Joe-Ezigbo: FG Must Incentivise Gas Sector Investors

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The President of the Nigerian Gas Association (NGA) and Co-Founder/Deputy Managing Director of Falcon Corporation Limited, Mrs Audrey Joe-Ezigbo, in this interview, speaks on factors stifling growth and investment in the gas sector, despite Nigeria’s abundant hydrocarbon potential. Peter Uzoho brings the excerpts: 

With Nigeria’s gas reserves of over 200 trillion cubic feet (tcf) and daily production of eight billion (bcf), do you see the National Gas Policy being able to harness the potential of this huge resource for national economic development?

Let me first say that the decisive action by the Nigerian Government to approve the National Gas Policy was certainly a significant move in the right direction, establishing the recognition of the Gas Industry as a stand-alone Industry with viable economic benefits to Nigeria. Its primary aim is to advance the diversification drive initiated by the government to move the Nigerian economy from an oil export based one to a Gas-based Industrialized one.It is important to note that although the Policy was approved by the Government, it is yet to be given necessary legal backing.

We must progress it to the level of regulation backed by law, thereby deepening its stamp on the Nigerian Gas sphere. This aside, I consider it to be a well thought out and articulated document. It may not contain every provision that would have been needed in order to establish Nigeria as a Gas-based Industrialization, but it undeniably constitutes a great starting point. Do I see the NGP being able to harness the potential of Gas as a tool for national economic development? Certainly! The policy provides for the separation of key aspects of the value chain -infrastructure ownership, operations and trading in order to dissuade monopolistic business operations along the Gas value chain.

As you can imagine, a monopolistic business environment, especially regarding a vital resource such as gas, is quite dangerous as it puts the power of the output of the resource primarily in the hands of a few entities. It Therefore, this provision seeks to encourage more entrants with expertise in various areas to come into the Nigerian Gas Industry, thereby encouraging competition and capacity as well as creating added depth within the Industry.  

The Policy also provides for the introduction of an Open Access regime regarding Gas pipeline networks and the articulation of a National Gas Transportation Network code. A lot of work has already gone into putting this together, and the NGTNP is expected to be launched at the upcoming petroleum summit in Abuja. 

 There are so many other provisions that speak to the focus on developing our in-country gas consumption and utilization capabilities, so in principle the answer to your question is yes.   The other side of the conversation however is that the policy cannot succeed out of a concerted effort to address and redress some of the other systemic challenges that have bedeviled the gas sector for quite a while now; challenges which international investor prospects are also reviewing when they look to what the possibilities are within the Nigerian gas market. The success of the policy cannot also be divorced from the broader ecosystem of headwinds impacting on the nation and economy.

There are many moving parts where this conversation is concerned, and they signal different things to investor prospects.I am however personally encouraged by the initiatives and proactive approach to things that we see from the Ministry of Petroleum Resources and other related agencies, including also the Gas Committees of both houses within NASS.

There is a lot of engagement going on with NGA and other professional and industry associations, seeking to find resolutions to some of these issues. I believe as long as we continue to apply ourselves doggedly in this manner, the needles will begin to shift. While acknowledging progress on one hand, there are also a few things that continue to give us cause for concern and so we are not relenting on our advocacy efforts to ensure the long-term best interests of our industry and nation are preserved. 

Industry operators including you, have been clamouring for an investor-friendly and sustainable gas pricing regime, what are really the fundamental issues around that? 

The primary dilemma of the Gas pricing conversation has been that on one hand, you have the government’s intent on ensuring  lower gas prices in order to ensure affordability of the end product to the final consumer, including power; and on the other hand, investors’ need to ensure gas prices that are  reflective of the spectrum of their infrastructure cost profiles and other variables that impact on the viability of their investments. The intention of government is a laudable one but in practice, this is difficult to sustain, especially if we want to see any tangible results in the short to medium terms. We have such a humongous and rather daunting dearth of infrastructure.

