The Downstream Gas Market Has a Large Headroom to Grow in Nigeria - Africa’s premier report on the oil, gas and energy landscape.

The Downstream Gas Market Has a Large Headroom to Grow in Nigeria

In the third and final part of a C-Suite interview series, AOGR’s Akpelu Paul Kelechi, searches for insights to Aradel Holdings’ Natural Gas Development Plans in Nigeria.

Excerpts from the answers by GBITE FALADE, the company’s CEO…

In a recent report, Aradel Holdings quoted the realised price for gas at $2.1 per thousand cubic feet (Mscf). For a company that supplies the Nigeria Liquefied Natural Gas (NLNG) system, that’s pretty low. That’s even lower than the $2.18 that domestic gas suppliers are complaining that government is limiting them to supply to electricity producers. Is that how low the NLNG pays?

The price that we get from our gas supply to NLNG is lower than $2.10 per thousand cubic feet. We have two customers and what we have published there (in the half year report) is the blended price of the two markets. The domestic off-taker is actually paying more than what the NLNG does but I think it’s important to go back in history. This is a pricing that has been enshrined in a long-time off-take agreement that lasted ten years. At the time when the contract was put in place, that price was the best you could get. The only option was the domestic market at that time was basically selling at N10 per thousand standard cubic feet. The pricing framework of gas is now more cost reflective. We are going through a round of negotiation to renegotiate that contract and we are very clear our minds that we would not renegotiate on those similar terms.

The NLNG model was structured such that gas was meant to be fed into the plant from the owner companies, from their upstream businesses. What those parent companies did was to take an integrated view.  So, it was okay for them to take a haircut on the feedstock sales price of the gas to NLNG knowing full well that the super normal margins they have in NLNG would make them more money on an integrated basis. For a third party like ourselves who do not have equity in NLNG, it’s a very punitive price. Now, [there has been] a whole lot of maturation in the gas business, that we now have options and we are digging in our heels to insist that we need to sell at a price that reflects what the domestic market currently offers.

“We’ve done feasibility studies for three major gas-based industries; ammonia-urea, ethylene and methanol. We are about on boarding a business opportunity manager whose full-time job is to drive this activity, such that as we bring more gas to the surface, we are sequestering a portion of it and creating”

Now that you have talked about a maturating market, what does the Nigerian government’s CNG policy mean for producers like you? Are people talking to you about gas supply? Government is keen on pursuing this as the alternative to gasoline and diesel and it looks like it might energise the domestic gas market.

One of our off-takers who has been off-taking gas from us for more than three years now is a CNG manufacturer. They source the gas from us, compress it and reticulate it using specialised CNG trucks.

It’s important to first understand the construct of the CNG business. It is meant to be a displacement fuel. CNG and LPG offer a commercial advantage where they are cheaper in terms of calorific content basis benchmarked against their next alternative. So, the whole idea around gas is that gas should be a displacement fuel. If your primary fuel today is LPFO, HFO or AGO for whatever application, gas is always in a position to displace them from an economic point of view.

There are a couple of CNG plants in the Southwest. Even at the current price today which is north of $8, in fact, it is more of about $10 per thousand standard cubic feet; it still offers a significant discount advantage relative to whether you’re talking about LPFO or you are talking about HFO and all of that.  Even within the southwest area, it offers as much as a 40% discount in terms of price advantage. By the time you transpose that into PMS, it even becomes a whole lot more. So, for producers like ourselves, we are more than happy to continue to support that space.

It is a space that is infrastructure enabled so there needs to be not just investment in the mother station that compresses the gas, you also need investment in the specialised trucks, you need investment at the last mile where you have a PR (Pressure Reduction) and monitoring station that steps down the pressure and allows it to go into the applicative usage. The more of those that we have, we could then create a network that makes it a whole lot easier. Initially, the off-take is more around people who are using it to displace AGO, HFO, HPFO and LPFO for power generation. So, people are using it to generate power of up to about 1MW capacity and that finds ready application in that area.

But that’s a one-to-one delivery. To use gas a displacement for PMS, it means you need to have a network of different CNG stations where if somebody fills up his car with CNG at point A, he doesn’t need to come back to point A to refill because there are intermediate spots among the line. As government continues promoting CNG, we expect to see entrepreneurs latching on to the momentum of government campaign and investing in dispensing stations. It may first of all start as a cluster maybe within the southwest and then extended to maybe the middle belt. Transporters can then be comfortable that as they drive through the length of breath of the line, there is a dispensing station that is not too far away where they can refuel and continue their journey. 

With as little as 5MMScf/d, you [can do] decent CNG investment that forms the basis of your mother station and then from there, you go to feed the daughter stations and the refuelling sites.

You’re suggesting that there is a whole lot of infrastructure investment that needs to happen. The way the filing stations are on the road as one travels from Afikpo to Bede in Nigeria’s middle belt, that’s not going to happen in three years for CNG right?

It can happen and it just takes a different business mindset to make it happen. An approach that segments the off-take for the purpose of transportation is required. They need to first of all target the fleet vehicles. And there are popular fleet vehicles and I will like to use for example, those from Port Harcourt to Lagos. Assume you do have supply capacities for CNG in the south-south and because you have the presence of the ELPS line from Warri all the way coming to Lagos; it then becomes possible to find intermitting points where you can T-off and set up a mother station such that when you look at the endurance, if somebody takes his truck today and fills it up, I don’t know the numbers but I strongly believe that a full tank for those trucks can take them some hundreds of kilometres in terms of drive time. So, coming from Port Harcourt and going to Lagos, you probably don’t need more than one or two intermediate points to refill your tank.

