Daily, huge economic value is lost from billions of cubic feet of natural gas which are being flared from oil mining sites in Nigeria’s oil-rich Niger Delta region. These are gas volumes that could potentially power homes, communities and industrial estates. In this interview, Babs Omotowa, the outgoing Managing Director and Chief Executive Officer of Nigeria Liquefied Natural Gas Ltd (NLNG) – a largely Nigerian-government-owned company established to harness natural gas for export – discusses, from an industry perspective, the reasons why so much gas flaring occurs in Nigeria.
Interview:
Babs Omotowa, MD/CEO of NLNG Ltd: Historically, before NLNG started, Nigeria was rated the second highest gas flaring nation in the world after Russia. In the late 1990s when NLNG started operations, the country was flaring about 65% of its gas. There were two main reasons for setting up NLNG. One was to help in eliminating gas flaring in the country, and the second was to monetise the gas itself. As at 2016, based on the U.S. Energy Information Administration (EIA) ratings, Nigeria is now fifth, with the actual volume of gas flaring in Nigeria reduced to about 11% to 12% from the 65% it used to be before NLNG started.
Today, nearly half of what NLNG produces is gas that used to be flared and which NLNG has now been able to gather and turn into value – as waste to wealth. That is how much NLNG has helped in reducing gas flaring in Nigeria, earning more than 40 billion US dollars from gas that would have been flared.
Nigeria Energy Future, NEF: So why did flaring occur in the first place?
Omotowa: Most of the oil fields and their facilities were built in the 1960s and 1970s. At that time, there was really no market or pipeline transport infrastructure for gas. In fact, there was virtually little or no demand for gas locally. The country’s population was not as high as it is now, and the major hydropower plants were adequately serving the country’s power needs. Also, most of the oil facilities were built in remote locations, and there were hardly any communities around many of them at that time. As there was no gas market and no gas-dependent infrastructure, there was thus no economics for investing in gas gathering initiatives. In addition, as at the time those facilities were being built, the environmental standards in the world were not that high, and many oil mining facilities in the country were built without gas gathering infrastructure. And on the economic aspects, even up until about 3 years ago, the pricing for gas was still so low domestically that there was also still very little incentive for gas gathering. Fast forward to many years later, to invest in gas gathering facilities is now difficult. This is because it is always far more expensive to retrofit than to have had the facilities right from the onset. In addition, it also now costs so much to build pipelines to transport the gas (if it were captured) to other areas of need. Given that domestic prices of gas were not encouraging, gas gathering was just not economically attractive.
NEF: About how low was the domestic price of gas, and for how long did the pricing stay unattractive?
Omotowa: It was as low as about 10 cents per million standard cubic feet (mscf) of gas, and we’re talking about right from the 1970s up till probably around 2010. And not only was the pricing poor at 10 cents, but also because the government, through the Nigerian Gas Company (NGC) was the one buying the gas, payment was an issue. In fact, some of the oil and gas companies who had some little investment in gas gathering had not even been paid by the government for more than 20 years. Again this was a disincentive discouraging investment in gas gathering initiatives, making them flare off the gas instead rather than selling to the NGC. But with NLNG coming in, things changed.
NEF: So how come NLNG was able to survive with its gas gathering endeavour?
Omotowa: One of the reasons why NLNG came was because it was set up as an export-oriented business. Since NLNG could do business at the time with a pricing of over $1.50, it became adequate for the oil companies to invest in gas gathering facilities because there was now a market – through NLNG’s exports – and a good price as well, making the economics work. With NLNG ready to pay a good price and connecting with export markets, oil and gas companies now had the incentive to invest. In fact, a lot of gas gathering facilities were built across both the western and eastern flanks of the Niger delta basin and much of the gas were then captured by NLNG. So with the right price, the right market and the right incentives, it was demonstrated that companies will invest in gas gathering rather than flaring gas.
NEF: Interesting, but why do we still have gas flaring? How come all the gas which used to be flared is not being captured?
