Since the first Industrial Revolution, energy consumption has continued to fuel global economic growth. Between 1760 and the late 1980s, the global energy system, or global energy mix, which is the combination of the various primary sources of energy used to meet the world’s energy needs, has expanded from biomass and coal to include crude oil, natural gas, nuclear and various renewable energy sources.
The world’s energy consumption has continued to increase. In 2015, the world consumed 146,000 terawatt-hours (TWh) of energy, about 25 times more than the consumption levels of the year 1800. According to data from the International Energy Agency (IEA) and World Bank, the fossil fuels – crude oil, natural gas and coal – accounted for about 80 per cent of the total energy consumed globally in 2015; renewables constituted less than 20 per cent (or 18 per cent).
Although Nigeria is heavily endowed with considerable volumes of crude oil, natural gas and coal deposits, the country has had historically low levels of energy use. Inadequate electric power generation has continued to delay the country’s industrialization. Without a doubt, adequate and reliable electricity supply is a catalyst for industrialization.
Being the leading oil exporter in Africa, and holding the largest natural gas reserves on the continent, Nigeria is a major energy player. Globally, natural gas is the primary energy of choice for power generation and for industries, with both sectors accounting for 75 per cent of natural gas utilisation. This is due to the low-carbon intensity of natural gas compared to coal. With a proven reserve of 5.1 trillion cubic meters, according to IEA, Nigeria has the potential to fuel its power and industrial sectors for the foreseeable future.
However, there is now an urgent need for Nigeria to define its energy policy. Many countries of the world, including the advanced economies and the emerging markets, are transitioning to a new energy system for the future. Therefore, it is imperative for Nigeria to define its future energy mix, its objectives, and the strategies to deliver it. That future is already here.
What factors are driving the country’s current and future energy policies? Are we concerned about cost, safety or low- to zero-emission? What is our overarching strategy for energy security?
Financial cost is a major factor in a country’s choice of energy. In Nigeria, the use of wood fuel, such as firewood and charcoal, is still widespread. Other forms of biomass such as biofuels used to generate electricity are less popular. But while these energy sources continue to meet energy needs, especially in the poor rural areas, the health risk and high carbon emission makes them unsustainable. Nigeria’s future energy mix would not require a trade-off between cost-efficiency and safety – in health and environmental terms.
Nigeria is one of the low-cost producers of crude oil and natural gas owing to its vast reserves and predominantly onshore exploratory activities. But the country has been flaring associated gas from its crude oil extraction. In recent years, however, there has been significant reductions in gas flaring. Only about 7 per cent of associated gas is still currently flared in Nigeria, due to environmental consideration and economic benefits of investing in gas processing. There has been an increase in natural gas processing, with the Escravos Gas-to-Liquids Project (Escravos GTL) (the Nigerian National Petroleum Corporation (NNPC) and Chevron Nigeria Limited joint venture) and the Oso NGL Project (NNPC and Mobil Natural Gas Liquids (NGL) joint venture).
Without a doubt, gas should be the major focus of Nigeria’s energy development. Indeed, this is arguably already the case. The government has deregulated the gas market. But while this has raised the prospects of profitability of the gas sector, there has been a growing concern about the ability of the government to fulfill its financial obligations to gas producing companies. An example of this involves the $1.2 billion Azura power deal.
Nigeria is a nascent gas economy. Although the country has been an oil exporting country for over five decades, it has been flaring its associated gas. Many challenges, chiefly fiscal, electricity tariffs and infrastructure, bedevil the development of the gas sector. Only two, out of the six power generation companies (Gencos) currently providing electricity in the country, are able to finance up to 40 per cent of their monthly obligations to their independent gas suppliers. The Gencos have been unable to break even under the current electricity tariff regime where power consumers are paying far below the break-even price for grid-electricity. A large number of consumers fall under the residential tariff class (R1) that pays as low as N4 per kilowatt-hour (KWh). Even then, many of such customers are unable to pay because of their low-income status.
These issues are further compounded by the inability of the Gencos to efficiently transmit the total power generated to the distribution companies (Discos), as a result of decrepit transmission infrastructure. These mounting challenges in the electric power value chain will further entrench uncertainty in the gas sector’s investment climate and may continue to discourage the much-needed foreign investment to develop the sector.
