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 challenges arising from the delay in signing into law of the National Gas Policy. Chika Amanze-Nwachuku presents the excerpts:

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 the few that have stand-alone gas operations, their operations have practically come to a halt, particularly where their gas is lean and they are unable to leverage on revenues from condensates or other bi-products of stripping the gas.

It is an irrational expectation for any business that has such extensive receivables for two years and counting to still stand, and we are talking of millions of billions of naira that were largely originally contracted in dollars when the dollar was a fraction of what it is today whereas the loans are to be paid back in dollars at the current rate of exchange. Many players are facing bankruptcy arising from inability to service their loans, and a severe liquidity crunch that impacts their day to day operations. It is a very dire situation indeed.

Speaking to the currency mismatch between investments and returns, there is the fact that the Government had recently mandated that Gas producers should be paid in naira, whereas Gas is dollar-denominated commodity, and loans for gas development and infrastructure projects are contracted in dollars and expected to be repaid in dollars. Effectively therefore, we have been operating a situation whereby the Gas producers source investment funding in dollars, are paid in Naira at the Central Bank rate. These same companies have however had to obtain dollars to service their loans from the parallel market as they are not able to obtain funds from CBN at the official rate. There was a point at the peak of the dollar crises when parallel market rates peaked at an all-time high of over N500, that those who had dollar-contracted loans were losing almost N230 for each dollar.

The situation has improved significantly this year resulting from the various interventions by the CBN. What still obtains however, is that for every N305million payment received for gas supplied, a producer/supplier remits the equivalent of N365million to its lenders. Now imagine, as is the case today, that even at this clear gross loss position, they also contend with upwards of twelve to eighteen months of unpaid invoices. This is clearly unsustainable, and no one can reasonably be expected to continue or survive under such a harsh operating environment.

What is the impact of the N701b payment guarantee to Gas producers on your operations? Is it improving liquidity constraints at all?

This N701 billion intervention fund was set up by the CBN to provide a payment assurance guarantee to address the liquidity constraints along the gas-to-power value chain. Let me first say that the funds are no more than a drop in the ocean as the debt value is currently in the trillions of naira in debt. The intervention also does not address legacy debt so there remains the question of how to resolve the backlog. Moreover, this announcement was made in March and to date not a single naira has been disbursed, meaning another seven or eight months’ worth of unpaid invoices have further accrued.

It is very troubling for us as a business because one way or the other, we are all feeding from the same gas supply pool and when certain factors have potential to upturn supply security, we must pay attention. Granted, the immediate impact is not at the distribution end of the gas industry value chain, but it is a significant factor nonetheless because we can only distribute what is supplied and if supply is threatened, distribution is inadvertently then also threatened. Falcon is a company that keeps her eye on mid and long-term prospects, opportunities, and key risks to our business, so it is of concern because the gas aspects of our operations cannot continue to run smoothly or at optimal capacity outside of our assurance of sustained supply at the volume, pressures and flows which we require.

What is the idea behind the recent Falcon Corporation’s Stakeholders’ forum on Underground Infrastructure Safety?

We operate the Ikorodu Franchise for the Nigerian Gas Marketing Company and have several kilometers of Natural Gas Pipelines traversing the Ikorodu area. We found that it was imperative to engage the various stakeholders (TELCOS, GENCOS, DISCOS, LASIMRA and other relevant agencies of government at various levels, etc.) to work collaboratively and in unison to ensure safety remains the highest priority for continuous sustainable growth and development. We have observed companies building infrastructure, carrying out excavations and installations, etc without taking into cognizance the risk implications that can possibly cause colossal loss of lives and properties to our host communities and understand that this challenge is enabled largely by two factors: the existing multiplicity of government agencies (State and Federal) which means that in many cases, permits are given for such works to be done without companies being informed of our existing Gas infrastructure within the area; and secondly, the lack of composite data and mapping of the existing underground infrastructure within the area.

We had a successful outing and achieved our objective of engaging various stakeholders operating within Ikorodu in order to keep them abreast of the importance of the safety and security of our host communities, human lives, assets and investments.

Do you see virtual pipelines as panacea to infrastructural challenges?

Virtual pipelines are but one of the available solutions to resolving infrastructural challenges, particularly the absence of pipelines and the ability to get gas to remotely located industries or plants. Virtual pipeline technology is however expensive, from the point of view of the equipment itself and then also the added costs of compression and/or regasification as in the case of mini-LNG, security, logistics and so on. It is thus better suited to bulk offtakers such as power plants and heavy industrial consumers, or in cases where there are industrial clusters that can absorb shared portions of the fixed costs.

In many instances there are limitations as to where and how efficiently you can deploy this technology and remain cost effective, particularly considering the state of our current road network and building patterns, and other challenges we face in the environment. It is an alternative yes, and it is commendable to see those investors who are making the first moves to deploy virtual technology to address the industry gaps.