Omotowa: As companies continue to invest in gas gathering in major areas of operation where they used to flare gas, they gradually began to get to smaller and more remote gas flare locations which are not economically viable to gather gas from and transport over long distances. Many of these are isolated gas flares and small which would prove difficult, significantly more expensive, and unprofitable to invest in.
For those remote, isolated flaring locations the solution would not be an NLNG-type solution, it would have to be localised solutions that are very close to such flare sites. These solutions could be in the form of small on-site power generation plants or small-scale plastic production outfits, or some sort of mini petrochemicals facility nearby. In any of these cases, there won’t be a need to build expensive pipelines over long distances or a need to build large, expensive gas gathering facilities. So, while large-scale solutions such as NLNG and major power plants may be able to do a bit more in gas gathering, the point we are now is one in which Nigeria needs more of the smaller scale solutions to capture gas being flared from the smaller, isolated and remote flaring locations.
NEF: So what insights do you have for industry stakeholders who are willing to invest in small-scale gas gathering initiatives? Can these investments really be pursued by private sector players?
Omotowa: Of course, the private sector has a big role to play. The opportunities are much and it’s not even just the power plants or the plastic companies. Opportunities also exist for producing CNG (compressed natural gas) – which can be used to power cars – as well. Some potential also exist for what some have called a mini-LNG facility. So there are several options for which gas can be used, and in which the private sector can invest. For example, small independent power producers can operate in those remote areas and generate, say, 1 MW of power – or even smaller – to supply to nearby communities.
NEF: This appears like much of the work has to be done by smaller players in allied sectors. Is there any role for the big oil companies themselves in reducing existing gas flaring?
Omotowa: No, that does not mean that the major oil companies are not also still able to gather more gas. Out of the remaining 11% gas flaring, probably about half of it can still be captured by the major oil and gas companies.
NEF: So why are they not doing that?
Omotowa: The big problem is that most of the flaring which occurs is generated by joint venture (JV) oil companies: Total JV, Shell JV, Agip JV, Exxon Mobil JV. These JVs are partnerships between the Nigerian government and the international oil companies (IOCs), with the government owning about 55% to 60% of these JVs through the state-owned Nigerian National Petroleum Corporation, NNPC. And the problem with joint ventures is that, over the last 10 years, there has been very limited investments going into them. The idea is that at the beginning of the year, JVs develop their programs, projects and expenditure, and each partner is expected to provide their equivalent share (based on shareholding proportion) to contribute to the funding of the operations and the projects. Year after year, the reality is that the government is hardly ever able to make adequate provision for its expected contributions to these projects. Many times, the government is barely able to pay its share of the running costs and ongoing operations, let alone pay its share of expenditures for new projects, some of which often include gas gathering projects. And so, you find that gas flaring continues because these projects are not funded.
NEF: And so this shortage of funds is not only from the government’s side, but also from the IOCs as well?
Omotowa: No. Because the government is not able to put in its share of the funds, then the IOCs are also not able to run the projects alone. Even if they [the IOCs] provide their own 40% to 45% of the funds, the projects won’t work without the government’s 55% to 60%. So, the whole JV arrangement is just not working.
And besides this, things have not even been easier for the IOCs because of policy uncertainties in the sector. In 2007, the government proposed the Petroleum Industry Bill (PIB). This has led to a lot of uncertainties. Because the PIB has not even been passed into law since 2007, industry players do not even know, and are not sure, what the industry rules would be like in the near future. As a result IOCs are cautious about investing in new projects, owing to policy uncertainties. In fact, many gas gathering projects have been kept on the drawing board over the years without execution.
