Developing Nigeria’s gas pipeline infrastructure

Environmental concerns have made the use of natural gas very attractive. Surging electricity demand is also one of the major drivers of increased consumption of natural gas (Gas-toPower).

Globally, natural gas utilization for electric power generation is expected to increase more than 25% faster than fuel use of all types over the next 10 years. Even in the US, ‘the most mature’ energy market, the use of natural gas to generate electricity is expected to increase by two and a half times by 2020.

However, the greatest boost to domestic and international gas marketing opportunities has been brought about by synergies between gas utilization and electricity generation.

Such synergies include the environmental benefits of ‘clean burning’ gas over other fossil fuel competitors; more favorable economics of a gas fired power station when compared to other fossil fuels and nuclear options; recent technological breakthroughs in combined-cycle technology which makes gas-fired power generation equipment significantly more efficient than its other fossil fuel competitors.

Uses of Natural Gas

Natural gas has many uses and advantages as an energy resource. It can be used in its gaseous state for heating, as industrial fuel and for cooking.

It can be liquefied to produce liquefied natural gas (LNG) by super cooling it under pressure to -256 degrees F. The cooling shrinks natural gas to 1/600 of its original volume, which permits easier and more economical handling and transportation. The LNG technology converts gas to a liquid state for transportation and is subsequently converted back to a gaseous state at the end user location.

Recent Gas – to Liquid (GTL) technologies convert natural gas to light synthetic crude, and then to clean light petroleum products, such as gasoline, diesel fuel, kerosene, and naphtha. An added bonus of the GTL technology is that it produces zero sulfur, thereby making the light synthetic crude the most desirable crude in the world, after condensates.

Natural gas can be compressed to 1/10 of its original volume to produce compressed natural gas (CNG) for use as industrial fuel, for transportation (CNG vehicles) and for power generation. It can also act as feedstock for the production of other fuels such as methanol using a different kind of GTL technology.

Regardless of the form in which natural gas is utilized, there is always a need for significant investment in gas pipelines and other gas infrastructure. Investments in natural gas supply pipelines are capital intensive.

Economics of Natural Gas Utilization

The economics of natural gas rapidly differs from that of crude oil in terms of the high cost and relative inflexibility of the transport systems required to get gas to marketplace. For instance, it costs 4-5 times as much to transport gas over land by pipeline compared to the cost of transporting oil. Transporting natural gas by tanker as LNG may cost 30 times as much as shipping oil.

Not only are gas transportation costs much higher than those for crude oil, also gas transportation costs exhibit strong economies of scale. The higher the volumes, the lower the unit cost of delivery. Therefore, the drivers of natural gas economics are principally high cost of gas transport systems and scale requirements.

As a result, global natural gas markets have historically developed first in countries with substantial natural gas reserves of their own, and later in ‘gas-poor’ countries with a large enough energy demand to justify the importation of gas through large international pipeline grid systems or through LNG tanker ships (e.g Japan, South Korea, Taiwan).

Costs of Developing Natural Gas Pipelines and Infrastructure

Natural gas pipeline construction costs vary between US$ 800,000 per km to US$ 2 million per km (for large diameter projects over rugged terrain).

Examples are: the 24 inch Yucatan Peninsula gas pipelines, completed in 1999 and running 432 miles from the Mexican State of Tabasco to power plants in the Yucatan province cost US$266 million. The 460 km line completed in 1996, from La Mora in Argentina to Santiago in Chile cost US$360 million. The 3,700 km pipeline from Bolivia to Sao Paulo in Brazil cost US$1.8 billion.

A typical LNG project may require more than US$10 billion of investment and lead time of 6-10 years from conception to completion. LNG tanker ships cost about US$200 million.

Responsibility for Developing Natural Gas Infrastructure

The Nigerian power sector will perform efficiently only to the extent that they have a secure supply of natural gas.

Considering the high cost of natural gas pipelines, which entity should develop this infrastructure? Should the responsibility fall on the International Oil Companies (IOCs), or the Federal Government of Nigeria (FGN), or Contractors?

So why have the IOCs not placed a higher priority on investments in natural gas infrastructure, since the inception of petroleum production in Nigeria? A number of plausible reasons come to mind! Gas infrastructure development generally costs substantially more than oil development (4-30 times as much) and takes much longer time.

Gas infrastructure investments may leave international investors more exposed to politically-inspired violence or generally to the risk of expropriation. Most importantly, the IOCs may be averse to investments in gas infrastructure because gas is sold in a local market rather than an international market (except LNG).

Thus, investments in gas infrastructure are likely to be regulated by a national government as public utilities. This may result in a relatively low rate of return. So, the IOCs would rather invest in LNG projects.

Therefore, the development of natural gas infrastructure has to be domesticated. Government and its joint venture partners in petroleum development derive revenue from the sale of natural gas to domestic industries. For governments holding significant shares in some end-user plants, it can also derive revenue from value-added associated with the export of the finished products. Governments and its citizens also benefit from increases in employment and the multiplier effects on their countries’ economies that come from increases in natural gas development.

For example, a major project such as LNG, methanol or fertilizer plants mobilizes local labor for construction work and can create local businesses to provide services to the new projects (material suppliers, engineering contractors, hotels, restaurants, transport services, etc).

Natural gas utilization for power generation can effectively transform a country and put it on the path of industrial revolution, social, economic and political stability. Considering all these benefits, it would make sense for the government to take the issue of gas pipeline infrastructure and gas processing facilities very seriously.

The AKK Gas Pipeline Project

Recently, NNPC made a bold statement by contracting out the Ajaokuta-Kaduna-Kano (AKK) natural gas pipeline to a mixture of indigenous companies (Oilserve/Oando) and China Petroleum Pipeline Bureau. The total length of this gas pipeline project is 614km (3 lots) at a cost of over $2.8bn, and contracts were awarded using a 100% contractor financing model. Considering that the backbone of gas pipeline infrastructure in Nigeria is estimated to be 2,500 km, the AKK pipeline system is a welcome incremental addition provided the project is successful in the end. However, more needs to be done.

 Looking Forward

The foregoing would suggest that the responsibility for developing effective gas transportation infrastructure rests squarely on government shoulders. The international financial institutions are currently sympathetic to funding ‘green’ projects. As a major gas country, there should be little difficulty in obtaining ‘resource development loans’ from the Breton-Wood Institutions (World Bank and IMF).