Coupled with this is the fact that the funds required to deliver on the infrastructure needs of the country are not readily available in Nigeria, and quite frankly have several options of climes where their returns profiles are better, their lives and assets are more secure, the policy landscape is more stable, and they can bank on the terms they contract on being maintained over the life of their investments.  The Nigerian Gas space at this time can only primarily be funded by the private sector. For every investment opportunity, however the economical dynamics must make sense. No investor would want to infuse huge costs in a place where their internal rate of returns don’t make commercial sense.

We cannot be trying to impose a social objective on an entity whose primary motive is profit-oriented, especially when we are not in a strong enough position to do so. We hardly manufacture any infrastructure components in-country so the bulk of the requirements on any infrastructure project will be imported, backed by dollar-denominated contracts. Loans are sourced in dollars to back projects and must be repaid in dollars. There is already significant value erosion based on the challenges related to forex revenues versus naira receipts and the constraints around sourcing dollars at the CBN rates. If we stepped back to look at it properly, investors are not being unreasonable when they ask for better pricing.

We need to allow more investors to come in on better terms and then see how competitive forces over time begin to put pressures on margins and force end prices down. I know may people argue that this will not necessarily be the case, but we have seen this happen in other industry and other climes, so it should be a risk worth taking. At this point, we are doing the same things, and nothing is changing. This should not be allowed to continue. Competition is supposed to drive tariffs but what we have is a reverse scenario where regulation is driving tariffs. This is unsustainable and we are already living in the fallout of this.

we cannot continue to play ostrich or laugh at the expression we make about how Nigeria does not respond to general economic principles. That time has since passed, and I dare say it was that mindset that has placed us in the current conundrum we find ourselves in.   Gas business is capital intensive and in order to encourage the much-needed investment into the sector, it must be treated as a business product not a social service. The Government cannot fund the development of this sector. It must therefore put in place incentives to attract investors. One of the incentives is a profitable pricing mechanism that would be deemed to be commercially viable to investors, both local and foreign.

 Is Nigeria doing enough in the area of gas monetization?

I would posit that there is both a yes and a no dimension to this question. Certainly, a historically perspective guarantees a negative response. Much as we can celebrate the many successes of our NLNG project, we sometimes need to go back and do a comparative computation of how much value was eroded by delaying the take-off of that project for all those years. Even with the Train 7 that we are so glad has taken off, the value lost by the years of delay on taking FID is monumental. Till today, neither Brass nor OKLNG projects have attained any significant progress, if at all. yes, these are export-oriented projects, but they also held in their hands the capacity to reign in significant revenues to our national coffers which could have been better deployed to building infrastructure and industrialization.

When we look inwards, much as we are now speaking to the critical gas development projects, we have had years where gas transportation, processing and storage facilities alike were not given prime consideration. If they had been, we would have been speaking to a whole different level of monetization, commercialization and utilization of gas industry. Our gas-based industrialization status is quite poor for a nation of our size, given especially the potential multiplier effects of having a good number of GBI’s domiciled within any one economy. that said, we must then also commend the efforts to bring to light some of the significant projects which we are currently speaking to, projects which are potential game-changers of the Gas monetization conversation in Nigeria. 

 Gas flaring in Nigeria had been a problem for decades in Nigeria, primarily due to ignorance of the commercial value of the resource.   We flared N460.5 billion of Natural Gas in 2019 alone. That is a huge amount considering we are looking to borrow about N2.8billion from both domestic and foreign sources to fund our national budget of N10.59 trillion In this context, we have to acknowledge the work being done to refocus the monetization conversation via the introduction of the Nigerian Gas Flare Commercialization Program which is being steadily progressed, albeit with some delays occasioned by the imperatives for more robust stakeholder engagements.   While the push for an enhanced focus on Gas monetization is ongoing however, there are other things that I believe need to happen in concert. As regards laws and regulations that govern the Gas industry, we are currently operating with outdated fiscals, Petroleum laws and regulations that need to be reviewed and amended to reflect the present realities of the Gas and business environment in Nigeria.