So, you can start by building the case around fleet vehicles such as the trucks, the luxurious buses, and as that becomes deepened, it becomes easier for even light vehicles to ride on the back of those structures. Before, you know what’s happening, somebody could say, okay, since there is a dispensing station at the Shagamu- Ore-Benin Road, why can’t I extend this CNG service into city-centre? So, it’s that sort of reticulation that allows people build around existing hubs and radially expanding out that could help the adoption and I think that in two-three years, this can be done.

”We’ve gotten to a peak of about 61Million standard cubic feet of gas per day in the recent past and we strongly believe that with some intervention work that we’re starting shortly, we should be able to restore our gas production potential to about 70Million standard cubic feet of gas per day

There was supposed to be some Final Investment Decision (FID) taken on a new, large, gas project. Now that you are talking of maturation of gas in the market, what is the agenda for gas commercialisation in Aradel in the next ten years?

Our future development plan is actually more denominated in gas than in oil. Our five-year programme would see more than double the growth rate in gas than what we have in oil. Our future plans and programmes are actually rooted more in gas exploration and gas development. But it’s not as if we are holding back our oil development; we are very focused on chasing the oil barrels because there’s a market for it today and we know that the time frame that you have for oil development is shorter than the one you have for gas because of the transition narratives. But even without holding back the development of oil, we have sufficient established gas reserves that allow us to be able to even grow our gas production at more than doubled the rate at which we are able to grow our oil. So, gas exploration and gas development are a big play for us going to the future.

We’ve gotten to a peak of about 61Million standard cubic feet of gas per day in the recent past and we strongly believe that with some intervention work that we’re starting shortly, we should be able to restore our gas production potential to about 70Million standard cubic feet of gas per day and that’s more than double what we had in third quarter 2022. But consistent with our thoughts, philosophy around oil and how we create value in the oil, we create value through exports and through refining for domestic. We’re taking a similar view for our gas. We’re going to bifurcate it along the lines of playing gas sales but we are also forward integrating in the value chain to applicative usages of gas. By the end of this year, we should be taking the final investment decision on which of the gas-based industry would we be creating as a further extension in our value chain. We do have the endorsement of our board to travel in this direction.

We’ve done feasibility studies for three major gas-based industries; ammonia-urea, ethylene and methanol. We are about on boarding a business opportunity manager whose full-time job is to drive this activity, such that as we bring more gas to the surface, we are sequestering a portion of it and creating value in some base industry whose final products them becomes the subject of either a domestic or a regional reticulation.

So, you’re going to see a wider extension of our integration beyond the three lines that we have today. Today we have the upstream, the gas plants in the midstream for gas commercialisation and the refinery. We will have an investment that is downstream of that gas plant that takes some of the product from the gas plant and create value. For us, that is the best way to domicile value and benefit for the local economy and in terms of what the product is, each of the three products that I have spoken about, we are undeserved; whether it is in our domestic economy or in the region economy. That is the direction we’re going.

Again, this is part of the reason why we will become listed and listing is going to ultimately [open up] significant capital to be able to play across all these Investments. So, gas remains a very key component part of our value proposition going into the future.

What is Aradel’s overall vision for the next five years?

Our vision is to continue to remain relevant when it comes to the key and strategic industry players. Today, we see an evolution in our industry, an evolution where, increasingly, the contribution of the IOCs, especially in the onshore, shallow waters and swamp is declining significantly. We’re seeing different players trying to come into that space and we think that process will become full blown within the next five years.

So, what you should expect of Aradel is that we will be one of the big players that will fully step in to ensure that the country doesn’t get short-changed because the IOCs have exited. We have in our own little way shaped how things have evolved in this industry. We pioneered marginal field operations, we pioneered host community trust fund and we pioneered modular refinery.

We intend not to vacate these spaces in the next five years. End of last 2022 we became the first company in our sector to go to the bond market and raise capital. When we did that, we were oversubscribed at excellent pricing terms, 99% of that subscription came from pension funds. That’s a huge vote of confidence, [for] pension funds which are the biggest holders of funds to start looking in our direction. We did that without being a listed company. We won’t be the first to become listed, Seplat is. But we would deepen that leadership when we get listed. You are going to see a significant scaling up of our reserves holdings, in our production and all of that.

Where we are headed to is when you look at our return in terms of value per barrel of our reserve per spend, you will struggle to find a company that is doing better than what we are doing.

One aspect that I’ve not spoken about because we’ve kept it under the radar is that we’ve already started a journey to renewables.  I am not allowed to say more about that at this pint.

You talked about the IOCs leaving and you own 42% of ND Western. Aradel has also, on its  own, apart from ND Western, taken a stake in Renaissance, which just acquired Shell Petroleum Development Company (SPDC). Will Aradel on its own singularly go for acquisition of Oil Mining Licences ( OMLs) or PMLs or would it continue to do so as a partner of ND Western?

All options are on the table. We also have demonstrated our capacity to work in partnership with others and that’s evident in ND-Western where with three other partners and allies, we invested and acquired divested interest and we have run that for north of 10 years. We’ve done that without an issue, which is very rare in our industry. Within the context of that framework we are committed to exploring more of such opportunities together. Within our structure as Aradel, we also do have some opportunities that we are pursuing but which are just premature for me to talk about now but which will end up in play. Our strength has always come from directly operating things.

”With as little as 5MMScf/d, you [can do] decent CNG investment that forms the basis of your mother station and then from there, you go to feed the daughter stations and the refuelling sites.

Our industry is evolving and we believe that as long as we continue doing what we’re doing now, it’s only a matter of time before we get to the next operated venture. Whether that is a full-blown mining lease or a PML.

 

 

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