Joe-Ezigbo: Appropriate Fiscal Framework will Propel Investment in Gas Sector

Audrey Joe-Ezigbo is the Co-Founder/Executive Director of Falcon Corporation Limited. In this interview, Joe-Ezigbo who is also the1st Vice President, Nigerian Gas Association, shared her thoughts on the opportunities in the gas sub-sector and the challen

Recently, the Federal Executive Council approved the National Gas Policy. Do you see the approved version as achieving its aspirations?

Without a doubt, the approval of the NGP is a welcome development, but it is early days yet as far as the journey towards implementation and tangible impact on the industry is concerned. It is important that we are very clear on this reality. That said, I view the NGP as a considerably well thought out governing tool for the Gas subsector. The focus of the policy is to provide an enabling environment for optimal development and commercialisation of Natural Gas resources across the value chain; the segregation of the industry into upstream, midstream and downstream operations being critical to the objective of positioning Nigeria as a gas-based industrialised nation. The policy is robust in its approach towards deepening value extraction from the gas sector, and I see this also as a reflection of the extensive multi-level stakeholder engagement that was part of the process of developing the final policy.

There however remain a myriad of deep issues plaquing the industry which cannot simply be wished away by the policy. In my view, it is in the determined addressing of those issues in a systematic manner on a continuous basis that will ensure the NGP achieves its aspirations. I can tell you for instance that the effectiveness of the NGP is hinged to a large degree on the expectation that Nigeria will be able to draw in significant investment into funding the various infrastructure projects required to be delivered across the gas value chain. On the other side of the table however, investors are watching closing to see what supporting fiscal framework the nation will put in place. I am aware the draft Petroleum Fiscal Policy is far ahead in the process towards obtaining FEC approval, and both domestic and international investors are waiting to see what the fiscals look like as the provisions will either attract or repel funding into the sector. The NGP aims to create an operational landscape within the gas industry where gas projects are undertaken largely only when they piggyback off oil exploration projects. This will not help us develop an independent strong gas industry. It is the fiscal provisions that will show if indeed a standalone dry gas project will be economically viable, and the nation will only see concerted independent exploration and production activities for gas where this is possible.

Generally, there is a high level of expectation amongst industry players, but there is also a heightened level of anxiety which is compounded by other sectoral challenges such as the power sector illiquidity issue which is quite crippling on the operations of gas producers and suppliers. Effectively therefore, there is still a lot of work to be done by both the executive and legislative arms of government, if we are to see commensurate positive responses and significant investment activity on the part of the industry players and investors. Generally, I believe that if we begin to address other unresolved issue impacting the sector, we should begin to see some traction in terms of impact of the NGP on the sector in about 2-3 years.

Nigeria’s Gas potential has been bogged down by infrastructural challenges. What is the way forward?

When I spoke earlier regarding investments in the sector, I was making inference to the huge infrastructure gap in the industry and the financing required to bridge this gap over the medium to long term. Let me put it in context a bit. The UK has approximately 176Bcm of proven gas reserves while Nigeria has about 187Tcf.

Conversely however, the UK has over 282,600KM of gas pipeline infrastructure, whereas Nigeria has barely 5,000km of antiquated pipeline infrastructure. When you further contextualize this along the lines of population, social welfare, level of development and industrialisation, you get a clearer sense of just how dire the situation is. A survey by the Independent Petroleum Producers Group (IPPG) posits that for Nigeria to bridge the gas sector infrastructure deficit, there is a need for an estimated initial investment of $6 billion annually over a period of four years, and then dropping to $3 billion annually thereafter in new Gas production, processing and transportation infrastructure. This is not money that can come from the government, and neither is it money that will come in unless private sector investors can see that the landscape has been sufficiently de-risked. Risk is part of business yes, but when you are speaking to policy and legislation; foreign currency rates, access and flow challenges; lack of market-reflective pricing mechanisms; lack of sanctity of contract; and so on, erosion of investors’ confidence and investor apathy are understandable outcomes in the face of more stable economies competing for the same pool of investor funds.

We didn’t get here overnight. There are legacy issues around how we have treated Gas assets in the past. Our gas discoveries were fallouts of oil exploration and production activities. We didn’t see gas as an economic resource, but rather as a nuisance. Over the past ten years particularly however, we have seen attempts to address the development of the sector, but there were many gaps with the gas revolution, the power sector reform initiatives. We ended up driving implementation of several gas-to-power and gas-based projects without giving commensurate attention to the gas transportation, storage and delivery infrastructure that will provide the interconnectivity framework to ensure the Gas was available where needed. And in all this time, the conversation has centered around utilisation of Associated Gas. We have not made any deliberate efforts to ensure exploration and production of Non-Associated Gas. This needs to change. The NGP recognizes and addresses this, but if we are to move forward we also need to address the earlier challenges I have spoken to. As a country, Nigeria needs to see Gas as a resource that is a critical enabler of economic development. All our industrialisation and diversification aspirations are tied to a large degree to our ability to address our power output deficit. Our reality is that gas, not hydro and certainly not renewables at this point in time, is the primary resource that guarantees the desired quantum leap in power generation across the nation. We are glad for the approval of the NGP and passage of the PIGB, but we need traction on the passage of the Petroleum Fiscal Bill, Petroleum Host Community Bill and the Petroleum Revenue Bill.

We need to address the issues relating to market-reflective pricing. We cannot continue to play ostrich in this regard. Governments’ social intervention stance is understandable but not reasonable in the face of the spate of investments required to guarantee a better standard of living for the people, vis-à-vis the need for investors to make reasonable returns. We will not attract the needed investments if the numbers don’t make sense, the landscape of business is tight and uncertain, and there is a mismatch between the currency of investment and the currency of revenues, and bottlenecks impinging upon revenue flows back to the country from which the funds were sourced.

How true is the assertion that power plant operators now prefer to shut down plants rather than continue to be owed?

This is a true and expected position, indeed to present it otherwise would again amount to playing ostrich. We cannot reasonably expect gas producers and suppliers to continue to operate where they are owed several billions of naira, with over two years’ worth of unpaid invoices accumulated. This does not make business sense in any clime. Some of the operators, who supply Associated Gas, have been able to manage the situation by leveraging their operation on revenues from oil exploration. But in the face of the lingering depressed global oil prices, this is not sustainable. For

Over the past ten years particularly however, we have seen attempts to address the development of the sector, but there were many gaps with the gas revolution, the power sector reform initiatives