Exploring the Gas-to-Power Value Chain

Natural gas has been heralded as one of the cheapest sources of energy. This information is desirable given Nigeria’s abundant natural gas reserves and the federal government’s Energy Transition Plan that seeks to leverage this commodity to achieve its net-zero carbon emissions by 2060. The enhanced utilisation of natural gas in the evolution of the Nigerian Electricity Supply Industry (‘NESI’) value chain serves as an opportunity for the federal government to:

• Upscale electricity generation and supply to meet the country’s domestic power needs.
• Increase its revenue from the reinjection of flared gas into the electricity value chain.
• Reduce greenhouse gas emissions (GHG).

According to the Nigeria Gas Flare Tracker (GFT), in the first six months of 2023, the country flared 138.7 billion standard cubic feet (SCF), losing $485 million in unrealised revenue. The Nigerian Oil Spill Detection and Response Agency (NOSDRA) estimates the country lost $22.9 billion to gas flaring from 2011 to 2021, which is uneconomical.

As indicated in the preceding paragraphs, commercialising gas flares yields benefits. For instance, its monetisation can shore up approximately $10 billion annually for the federal government, which can fund the country’s Energy Transition Plan’s $10 billion annual budget. On the other end of the spectrum, the gas-to-power value chain also faces several challenges, one being political misalignment.

Gas-to-power value chain: the challenge

The gas-to-power is complex due to its highly politicised upstream component in the value chain. The gas-to-power chain starts with the upstream players, gas exploration and production companies, and ends with the generation companies (gencos). In contrast, the NESI value chain starts with the generation companies, then the Transmission Company of Nigeria, distribution companies and the end users. This significant political involvement is due to the federal government’s pursuit to keep domestic gas prices low to protect public interests. However, this situation results in discord between the public and the private sector as private participants aim to maximise profit.

An illustrative example is when the federal government cut gas prices from $2.50/MMBtu to $2.18/MMBtu in July 2021 to prevent higher electricity tariffs. This action forced generation companies to cut prices, which led gas producers to lower gas volumes supplied to the local market, thereby resulting in electricity supply shortfalls. Thus, misalignment inadvertently leads gas actors to default on their market obligations, exacerbating the nation’s energy insecurity. Industry experts explain that a compulsory obligation on gas producers by the government to sell a certain percentage of produced gas to legacy power plants at a controlled price, regardless of production and pass-through costs, disincentivises gas producers from complying.

Looking Ahead

The political, regulatory and commercial stakeholders must synergise to make the gas-to-power value chain work. A unified approach to regulating domestic gas supply in Nigeria is critical to advancing the gas-to-power value chain. Repeatedly, the gas and electricity regulatory regime has disintegrated because of stakeholder’s unwillingness to take cognisance of the affairs outside the formal politics in the National Assembly. Gas unions, such as the Nigerian Gas Association and Nigeria Union of Petroleum and Natural Gas workers, drive the trajectory of the crystallisation of the gas-to-power value chain. Thus, the extensive commercialisation of the gas-to-power value chain hinges on coordination across the value chain.

Conclusion

Commercialising gas flares can significantly close energy access gaps. However, establishing an electricity market out of the gas-to-power value chain requires political balancing. The gas-and-power industry regulatory regime is dimensional. It requires uniformity between the political, regulatory and commercial players to open up the gas market for competition and improve the overall sector performance of the gas-to-power value chain.