Ige: FG Must Address Distortions in Gas Market

oil and gas - September 7, 2021

The Chief Executive Officer of GasInvest Limited, a consultancy services provider for local and international investors in the gas business, Dr. David Ige, in this interview, dissects the Petroleum Industry Act (PIA), particularly as it relates to its implications for the gas market, among other key issues. Peter Uzoho presents the excerpts.

Recently, President Muhammadu Buhari signed the Petroleum Industry Bill (PIB) into an Act. What is your take on this development?

It is indeed a positive development. Like any other Nigerian, I am excited about the enactment. Though it took so long, I think it’s better late than never. The PIA brings some clarity and definition into the Nigerian oil and gas sector investment environment.

So, for that purpose, I think it’s actually a great achievement. Investors want clarity. It allows them quantify their risks and plan mitigations for profit. A not too attractive framework is better than none.

The absence of a clear legal framework has led to a slow growth of investment in the industry over the years. Hopefully, this will begin to lead us towards a more certain investment environment and time will tell whether it is good enough to attract the kind of investment we desire or not.

In more specific terms, what are the prospects of the oil and gas industry in Nigeria with the PIA coming in place, particularly as it concerns the gas sector?

Prior to today, there was no legal framework for gas. What we had was a cocktail of fiscal bills or statutes over the years targeted at specific fiscal gaps or interventions. Collectively, they didn’t add up to a comprehensive legal framework to stimulate or sustain a vibrant gas market or gas environment.

So, now, at least the first step is crossed. We have a dedicated legal framework that is focused on gas. There are a few highlights arising from this enactment for gas. Number one for me is that it introduces a regulator for the midstream/downstream segment which largely covers the gas market.

Because of the nature of the gas market, it is almost impossible for you to get investment in gas without a clear regulatory framework. So, we didn’t have that before. We had an upstream regulator in DPR but that was not effective in regulating a gas market.

The absence of a regulator is like a football match without a referee. There are no rules and that is dangerous for investments, particularly in a sector which is infrastructure and capital intensive. So, with the introduction of a regulator now, that clearly addresses that point.

Secondly, with a dedicated fiscal term on gas which aims to stimulate supply, that hopefully, as well, should be able to entice some investors to come into the market. There is a global energy transition in place and rapidly so too.

There is need for Nigeria to rapidly develop and monetise as much of its gas as possible over the next 20-30 years when fossil fuels will see a gradual phasing out.

If you consider that many countries in the world with huge gas deposits are as equally concerned about the long term prospect of their gas, then you can imagine that there will be competition for commercialisation of gas everywhere.

The gas-focused fiscals hopefully positions Nigeria gas competitively. Thirdly, when you look at the things around the midstream sector, we didn’t have a midstream gas sector clearly defined before. In the gas master plan, we attempted to do that in a backdoor way, trying to set up central processing facility to be owned by investors independent of upstream producers.

What this law does now is that it clearly delineates the market into an upstream, midstream and downstream market. What that means is that investors can come to play specifically in the midstream. You know, the midstream is a very crucial segment of stimulating the gas market because it’s in the midstream that you have the pipelines, the processing plants, the liquefaction plants, the compression plants and so on, and those are the engine rooms for a gas market.

So, now, it has clearly recognised and created all sorts of licence regimes for the midstream. Again, that’s a good thing. It also talks about the structure of energy security in terms of the domestic supply obligations and so on.

So, when you bring all of these together, it moves us a bit forward on the gas side. Now, there are one or two areas I would have hoped that we did a bit better. For example, the most critical area for me relates to gas pricing and the move towards liberalisation of the market.

We are running a race right now with the world. There is a migration away from crude oil and there is the time-bound evolution from gas to renewables even though gas is going to be there for a while.

But for the amount of gas that we have in this country, we really have to do a lot to stimulate both supply and demand of gas so that we can utilise our gas, and that includes both the domestic market and the international market and all sorts of supply, basically.

In order to do that, when you have a very diversified portfolio of supplies as we have in the Niger Delta, where we’ve got very rich gas and in some cases, very lean gas, in some cases, smaller reservoirs, in others, the associated gas and non-associated gas and all sorts of stuff, operating in a regulated price environment always runs out of steam very quickly, because you will never be able to find a regulated pricing regime that is robust enough.

The best thing is to allow the market to liberalise, such that the market drives the price basically. You know, in the master plan, when we started it, we started with a regulated pricing regime because the market was very young and we wanted to stimulate the market.