Investors, both foreign and domestic are not keen to spend their resources on domestic Gas projects when they are not protected or encouraged by the domestic laws governing the sector, especially in an increasingly tough and insecure clime. The Gas industry is one that is rife with risks and players should be incentivized by fiscal and commercial frameworks, backed by enabling laws, in order to encourage more participation in the industry, thereby leading to an increased in-country utilization of the resource. And we must build these in-country capabilities. Our wealth is not so much in having the Gas as it is our level of domestic consumption and utilization across various facets of industry.

Specifically, what pricing structure and mechanism would you prefer to be adopted for the Nigerian gas sector? 

At this point, the preferred pricing mechanism for the Nigerian Gas market would be the Willing Buyer-Willing Seller pricing model. This model advocates for a fair price agreed upon by both the buyer and the seller of the Gas product, armed with knowledge about the dynamics of the product and under no forced obligation to transact with a price that is deemed unfeasible. our reality is that we already have these types of transactions happening in the country. We should allow market-reflective tariffs that support investment economics needed to ensure expansions in the Gas infrastructure backbone across the country.

As it stands, NGA has been advocating for a while now for a Gas Tariff methodology study to be done, to adapt a model for Nigeria that creates a clear returns pathway for both existing and potential entrants in Nigeria’s gas space. A clear unambiguous and scientific approach to the development of tariffs is a good first step on the journey to full market liberalization.   

What are the major risks in the sector that need to be removed to attract more investors and encourage existing ones to remain in the business’s? 

Primarily, we need to deal decisively with the investment risk posed by  the absence of a substantive legal framework for the Gas Industry. The Petroleum Industry Bill which has been stalled for a long time must be passed before any investor can regard the Nigerian Gas Industry as a viable one. There are those who challenge this assertion by referring to some of the existing investments that have been made, but our reality is that we are dealing with very different national and global dynamics today that used to be in the past. We are dealing with new types of risks and uncertainties, a different dimension of global interplays and impacts of non-core issues on industry developments.

Global investment capital is also more informed, more sophisticated, and above all, more sensitive. I continue to argue that while it is important that we celebrate any recent wins we have seen, we must be challenged by the pace and scale of investments into our industry and economy, particularly considering our population growth. A population growing at 2.6 per cent average per annum with a GDP growth rate that is sub-2 per cent on average, is a huge challenge. Gas can get us on a trajectory well aware from such dire numbers, but we have to create the environment for this to happen.

There are indications that this PIB will soon be passed into Law and NGA is earnestly looking forward to this being a reality. It is also imperative that we move away from market regulation and allow for liberalization. A review of the National Gas Master Plan of 2008 tells you that the plan was to move to a liberalized Willing Buyer, Willing Seller Gas market. Over the past couple of years however, actions have been taken that shows increasing regulation rather than liberalization. This will not augur well for us in the medium to long term. I dare say we are already seeing the ripple effects of this unfolding. What we need to examine is where over-regulation has brought us. We need to look back and see what principles underpinned the concepts of aggregation and the imposition of Domestic Supply Obligations.

We need to look at some of the policy thrusts we had before and which we have carried into today, even though the issues underpinning their development at that point have since been overtaken by events. We need to do a comprehensive review and see how to reposition our industry. This is one of the toughest climes to operate in, with too much uncertainty. You know it is said in business that you can model risk, but modelling uncertainty is another ball game entirely.

We must address this. There are several other issues that we have consistently pointed out that need to be addressed. There is the issue of foreign exchange rate disparity and the imperative for a unification of the different rates of foreign exchange in Nigeria, especially as the currency for Gas transactions globally is the dollar.    Sanctity of contract remains an area where there is much work to be done. Gas investments are typically long-term investments. It cannot be assumed to be normal that terms can be breached or changed unilaterally at any point in the life of the agreement, but this happens more regularly than should be the case. Nigeria currently has an infamous reputation of having utter disregard for the sanctity of contractual terms by the introduction of policies that might outrightly upturn contracts made. This is a terrible signal to investors.

