Israel Aye and Chigozie Anyanwu of Sterling Partnership in Lagos provide an update on recent trends in the Nigerian gas sector

How have opportunities in the gas and gas-to-power sectors changed over the last couple of years (in terms of interest, focus and activity)?

Historically, Nigeria has concentrated primarily on oil production and gas for a long time was flared as a by-product of production activities. This is despite the fact that Nigeria is actually a gas province with pockets of oil. This trend has changed in the past few years primarily as a result of government interest in generating economic value from gas production as it has with oil. Other drivers include moves to develop he domestic gas market and closely linked to this, to end gas flaring. Nigeria is estimated to lose about $2.5 billion through this process.

Recent power sector reforms in Nigeria have also generated activity in the gas sector and gas-to-power projects are at the core of the nation’s gas agenda. Domestic gas supply has been identified as the immediate, if not major source of gas for gas-to-power projects and is a critical success factor in the power reform. Incentives have been developed specifically for gas-to-power projects.

What are the key elements of the legislative framework governing the gas sector (considering supply, transmission, transport and distribution)?

The National Domestic Gas Supply and Pricing Regulations and the National Domestic Gas Supply and Pricing Policy provide the framework for gas pricing and supply. The highlights of the legislative framework are pricing, domestic supply obligations and curtailing gas flaring. All gas asset holders and companies engaged in the production of gas (associated and non-associated) are mandated to reserve a specified quantity of gas produced for supply to the domestic market (i.e. the Domestic Gas Reserve and Production Obligations) to ensure a stable supply of gas. This obligation will be stipulated periodically by the Minister of Energy (now the Minister for Petroleum Resources). The framework also establishes a Strategic Gas Aggregator, and this resulted in the establishment of the Gas Aggregator Company (the GACN) in 2010. The GACN was created to manage the Domestic Gas Supply Obligations (DGSO) volumes and amongst other things, coordinate a streamlined process for wholesale gas supply from producers to eligible purchasers, conduct due diligence on eligible gas buyers, allocate available gas to buyers on successful assessment and facilitate expeditious execution of GSAA and GTA between buyers, seller and transporter.

Who are the key participants in the sector?

There is a fair mix of the participants in the gas sector in Nigeria. Local content requirements under the Nigerian Oil and Gas Industry Content Development Act has facilitated increased participation of Nigerians in the sector. However the International Oil Companies (IOCs) continue to play a major role. JV and PSC multinational companies are also being encouraged to participate in the development of Independent Power Projects (IPP), which will provide the necessary infrastructural support for economic growth.

What are/will be the key sources of financing for projects in this field?

Public-private partnerships (PPP) is the preferred approach for delivering IPPs. The Infrastructure Regulatory Commission of Nigeria (ICRC), established under the Infrastructure Regulatory Commission Act is saddled with the strategic objective of accelerating private sector investment in infrastructure development. Power generation and transmission/distribution networks is listed as one of the primary target areas of development.

Nevertheless, debt accounts for about three-quarters of project funding for power projects. The off taker who is the purchaser of the power output is the sole provider of the revenue stream on which financing depends. The competence and creditworthiness of the off taker is crucial to the bankability of the project.

Where the off taker is unable to support the project, parties may solicit government support. The Electricity Bulk Trading Company (NEBTC) is the government owned trader with bulk purchase and resale licences. The NEBTC is empowered to enter into bankable power purchase agreements with generation companies who will in turn sell electricity to the distribution companies. The distribution companies will then subsequently enter into direct purchase arrangements with the generation companies on market terms.

What significance might the further development of gas-to-power have for Nigeria?

The Nigerian government is making concerted efforts through the National Integrated Infrastructure Master Plan (NIIMP) to raise Nigeria’s spending on infrastructure from the current 20-25% of the GDP to at least 70% of GDP by 2043. It is projected that about $3.05 trillion will be required to deliver infrastructure across the identified sectors including energy, transport, ICT, housing, water, agriculture, mining, social infrastructure, vital registration and security over a 30- year period. The first 5 years of the NIIMP (2014 – 2018) is expected to take up investment of up to $166.1 billion to deliver quality infrastructure.

Finding a solution to the power sector is a precursor to all the growth the nation hopes to see in all infrastructure sectors.