To improve investment in the gas sector, while addressing the current fiscal situation with gas-to-power in Nigeria, it is important to promote gas utilization across the domestic, commercial, industrial and transportation sectors. Currently, the Nigerian gas sector mainly serves the export market. Of the 8.5 billion standard cubic feet per day (bscfd) of gas produced in the country, only 18 per cent is utilized locally. This means the local value chain for the gas market may remain underdeveloped, since it is undercut by the export market.
Happily, though, other derivatives of natural gas, such as liquefied petroleum gas (LPG), have continued to witness an unprecedented growth in recent years. Its relatively low cost and higher efficiency as a domestic cooking fuel, compared with kerosene, has led to growing demand in the market and a transition that has created sizable values and job opportunities across the LPG supply value chain. According to the Nigeria Liquefied Petroleum Gas Association (NLPGA), demand for LPG is estimated to grow by 733 per cent from 600,000 metric tonnes per annum (MTPA) in 2018 to over 5,000,000 MTPA within 10 years.
However, the setbacks to this LPG revolution in Nigeria include inadequate market penetration, poor logistics and supply chain, and safety concern. In the first quarter of 2019, 47 per cent of the LPG consumed in the country was imported from the United States, majorly. Other marginal suppliers were India, Argentina, Algeria, Trinidad and Tobago, and Equatorial Guinea. This is a drain on the country’s foreign exchange earnings.
Nigeria Liquefied Natural Gas (NLNG) needs to pick up much of the slack in domestic gas supply in the short- to medium-term. The company should scale up its annual allocation of 250,000 MTPA for the domestic market because of the aforementioned demand projection.
Yet, there is even a segment of the domestic gas market that has hardly taken off: the transport sector. In the transport sector, another derivative of natural gas – compressed natural gas (CNG) – can be utilized. CNG is a form of natural gas, which is compressed to about 1 per cent of its volume at a very high pressure. There are over 15 million vehicles running on CNG in various countries around the world, including Iran, Pakistan, Argentina, Brazil, and India, which are leading this innovation.
CNG is desirable over petrol and other conventional liquid fuels because of its relatively clean-burning properties and cost-efficiency. In Nigeria, not much has been done in encouraging the use of CNG as an alternative to petrol, which is more expensive and subject to scarcity due to its importation. In 2010, Green Gas Limited, a Joint Venture of Nigerian Gas Company Ltd. (NGC) and NIPCO Plc. started a CNG project in Edo State, building seven CNG stations over the following two years. However, this initiative has been dampened by weak investment and lack of policy backing.
The development of gas-to-power in Nigeria could be rivalled by solar and other renewable and clean power sources. Accordingly, over $20 billion of solar projects are either under construction or planned around the country by the federal government and private firms. However, solar power remains pricey because of the high-cost batteries required by off-grid users, although overall cost has been declining in the last few years. The country is also pivoting to hydro power. Chinese investors are trying to revive the moribund Mambilla hydro power project, which is expected to add over 3,000 megawatts of electricity to the national grid upon completion. The seasonal fluctuations in hydro-electric power generation have, however, continued to affect its reliability and long-term sustainability.
In Nigeria, natural gas stands tall among these energy resources owing to its abundance. The country is ranked as the 9th largest reserve holder, and among the world’s top 30 largest natural gas producers, in the world. Natural gas also has a global reputation as a cleaner and cheaper source of power generation. In the 2015 Paris Climate Accord, there is a general consensus that natural gas is the transition energy. It is, therefore, seen as the perfect substitute for coal to become the dominant energy source for power generation. A 2011 IEA report estimated that natural gas utilization will rise by about 50 per cent from the level in that year, such that by 2035, it would account for 25 per cent of global energy consumption. The emergence of renewables as the energy of the future is sacrosanct; but the challenges of cost, scalability and intermittency make natural gas the perfect option for the future energy market.
To achieve the immense growth potentials of the Nigerian gas market, government needs to provide the necessary policy backing for the development of the value chain, ranging from upstream to downstream processes. Also, the existing energy fiscal regimes should be reviewed in order to deepen foreign and domestic investments in natural gas.
Kayode M. Oluwadare, an energy economist and entrepreneur, is the Managing Director and CEO of Green Fort Ltd, an energy project company with core interests in LPG projects, as well as consultancy in natural gas value chain management.