Ihenacho: Nigeria’s Gas Sector Must Leverage on Investment Options
Phillip Ihenacho is the Chief Executive Officer of Seven Energy, an indigenous integrated natural gas development, production and distribution group. In an interview with Chineme Okafor in Abuja, he spoke on a wide range of issues, including the options t
With Nigeria’s rather slow-pace gas utilisation, what challenges has Seven Energy faced in attempting to monetise some of this huge gas resource? There have been many challenges and hurdles but we think that the effective utilisation of Nigeria’s large gas reserves is a good problem to have. In terms of gas, Nigeria sits with an incredible 179Tcf of gas as at 2013, the largest proved gas reserves in Africa. Unfortunately, when it comes to utilisation and production Nigeria is lagging behind with only 14 per cent being supplied to the domestic market, approximately 38 per cent exported as LNG, 24 per cent is flared, and the remainder is re-injected, used as fuel or processed into liquefied petroleum gas or gas liquids.
There is disconnect between the size of Nigeria’s reserves and the translation of these reserves into production. Seven Energy is working towards capturing this opportunity by building gas infrastructure and promoting gas-based industry in Nigeria.
The initial challenge that we encountered is the necessity for long-term infrastructure. This requires long-term investment and convincing investors that the investment in Nigeria’s gas infrastructure will pay off.
The second challenge we faced was to develop several reliable off-takers or customers of our gas and what they are willing to take and pay. The investment in infrastructure and the gas off-takers go hand in hand, because investors need to invest in a commercially viable operation.
As 70 per cent of demand for gas in Nigeria comes from the power sector, this is our largest customer and it is imperative that this sector is successful. We need to see this sector commercialised with commercial electricity tariffs that bring money into the system. Ideally, the end customer who is paying for electricity pays the distribution company, the distribution company collects its returns and pays the transmission company, the transmission company collects their returns, pays the generation company, the generation company collects their returns and then pays the fuel supplier, which is the gas. It is a chain that needs to work. Seven Energy does not rely solely on the power sector however, and we currently supply gas to multiple customers such as factories producing cement and fertiliser and increasingly light industrial and manufacturing companies who are willing off-takers of our gas.
The major challenge for Seven Energy and the country is the success of the power sector. I believe that this is crucial for Nigeria’s economic development. We are hopeful that the current government will build on from power sector reforms of previous governments and establish willing buyer/willing seller commercial tariffs to ensure that the system is monetised.
An agreement brokered with the immediate past minister of petroleum resources stated that buyers and sellers had agreed on the price for supply of gas. How has this impacted the supply chain of gas to power in Nigeria? Most of the pronouncements of the previous administration were in connection with the domestic supply obligation of the International Oil Companies (IOCs). The previous government was requesting that the IOCs supply gas at a certain price and that price was below the commercial price of gas.
The previous government was trying to encourage the IOCs to consider supplying gas to the domestic market by making the pronouncements of higher gas prices.
In an ideal world, there should be no government intervention on gas prices. The price should be negotiated between the gas buyers and the gas suppliers and price should be down to basic demand and supply and this should work as it does for any other commodity. Ultimately, we need to work on a willing buyer/willing seller basis.
In that situation, is the ability of the consumer to pay factored in, how do you address these social issues in pricing for gas? Actually, the social impact of a commercial and reliable gas supply is very positive. It means that remote areas and villages could be electrified in the future. People in these remote areas are currently using firewood or small diesel generators and as we know, diesel is about four times more expensive than using gas. We see this on a macro-scale with our industrial customers, where we are significantly reducing their cost of energy by supplying gas as opposed to diesel and other substitutes. When a customer pays for gas, they are paying in part for the gas infrastructure such as pipelines that is required to connect their location but even when you factor that cost in, it is still far lower than burning diesel. If more independent operators were given access to gas acreage in order to develop gas businesses to supply the domestic market, this will have a big social impact on Nigeria. As the gas price becomes more commercial, the IOCs too will come to the party. We are in an environment that is blessed with plentiful gas to supply and over time, provided a commercial price is paid for the gas, the supply will come to meet the demand.
But we have recently seen increases in gas price yet we still have gas power plants that are idle without supply. What is the problem? If there is a power plant that is willing to pay a commercial price for gas, the first thing that we consider is its location. Seven Energy will then have to drill for gas, process it and build a pipeline to connect the customer. This all takes time and money. We are seeing the incentives now but the resulting development does not happen overnight.
What you are seeing are independent companies like Seven Energy and Seplat investing and developing gas infrastructure for the future but all of these initiatives are based on commercial viability. In the past, IOCs made investments in gas infrastructure with the objective of ‘good citizenship’ and the associated tax benefits that came with that. What we want is for the gas infrastructure industry to become profitable on a stand-alone basis, which is starting to happen.
Companies will then start investing in gas infrastructure and distribution as a commercial business not just for good corporate citizenship purposes. We need companies that are specialist in developing gas infrastructure and transporting it which is different from upstream exploration companies that we are used to seeing in Nigeria. The increase in prices is yielding results, but building gas infrastructure takes time.
How difficult is it for private companies to invest in gas infrastructure? The belief, before now, was that the government has to provide infrastructure. Again, how much has Seven Energy invested in gas infrastructure so far? In our primary area of operation, we have invested over $800 million in gas infrastructure. That is in the area between Port-Harcourt and Calabar and up to Aba. We have invested in pipeline infrastructure which, once we have completed the next phase, will mean we have a pipeline network of over 250 kilometres and a processing plant that can process in excess of 200 million standard cubic feet a day of gas (mscuf).
This is a substantial investment and by next year, we will have invested over $1 billion. It is not easy to raise capital for infrastructure and the success of our business is essential for Nigeria to continue to attract further investment in the sector. Success will bring further capital.
We have invested on the basis of long-term off-take agreements with Ibom Power, UNICEMthe Lafarge cement factory and Calabar NIPP, and these agreements are 10 to 20 years in duration. Ideally these contracts are backed up by credit enhancement or guarantees, for example the World Bank is working with us on Calabar NIPP.
These contracts give us a few anchor customers with which we have long-term off-take contracts. It is very similar to constructing a new building where you look for a few tenants who can take a few floors for a 10-year lease, and once these are in place, you have the confidence to build. Once the building is ready, you can then look for additional tenants.
I believe that Nigeria needs to unlock money for the private sector and this can be facilitated by working with organisations like the World Bank and African Development Bank to enhance credit and provide some sort of guarantee to create credit worthy long-term contracts.
Up till March this year, we saw a lot of attacks on gas pipelines. Economically, one finds it hard to understand because it has no economic value to vandals. As an operator in the gas sector, what could be the motivating factor? The building of gas infrastructure is a long-term investment, at least a 20 year investment. The