What cross border/west African opportunities are there for the gas sector?

The West African Gas Pipeline (WAGP) project is a joint venture between public and private sector companies from Nigeria, Benin, Togo and Ghana. The project is regulated by the West African Gas Pipeline Authority, and the West African Gas Pipeline Company owns and operates the WAGP. The company has a mandate to transport gas from Nigeria to other parts of the region. The final investment decision for the project was signed in 2004 and the initial capacity utilisation of 200mmcf/d is expected to increase to about 400 mmcf/d by 2026.

Another project under consideration is the Trans-Saharan Gas Pipeline, a collaboration between Nigeria, Algeria and Niger. The 4,400km gas pipeline is aimed at making Nigerian piped gas available to Europe and is expected to cost approximately $12 billion. A memorandum of understanding has been signed and feasibility studies show that the project is viable and has the potential to develop all the communities along its route.

What are the key obstacles in developing a strong gas sector?

There is a deficit of gas infrastructure in Nigeria at the moment. Part of the challenge that must be surmounted is for investments to be made in this area. However, this provides a viable opportunity for investors to benefit from the provision of gas infrastructure as part of the value chain. Another challenge is the heavy funding requirement for production of gas as compared to petroleum. That notwithstanding, the gas sector in Nigeria has the potential to surpass in value the revenues generated from the oil industry.

Considering that Nigeria’s local gas market is primarily the power sector, there is also the vexed question of a fixed gas pricing regime, which had hitherto acted as a disincentive to gas development as selling locally is considered unprofitable. The consensus is that the pricing regime is low. Following expressions of discontent, gas pricing has risen from $0.5 cents to $1 per MMBTU in 2010 to $1.50 by 2011 and then $2 by the end of 2013. Effective January 1 2015 the Nigerian Electricity Regulatory Commission (NERC) has set the price at $2.5 per MMBTU and $0.80/mcf as transportation costs. Hopefully, the day is near when the normal forces of demand and supply will be applied to further incentivise the development of the gas sector as the potential for growth is enormous.

Policy stability is also a big issue. NNPC, for instance, is only 38 years but within this timeframe it has had 16 Group Managing Directors (GMDs). Between 2007 to date there have been seven GMDs. The Department of Petroleum Resources is the same as there have been six Directors of the DPR in seven years. Now that a new regime will soon be at the helm of governmental affairs, we have seen how much panic this has created in the industry as business men are not sure with whom they would be required to deal with going forward. Aside from the very legitimate fears of the ensuing delay as a result of the timeframe the new helmsmen would need to bring themselves up to speed with the various transactions swiftly.

Were there any milestones reached in 2014/early 2015 and what are the current flagship projects in the sector?

There is the ongoing development of the Ogidingbe Gas Based Industrial Park which would be a free trade zone, it has port infrastructure with enormous potential in terms of real estate development. It is envisaged to be the largest gas industrial park in Sub-Saharan Africa, consisting of power, methanol and fertilizer projects. Construction work on the CPFs and real estate development are ongoing while construction work on the petrochemical complex is projected to begin in 2016.

Other recent projects in the gas sub-sector include private sector driven projects such as Green Gas’s (GGL) multi-billion dollar compressed natural gas (CNG) plant, located at Ibafon, Ogun State, which is said to be 95% completed. The CNG plant is a joint venture between Nigerian Independent Petroleum Company (NIPCO) and Nigerian Gas Company (NGC).


Israel Aye
Sterling Partnership

About the author

Israel has extensive commercial and legal knowledge of the oil and gas business in Nigeria. In addition to his role at Sterling Partnership, he is a Director at the Aspen Energy Nigeria (Energy Services and Consulting) Group and faculty member of the International Law Institute- African Centre of Excellence (ILIACLE). Israel has been named by Who’s Who Legal annual ratings as one of the world’s leading expert in energy and natural resources legal practice consecutively since 2012.


Chigozie Anyanwu
Sterling Partnership

About the author

Chigozie advises a wide range of clientele on entry into the Nigerian oil and gas sectors, especially with respect to the regulatory compliance regime and offers fit for purpose insights into both the commercial and public policy issues that directly impact on business in the oil and gas sectors.