Afrikonomics Podcasts 1: Nigeria’s shift from oil to gas

In this episode of Afrikonomics Podcasts, Cheikh Faye, head of investments at Questar Holding, explains how Nigeria could benefit from a natural gas-based energy strategy.

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Nigeria is at the dawn of a new day. The foundations of its oil-centric economy are seriously shaking under the pressure of low oil prices and growing import debts. Nigeria, very much like many other oil-centered countries, needs to operate a structural shift away from the oil model which has shown its limits in a brutal fashion.

Cheikh Faye, head of investments at Questar Holding and advisor to the public and private sector on energy-related issues, is our guest for this first edition of Afrikonomics Podcasts kindly hosted by Naledi Willers. For Cheikh Faye, Nigeria should shift its energy strategy towards natural gas and abandon its old petroleum-centred ways. A number of measures need to be undertaken, but natural gas is key to develop an autonomous domestic energy system. In Sub Saharan Africa, Nigeria already produces and exports more than half of the region’s natural gas.

Choosing gas over oil to power the economy doesn’t mean there won’t be new challenges to face: As Nigeria grows a market for gas domestically and regionally, it will hold market shares that could attract the attention of other international gas exporters. Hence our debate on Donald Trump’s arrival at the White House and its potential impact on the natural gas market in Sub Saharan Africa.

Nigeria’s historical tie to oil

top global oil reserves nigeria

Nigeria ranks among the top reserves of oil worldwide.

A colony of Great Britain until 1960, and governed by military leaders up until 1999, Nigeria historically attracted foreign investments with its oil-rich Niger Delta. Naturally, oil producers who led the development of the country used the most accessible energy source to develop a nationwide industry: Oil. Fast forward to today, most of the industry in Nigeria is diesel-powered.

However, those producers (mostly British) kept their refineries out of the country, and worked out a deal where they buy crude from Nigeria, refine it externally, and sell it back to Nigeria (at a higher price). The country’s infrastructure was developed around that colonial prism. Today, if crude prices drop, Nigeria’s revenue shrinks, refined oil becomes more expensive and scarce, and the entire nation’s energy distribution system fails to power the other dependent industrial sectors.

With the establishment of the 4th republic of Nigeria in 1999 came democracy and open markets. For the past 15 years, Nigerian governments have been struggling to defeat the corrupted systems set up during colonial and post-colonial times. The Niger Delta is a highly unsecure area where rich and polluting oil producers barely share a profit with the locals, and the country’s northern provinces are also plagued with armed conflicts. The whole country grew on a parallel economic system powered by corruption money, and adjusting the Nigerian economy to international standards has been a cause of grief for experts.

OIL, Oil, oil… and GAS ?

International institutions blame Nigeria for its lack of economic diversity. The oil-tied history mentioned above is a partial explanation on the causes of the Nigerian economy’s lack of diversification. Oil drilling naturally yields associated gas. That gas can be captured, processed, and sold as natural gas through pipelines and in liquid (LNG). Historically, natural gas from foraged oil is flared (burned) to regulate pressure and avoid the costs associated with its recovery. Nigeria has signed a few bills and memorandums to reduce gas flaring in the country, to no avail (sanctions not stringent enough for cash-rich foreign producers). Since the country needs the oil producers, gas flaring is still prevalent in Nigeria with 70% of its associated gas still burned in the open air (world’s 2nd gas flarer after Russia), with the environmental and health issues it generates.

