The $1bn West African Gas Pipeline initiated as a project in 1982 and completed in 2007 was meant to do two things.
First it would encourage Royal Dutch Shell and Chevron to tap into a vast resource that since the onset of oil production in the 1960s has been wasted in the associated gas burning-off process known as flaring.
Second, it was to provide a cheap source of energy in a region starved of electricity, by connecting Nigeria’s western oil and gasfields to neighbouring Benin, Togo and Ghana.
A third byproduct was the novelty of such an infrastructural collaboration – between different states, private companies and multilateral finance institutions – and the victory this represented for regional integration.
The pipeline sputtered to delivery in 2009. But one flaw is that the first destination, before it crosses the Benin border, is Lagos – a city state that contributes about 12 per cent of Nigeria’s GDP, and whose economy alone is nearly twice as large as that of Ghana by recent estimates. After meeting the demands of Lagos, there is not much left for neighbouring states. Nigeria’s needs far surpass natural gas supplies.
This could be changing. But the recipe for driving the multibillion-dollar investments required has yet to be created.
Nigeria has among the largest reserves of gas in the world, but the state-owned power stations that accounted historically for the bulk of domestic demand were poor customers. When they were able to make payments, they paid fixed low prices, thereby discouraging the investment needed in infrastructure and supplies.
Private sector companies have poured billions of dollars into power stations and distribution companies over the past year as part of a programme to transfer control of electricity supplies into what the government hopes will be more efficient hands. A new generation of power stations built under state ownership, capable of nearly doubling generation capacity by 4,000MW, is due to come on stream.
These stations will more than double demand for gas. But industry officials say it could take up to four years for the infrastructure to be in place to provide the necessary gas feedstock to fire them up. For this to be viable it may in some cases require a change of government policy on pricing.
People in the energy industry describe the lack of gas supply as the biggest problem when it comes to President Goodluck Jonathan’s electricity plans.
“Some of the newer power plants were built without all the necessary factors being in place, most importantly the source of gas,” says Andrew Ali, chief executive of the African Finance Corporation, a multibillion-dollar fund set up in Nigeria and focused on pan-African infrastructure investments.
The government has made some concessions recently on price. In the past, power stations paid as little as $1 per million British thermal units (Mbtu) for gas – a fraction of US or European prices. With the approval of the regulator, prices can now be as high as $2 or even $2.50 Mbtu.
That limited reform was enough to spur some change. Historically in Nigeria, oil companies did not develop fields thought to contain only gas. Where the international companies have developed gas supplies it has mostly been for export as LNG (liquefied natural gas) although Shell now also supplies gas for domestic power stations.
In 2009, Seven Energy, a local company, bought a field from Shell knowing it contained no oil at all. The company started supplying gas to a power plant in Akwa Ibom state last year.
Seven has been successful in raising international capital. Temasek, the Singaporean state-owned investment company, bought a $150m stake last month, and the International Finance Corporation, the
World Bank’s private-sector arm, injected $105m.
But Phillip Ihenacho, Seven’s chief executive, says that for some gas-to-power projects to become commercially viable, the set price would need to nearly double again. There is the thorny political issue of how to pay for infrastructure carrying supplies much longer distances, for example to stimulate industry in the economically depressed northern states.
“The investment required on the gas side is equal to that on the power side,” Mr Ihenacho says, stressing how illogical it is for a country so well endowed with natural gas to use more expensive energy.
“Nigeria is sitting on a huge gas bubble yet we are exporting gas and importing diesel – the most expensive way of generating electricity,” he says.
A further complication lies with the multinationals that still control most of the oilfields where gas is abundant, but whose main concern remains to export oil.
A five-year stalemate between the companies, the legislature and the government over a new bill designed to shake up the structure of the oil industry, is also holding up prospects for gas. Some in the industry argue that for the country’s potential to be fully realised will require the financial muscle of the multinationals.
“[The] economy could be growing at 12 per cent for a decade if it had a power industry with a reliable gas feedstock,” says a western diplomat. “There are no indigenous companies who can alone deliver the kind of resources needed.”