadership from power generation in sectoral demand growth Gas for power generation, once the primary source of growth, expands slowly amidst tougher competition among generation fuels.
Power generation accounted for half of the growth in natural gas consumption over the last decade, helped by abundant fuel supply in mature markets, fuel switching from oil in emerging markets, and the reduction in nuclear generation in the aftermath of the Fukushima Daiichi nuclear accident.
During the projection period, natural gas for power generation continues to grow in North America and the Middle East driven by cheap domestic resources, but slower global electricity demand growth, the rapid rise of global renewable electricity production and tough competition from coal, particularly in Asia, limit its growth prospects.
The industrial sector is expected to account for 40% of the increase in natural gas consumption, replacing power generation as the main driver. Incremental industrial uses cover both energy for processes and feedstock for chemicals including fertilisers in emerging economies and feedstock for petrochemicals for export in regions with abundant natural gas.
What does this mean for Nigeria?
The consequences for Nigeria are unnerving. The bulk of Nigeria’s gas is supplied to Japan and other Asian markets in the form of liquefied natural gas, in the next five years, the competition for these markets will be intense and production is not prolific.
Nigeria started its LNG operations 24 months after Qatar but Qatar now produces 77 million tonnes per annum, while Nigeria has not moved the needle on 22 MTPA.
In Africa, significant gas finds in excess of 127 trillion cubic feet in Mozambique have created the potential for another African super player. Mozambique is expected to become the second-largest exporter of liquefied natural gas by 2025, as the country steps up production from 10 million tonnes per annum in 2017 to an envisaged 50 Mtpa.
Egypt which could become self-sufficient in natural gas by the end of this year with the start of EniSpA’s giant Zohr field has vast facilities to turn gas into LNG, which can be exported by ship.
This is just Africa. The IEA believes that Australia, Qatar and the United States supplying 60 per cent of the world’s LNG by 2023 and increasingly doing battle for a bigger share of the key market of Asia. Right now, Australia has built more facilities than it can provide them with gas.
Nigeria has been unable to add new trains to its LNG plant. The units that freeze natural gas into liquid form for export on ships are known as trains in the natural gas industry.
Big ticket projects like Olokola LNG, Brass LNG and the NLNG’s Train 7 have been unable to reach final investment decision by the stakeholders.
The OK LNG project was stalled because all the international oil companies (BG, Shell and Chevron) withdrew from the project, with only the Nigerian National Petroleum Corporation left.
The Brass LNG project, which was designed to produce 10 million metric tonnes per annum, was to be built by the NNPC, Total, ConocoPhillips and Eni Group. But ConocoPhillips withdrew from the project in 2013.
“It’s time to prepare for the likely demand outlook that’s positive, and has out-performed projections in the last three years. Let’s get back to exploration and production activities,” Tony Attah, managing director and CEO NLNG Limited said at Nigeria International Petroleum Summit in Abuja in February.
Nigeria could struggle to regain prized markets for its long-term contracts due to its unstable regulatory environment, including the moronic decision to amend the NLNG Act by the House of Representatives.
The fact that competitors are offering more flexible terms calls for rethinking the NLNG strategy. LNG buyers receive fixed monthly volumes. Even if a buyer cancels a cargo due to a period of unusually low demand, payment is still due under “take-or-pay” obligations.
Most Asian long-term supply contracts contain “destination clauses” which prevent buyers from on-selling LNG to third parties. To protect buyers and sellers from sharp price swings, the LNG under most long-term contracts is indexed to oil which is prone to volatility.
However the United States has developed destination-free and gas-indexed US LNG exports and this provides additional flexibility to the expanding global LNG market and makes its cargoes more attractive to Asian markets where Nigeria is targeting.
What is more, industry leaders say shorter-term contracts and spot markets will increasingly gain prominence.CharifSouki, chairman at US LNG developer Tellurian Inc., at the Flame conference in Amsterdam on Tuesday, said long-term contracts in the LNG sector would soon be a thing of the past.
“The market has become sufficiently liquid today that a buyer does not need to enter into a long-term contract,” Souki — who was the founder of US LNG pioneer Cheniere Energy – said according to reports by Platts.
“There is no incentive, no imperative to have a long-term contract,” Souki said, unless a buyer is a large utility that needs the guarantee of supply.
Nigeria also needs to review its domestic gas policies. Oil majors with access to vast gas acreages have no financial incentive to develop them because it does not make economic sense due to limited returns in domestic market sale, this leaves these assets stranded. Independents have motivation but lack acreages and Nigeria does not have separate licensing round for gas blocks.
The domestic market needs to be attractive and government can do this by liberalising pricing.
Local gas producers, forced to sell to power plantsalmost 20% of their market invoice due to exchange rate volatility. Their gas contracts are in US dollars but they are paid in naira at Central Bank exchange rate of N305 to a dollar. 40% of their income was wiped out in 2016 when the dollar exchanged for N510.
Nigeria lacks critical infrastructure to move gas around the country. Statutory charges involved in moving gas do not incentivise producers. Investments required to build them stalls on absence of a viable fiscal law that encourages investment and tardiness in enacting a reformative petroleum industry bill.
“In framing gas fiscal term, Nigeria would need to decide if it wants to grow revenues or develop the domestic market,” Austin Avuru, the CEO of Seplat said at a conference last year. .
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