Nigeria produces less power as a country than the city of Glasgow. – Cheikh Faye

However, since the fall of oil prices, there is a paradigm shift, and Nigeria needs to figure out more autonomous schemes to power its growing economy. From that standpoint, gas remains a highly attractive solution. The crisis is hardly-felt, Nigeria’s economy is yearning for a change.

natural gas production world

Yearly natural gas production worldwide (2011)

Developing the production of natural gas in Nigeria is not a novel idea : Nigeria is already the top producer of natural gas in Sub Saharan Africa, covering 75% of Sub Saharan natural gas exports (2011). It holds a modest 3% of the world’s reserves in natural gas. The Nigeria Gas Company was created in 1988 to develop and sustain the country’s infrastructure. Nigeria has the world’s 4th largest LNG plant. Nigeria sold $11.5 billion worth of LNG in 2012. Nigeria has about 1000km of domestic gas pipelines, and the West African gas pipeline that serves gas to Benin, Togo and Ghana (with a small 5 bcm/year capacity). However, acts of sabotage on Nigerian gas pipelines are frequent, thus making it a less reliable source of supply.

Developing gas production to grow revenue is not a new idea, but putting gas at the center of Nigeria’s domestic energy mix is a fairly novel one. And coherent one too, as the country has clearly demonstrated its leadership in gas production in the region. Consider the following facts:

  • Natural gas is 3 times more cost-efficient than diesel for power generators
  • The energy bill usually amounts for 35-40% of an heavy manufacturer’s total production expenses
  • Nigeria’s gas reserves are twice bigger than its oil reserves
  • Domestic production of electricity already consumes 70% of Nigeria’s natural gas output yearly
  • In Nigeria, 45% of the 175m population does not have access to electricity

The math is straight forward: To shift towards a gas-centric energy mix for domestic use, replace diesel-powered generators with gas-powered ones, and use the savings to fund the process on a national scale. Unlike oil, gas pollutes less, is processed 100% domestically, and Nigeria’s gas reserves abundant. Plus with an autonomous power-supplying strategy, Nigeria could grow its electricity network and grow its middle-class. It’s a win-win scenario.

Nigeria’s gas potential is almost as important as its oil potential […] Just by capturing what Nigeria is flaring today, Nigeria could add roughly $4 billion in terms of income – Cheikh Faye

USA: natural gas and the Trump factor

The global trend towards natural gas has been boosted in part by the USA’s decision to produce it on top of its newly-deployed shale fracking industry. Once fully operational, the USA will hold major stocks of ready-to-ship natural gas and flood its neighbors with it.

us natural gas production

US natural gas production

The USA are already fueling Mexico with natural gas through pipelines. Mexico contains great oil & natural gas resources but the country never led a decisive pro-gas campaign to favor its production, thus Mexico lost the natural gas production race and has no choice but to buy the cheap gas pouring from the USA for domestic power generation. Furthermore, now that Pemex is going through a privatization process, it’s now up to the private sector to decide if Mexico will significantly develop its gas production sector or simply depend on the USA ad vitam æternam.

Mexico is a good example of how the US natural gas can cannibalize other resourceful markets thanks to its technological and financial lead. LNG export terminals are still being built to prepare for the USA’s full-blown natural gas export strategy that will turn into a cozy revenue on its global trade balance sheet.

Donald Trump needs to prove to the markets that it will be business as usual at worse, and at best there will be very business-friendly policies implemented […] I have to believe that being a businessman himself, he will not launch measures that will be detrimental to the business community, otherwise the whole promise of his candidacy would fly out the window. – Cheikh Faye

Now that Donald Trump has been elected executive president, how much more aggressive can the US LNG game get ? LNG export terminals are mainly being built on the east coast to serve Asia (Panama Canal), South America, and … Western Africa. How much market shares will the US get in the region ? Will the new US president turn into that business shark – as portrayed by the media – when it will come to securing revenues from LNG in that region?

Speed up Nigeria’s gas transformation

The international climate around gas production is getting tensed. Even domestically, Nigeria will need to compete against low international prices. This will be feasible if Nigeria built the proper infrastructure. But the real threat to Nigerian gas is Nigeria itself. For the time being, Nigeria is riding the oil-driven wave of incoming cash, freeloading on the back of its soil’s wealth. The country displays great economic and financial capacity but no real signs of long-term stability. While natural gas could fix Nigeria’s precarious economy, it’s up to Nigerians and their representatives to seize that opportunity.

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