But the vision was always that at a particular point, we would very rapidly migrate into a liberalised market. I think the PIA in its current form inadvertently reinforced regulated gas market more than move us away from it and I feel that is probably one of the areas that need a bit of attention because there is a lot of prescriptive pricing framing in that law.

And if you want to do that, you tie the hands of the market. The law doesn’t put a lot of emphasis on how to move the market away from the regulated pricing regime we are in, into a fully liberalised market.

Investors in gas will typically be looking for a liberalised market or signals to a liberalised market. I think there seems to be more signals towards a regulated gas market than a liberalised gas market in this Act, and I think, for me, that’s probably one of the weaker areas of the Act.

It prescribes price caps, base pricing etc. Something has to be done in managing that, otherwise the investment that we desire will not be able to come. The kind of actors that you need in the market, whether they are gas traders and all sorts of fringe suppliers and different kinds of people who want to come and take different risk positions, want to get premium for taking those risks positions in allowing the market to move.

But when the market is too regulated, there is no room for those kinds of people. The law recognises the need to move to liberalisation but I just think that it does not do a very good job in making that a key focus of accelerating that move and very clearly specifies steps that can make that happen quickly and de-emphasise the regulated market.

The thing with a regulated market or regulated pricing is that it doesn’t matter how you do it, it becomes obsolete very quickly. We are seeing that in petroleum products and so on.

There are always so many variables that will continue to challenge it. So, what was a regulated pricing yesterday that was adequate becomes inadequate tomorrow.

But if you allow the market to drive itself, then it begins to regulate itself and modulate as appropriate and everybody adjusts appropriately to that. So, I think that part of the law needs some attention as we go into implementation. But hopefully, we are in a situation where we have something for gas which we didn’t have before.

Over the years, sector players and the government have been involved in the argument over whether to allow a willing-buyer-willing-seller gas regime in the Nigerian market. What is really the issue?

In think in gas, as we speak today, the market is comprised of both regulated and willing buyer, willing seller elements. So, already, we have started the willing seller, willing buyer in the market.

So, what I would have expected would have been to consolidate that space and accelerate the move. Because if you look at the western network all the way from Oben on the Escravos-Lagos Pipeline, which is the biggest network in the country, that market is sufficiently liquid now for there to be willing buyer, willing seller transactions routinely.

I know some who have willing buyer, willing seller arrangements with their suppliers.

So, it’s there already. What the Act should have done is to consolidate that regime and put very specific steps in specific timelines to now make it even more global.

And I think, government is sort of shying away from doing that and it dwells a lot on the regulated regime. I played a key role in the past in building the current regulated pricing regime that we are using in the market when we were doing the gas Master llan –all those strategic sector –power, industry and agriculture.

Those were the things we did in the master plan. But when we did it, we recognised that this was intended to just jumpstart the market. We didn’t intend the market to be run by compulsion, where the majority of the flow in the market is based on domestic supply obligations.

Because in a market that you are compelling supply and you are also compelling price, that market is essentially not going to grow, it’s not going to be liquid market. So, we did that as a beginning in the gas master plan and of course, at that time, the gas sector was zero.

It almost didn’t exist. So, we needed to sort of find a way to squeeze gas into the market to meet the power requirements and some others. But we needed to get to a point where people invested willingly and they were able to adjust prices to fit into the competitive pressure in the market and so on.

We expected that by now, we would be achieving that, but this law does not pay sufficient attention to that. It emphasises regulated regime more than show the pathway towards a liberalised market, and I think, that may in itself, impact the kinds of investors that we will attract.

With the scrapping of some agencies under the ministry of petroleum, what do you think will be the fate of the chief executive officers and employees of these abolished agencies?

I think that is what the PIA implementation committee will look at. Clearly, those agencies collapsed into two –Authority and Commission. That’s number one. However, the number of the former agencies’ CEOs will be reduced to two.

The bottom line is that there is going to be two CEOs, whether they are going to be from the existing people or new people, I don’t know. The structure of the two agencies will determine how many people they need and how to transition people from where they are to the new place.

Bear in mind, the skills-set that are required is what is important. The biggest mistake we will make is to have regulators that are not competent for their roles. So, the most important consideration in this game must be the competence of the regulator and the regulatory agencies.

That means that the choice of the people and their skills will be very crucial. It’s either from the existing pool of people that you find those who have the skills or there is an accelerated training of the people that are there to develop the right skills or you bring people with skills from outside or a mix of all these.
But whichever way we go, this must not stop at just moving people around. It must be a case of making the right skills-set to have a very competent regulator in place. A bad regulator will be worse than no regulator and will set us back many more years. Remember, time is against us now and no room for experimentation. Only the best will be good enough.