Apart from these two reasons, the third problem is that, for both budgeting and contracting of projects, these JVs also require approval from the government through the National Petroleum Investment Management Services (NAPIMS) – an arm of the NNPC. To get approval for any gas gathering project, the JV arrangement requires IOCs to pass the intended project through NAPIMS. And even when the project is approved, all tenders and contracting for the project still have to pass through NAPIMS under the auspices of the NNPC board, which sometimes, may not even sit for up to 2 years. As such, the contracts are delayed. Nigeria has a reputation of taking an average of 2 to 3 years to award just one contract. And of course, these delays have significant cost implications, making oil and gas projects in Nigeria one of the most expensive in the world. With such huge associated costs, investments in gas gathering projects become less attractive to the oil majors, especially given the comparatively lower project costs and greater efficiency in other countries where they operate. So it’s not as if the super majors are not willing to invest in gas gathering initiatives and thus reduce gas flaring, but it’s just that the conditions are not right locally.
NEF: But then, if the market conditions are not really encouraging for the IOCs, what incentives exist for the small-scale investors? If the super majors are shying away from further investments in gas gathering, why should the small-scale local players want to invest in projects to capture gas being flared?
Omotowa: When you are a super major, you have investments all over the world, so your portfolio review will include projects across many different countries. As such, it is not unusual that a project in, say, Warri or in Sapele in Delta State or in Oben in Rivers State may not rank very high, in terms of relative attractiveness, costs and profitability, compared to a project in, say, Mozambique or Tanzania. When the project in Nigeria doesn’t rank very high then the super majors may not be investing in it. And that is why it would be easier to find a local person who would buy into the project. And because the local player only has that one oil field (or a few oil fields) from which to capture gas – and not a large portfolio of several investments – then there aren’t many competing investments; and he only has to focus on making that one investment work. Also, for a local player, sometimes one may also get incentives from the government.
NEF: Are these real incentives that are backed by policy or just propositions?
Omotowa: There are some real incentives backed by policy. For example, the last set of individuals who bought oil fields got about 5 or 7 years tax-free. For a local investor who wants to produce CNG for example, or who wants to set up a mini gas-fired power generation plant near a flare site, and who gets similar incentives, then it definitely makes business sense given his scale of investment. Making a profit of a few million Naira would not be bad for a small investor, but an IOC would not invest at such small scales, when there are more technically-challenging, higher-risk, and higher-profit investments for them to embark on. In addition, the advantage that a small player has is that, he doesn’t have the overhead and the higher running costs that IOCs have. Besides, the small players would also not be plagued by the bureaucracy and inefficiency associated with the JV arrangement under which the super majors operate. These allow for greater chances of success for smaller players to make small-scale gas gathering businesses work.
NEF: If this small scale gas gathering business is that attractive, why then do we not have several of them capturing gas from the country’s remaining isolated gas flaring sites?
Omotowa: It’s a combination of several things. Mainly, these endeavours require very serious technical capacity and know-how. In the past, there haven’t really been too many oil and gas entrepreneurs who had the expertise to do the required technical due diligence. However, in recent times, we are beginning to have more and more Nigerians retiring from the bigger oil and gas companies. These guys are now setting up smaller indigenous companies, and they are technically able to do the kind of work required to succeed in these small scale gas gathering and gas utilisation business.
NEF: So hopefully, we should be seeing more of these smaller gas gathering initiatives springing up in the country in the near-future?
Omotowa: Of course, a lot more people are showing interest and beginning to look at this area, with a couple of proposals now being made. I think it would grow.
NEF: In all, if you were to sum up what Nigeria needs to do now to seriously limit gas flaring, what two things would you suggest?
Omotowa: We have to resolve the JV structure, as it is militating against progress in the sector. The Nigerian government has to step out of oil and gas companies and allow private investors to run them, as it is in many other countries of the world where the government’s involvement is in providing clear regulations and in tax collection. The second is about incentives. Many times we try to solve problems with penalties, but a lot more times, the same issues can be solved with incentives. Provision of the necessary incentives, such as tax waivers, commitment to not changing policy conditions haphazardly etc., will surely allow for more investments in gas gathering initiatives by small, medium and large players in the country.
Interviewer:
Emmanuel Taiwo
Research and Liaison Officer,
Alliance on Nigeria's Energy Future
Babs Omotowa is a former Managing Director and Chief Executive Officer of NLNG. He has been appointed by Shell International into the Global Upstream Leadership Team as Vice President (S&E).
