David Ige, the Group Executive Director for Gas and Power of NNPC, the Nigerian state hydrocarbon company, is fond of drawing similarities between the massive road construction going on in Lagos and the laying of several pipelines to transport gas to various Independent Power Plants around the country.
When the road is finished, everyone forgets the inconvenience they endured while construction was underway, he often says. So is the case of the gas lines, he argues. We all get relieved when they start to help deliver power.
This is true up to a point.
The Nigerian government is spending about $2Billion to build seven pipelines with a total length of about 900km -either directly to power plants or to gas hubs. These are, in effect,the building blocks of a domestic gas grid in Africa’s third largest economy. The petroleum ministry has completed the looping of the Escravos Lagos Pipeline System from Escravos to Warri, a project christened ELPS-A. It hopes to complete the looping of the 324km leg from around Oben to Lagos(ELPS2). The gas line from Oben in Edo State to Obiafu-Obrikom in Rivers State is the crucial line to enable the industries of western Nigeria to access resources in the gas rich eastern Nigeria.
This large infrastructure build is part of what the government calls The Gas Revolution.
But the volume of the fluids that will flow in most of these pipelines is already determined by certain agreements. That volume is not enough for the power that is envisaged that the country will generate, by mid 2013, in terms of the country’s Road Map For Power.
Again, access to gas will lead to more demand. The Nigerian state cannot build its way out of increased demand. It needs loads of help from the private sector.
So far private companies have been reluctant to invest in Nigeria’s domestic gas industry. “The problem is creating a commercial and governance structure that encourages private investment to build the distribution infrastructure, including the last mile delivery for alternative uses-electricity generation, industrial and domestic uses”, says BGL, a firm of financial analysts.
That statement emphasizes only one aspect of the value chain. Someone has to produce the gas from the wells, and construct the gas processing facilities that ensure that the fluid in the pipeline infrastructure is dry gas. This is for power. As Nigerian gas is very rich in liquids, there’s a whole range of industries it could spawn, but government has to provide the enabling environment.
This is what the Petroleum Industry Bill (PIB), currently on the table in parliament, was expected to do. After all, the law is a tool that can effectively beat a path to a fiscal framework that strikes a balance between the need for government revenue and a healthy take off of an industrial economy.
The philosophy of the current PIB proposal has been largely explained in the last edition of this magazine. It is firstly and lastly about more government take. Nowhere is this philosophy expressed more ideologically than in the way it addresses the taxation and incentives for gas exploration, production and delivery.
The Petroleum Profit Tax on sale of gas in the prevailing dispensation, i.e. pre-PIB, is 30%. With Royalty, it comes to 37%. In the post PIB regime(i.e after the law is passed), the Nigerian Hydrocarbon Tax for gas produced onshore will be 20% higher, at 50%. On top of this, the companies pay Company Income Tax of 30%. So for onshore gas producers the tax is 80% in the PIB proposal. This is largely the same government take for crude oil. The idea is to have a uniform taxation for both gas and oil onshore. I am dealing with onshore here because this is where most gas to power projects will be cited, and this is where the acreages of most small Nigerian companies, who are expected to provide gas for the electricity market, are located.
Although the clearest indication in the PIB proposal is that the Royalty charges are not specified, Africa Oil+Gas Report is privy to documents that show that Royalty for onshore gas production, will be 2% if the PIB is passed as it is. Okay, so there will be less Royalty, going forward, for gas, but the Tax will be much higher and will wipe off the effect of lower Royalty.
Are these fiscals attractive to any company that is trying to put gas into the domestic market?
The PIB proposal puts in a rebate for a new producer who puts gas into the domestic market, which enables such investor to claw back about 30-40%, but overall, the terms are still higher. The modeled example which gives us this kind of figure (including the 2% royalty) is an investor who produces 100Million or more standard cubic feet of gas a day. The minimum tax he’d pay is at least 50%.
Domestic gas producers are almost, as a rule, those who supply gas to power plants. They’re not allowed to charge more than $1-$1.5 per thousand standard cubic feet of gas, today. If the price of gas-for-power is allowed to respond to market forces-as the Gas Master Plan and the Power Road Map instruct- and the price goes to, say $3 per thousand cubic feet, then a higher Royalty will kick in. It can get as high as 12.5%. The Nigerian Government, badly, wants to collect money.
Now this is a digression, but it’s important: None of the producers who put gas in our power plant gets paid more than 70cents today. And , Bulk Trader or not, NELMCO or no NELMCO, the payment isn’t just forthcoming.
Back to the PIB. One has to understand where the government is coming from. The Nigerian state was so desperate to have the petroleum industry utilize the gas it has flared for 54 years that it allowed incentives in oil production to be linked to gas output. Companies were allowed to make deductions on the 85%Petroleum Profit Tax if they carried out projects on associated gas. The Associated Gas Framework Agreement (AGFA) regime, allowed offsetting negative tax against oil income. That is gone. And that is wise. But the gas tax regime proposed, as it is, makes things several times more difficult.
Gas is an infant industry in Nigeria. That country needs to strike a balance in its fiscal regime, between taxing projects that already have a sure steady stream of income and those that may not take off if the environment is perceived to be difficult. Domestic gas production is clearly more of the latter.