Given the controversy over the percentages for host communities and frontier explorations, what is your advice to the implementation committee in ensuring hitch-free implementation of the Act?

The implementation committee will need to first of all identify things that are urgent and highly impactful to the workings of the sector and the economy –the things that require urgent attention so that the economy doesn’t drop. So, they need to identify those ones and keep them as priority.

They need to identify the things that are contentious, controversial, that require to be addressed. Then they need to identify the things that have some long term strategic impact for the country, like energy transition and the likes.

If they do not approach the issues based on impact, if they just put everything together and try to implement a 200-page document page after page, without looking at impacts, they would be lost in details and many months after now, we would probably be in a worse situation.

So, if I’m to advise the group, I would tell them to distill the Act into four buckets like I just described –the ones that are absolutely critical and to the short term running of the country from the oil and gas perspective and quickly get those ones done.

The things that have to do with human resources –people movement, people counselling, people transitioning, people training and others. The things that are controversial and require some rethink should be in another group.

And then the things that are strategic to the longer term agenda of the country and how to implement it or optimise it. So, when you have these four or five different implementation sub-groups, I think they are able to scheme the Act a little bit more efficiently and they can avoid being overwhelmed by the numerous inter-dependences.

When can we possibly begin to see the impact of this Act on the economy and on the nation’s oil and gas industry?

First of all, I think we would begin to see the impacts in about say two years –18 months to two years. And usually, when I talk, I talk from the gas perspective than anything else.

When you look at the fiscal terms that have been introduced in this one, both in the upstream and midstream, it is going to stimulate investments in gas. For example, it takes about a year to 15 months before that matures into the market.

Regulation must be one area where we expect to see some action and benefits quickly. If the regulator is appointed quickly and if the regulator is a very competent regulator and the regulator is able to look at critical areas of operations of the market and intervene quickly, you can begin to see some small adjustments here and there in terms of the current performances of the market which can deliver some early quick wins.

For example, if the regulator comes and finds a workable way for open access to gas pipeline, which is something he can do within a couple of weeks, if he is able to find a solution to open access, he is able to licence players or operators and so on, you can begin to see some more volumes of gas move.

If the regulator is able to address some of the critical market issues –the issue of demand and supply, then you can almost see some improvement in gas-to-industries, in gas-to-power and so on and so forth, as a short term benefit.

I think the short term benefits which we can see happen within a year are benefits relating to introduction of competent regulator, who addresses certain market imperfections that are low hanging fruits right now, and those in my view could translate to some marginal increase in the gas market which has benefits to the economy.

And then, medium term, you start to see the impact of fiscals on the upstream development and that starts to manifest in about 18 months to two years, going forward. I think some short term games are possible, they may not be ground-breaking but they may be visible.

I can see how some very clever interventions of the regulator can unlock 50 million cubic feet per day (mmcf/d) of gas to 100mmcf/d of gas even up to 200mmcf/d of gas before the end of year one, and if that happens, the country will see that impact either on power or whatever.

GasInvest Limited has been doing a lot in the Nigerian gas space. When did you come on board and what are you doing now?

When I left the Nigerian National Petroleum Corporation (NNPC) in 2015, a few things were clear to me . One, that there were huge opportunities in gas in Nigeria. Two, it was clear that there were so many landmines or risks in the investment environment in gas.

GasInvest was set up in 2016 and our objective then was to provide holistic consultancy support to investors in the gas market, but also to pick positions in infrastructure investment where we have the opportunity.

So, we basically provide consultancy services for upstream companies that are looking for monetisation opportunity for their gas or downstream investors that are looking for gas, or governments that are looking to leverage gas for industrialisation.

An example of that is that we are working with the Delta State Government at the moment to develop the Kwale Industrial Park, which is supposed to be a gas-based industrial park that is going to leverage the Delta’s huge gas resources for industrialisation in the state, particularly for industries that are energy intensive like ceramics, glass, rubber and so on.

So, we are working with them to develop the idea. There are other states that we are having conversations with to develop strategies for gas, and we are working with some international players as well, who are looking for gas opportunities out of Nigeria.

And we are also in the early stages of developing small scale Liquefied Natural Gas (LNG) plants as well for the market. So, those are some of the things that GasInvest is working on, and our idea is to be thought leaders in terms of gas in Nigeria.

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