Conversation around gas-to-power, and gas-to- industry have been rife, are you an advocate of this? Also, how can Nigeria leverage on this to scale up the economy?

I am certainly an advocate of anything that would advance the economy of this country. Gas is a known feedstock to several industries such as petrochemicals, fertilizers and plastics. In a country that is as blessed as we are with a wide range of natural resources which readily find outlets in global markets; the potential for Gas-based industrialization is immense. Recall earlier that I alluded to the multiplier benefits of GBI’s. not only are talking about significant employment opportunities, but they also engender the development of various layers of enterprise to support their value chain from supply to logistics, etc.

Late last year, there was a feature on Indorama plant, what was formerly the Eleme Petrochemicals plant up until 1996. That singular investment has grown and expanded, provided thousands of direct and indirect jobs, earned several billions of dollars in revenue for the government, and by their records, is feeding polymer resins as raw materials for production to over 600 plastic industries in Nigeria. We only need to do the math to see what having multiple Indorama-like GBI’s operating across Nigeria. When we speak to how we can scale up Gas-to-Industry therefore, it goes back to us addressing some of the issues I have spoken to earlier and also coming up with creative ways to incentivize investors and draw them back into the country in their numbers. 

Regarding the use of Gas as fuel for power generation, it goes without saying that this is the priority direction for us to go when we think power in Nigeria. Nigeria currently barely produces 4, 000 MW of Power for a population of approximately 200m people. Given that by UN standards, we should have at least 200GW of power. We have a long way to go and Gas can shorten that journey for us. As you know, adequate power is a tool also for growth in enterprise, industrialization, improved healthcare, more robust agricultural development and unlocking of its higher export potentials through food processing and storage, of and a general improvement of the standard of living of a nation’s citizenry.

The onus is on us to fix our power sector quickly. While there are specific structural issues relating to the power value chain itself, we also must address the Gas side of the equation so that the wider ecosystem of Gas-to-Power works seamlessly, efficiently and effectively. And there are many technologies available for us to quickly optimize both Natural Gas and indeed Liquefied Petroleum Gas (LPG) as fuels for power generation.  One of the key things that NGA has been advocating for is closer and more synergistic relationship between the Ministry for Power and the Ministry for Petroleum Resources. There is an evident loss of efficiencies and value erosion where we have the GASCOs having to relate with both ministries separately, and sometimes it is clear that the outlook and agendas of both ministries are not in tandem.

We are engaging with these ministries to have what would be the first of a series of workshops aimed at a better understanding and collaboration strategies between these ministries. 

How did Falcon Corporation fare last year, and what is your projection for this year? 

The year 2019 was, for want of a better expression, an interesting year for Falcon Corporation as indeed I am sure it was for most industry players. We took our fair share of hits from the broader economic pressures, policy undulations that impacted the industry, and so on. At the same time, because we remain resolute regarding our commitment to grow and expand the business, we took on some major strides in expanding our distribution business, progressing our LPG tank farm project in Port Harcourt, gaining a foothold in the LPG trading space, and other expansions which have moved past the ideation stage but which I am not at liberty to share at this time. In essence, 2019 was for us a tough year but it was also a year that opened up new opportunities for us because we chose to push past the pressures and the odds.  For 2020, we will continue to progress our existing business while advancing the maturation of our expansion initiatives.

Falcon Corporation is a company that prides itself on upholding the highest standards of ethical practice in the Midstream and Downstream Gas business and that has been our voice in the room even in conversations that we had no physical representative. 2020 is, therefore, a year where this standard of excellence would be upheld while we constantly work towards optimizing the outlook for Gas in Nigeria.