Harnessing Upstream Gas Resources for Power Generation in Nigeria: Issues, Strategies & Economics

Abstract

Abstract Nigerian gas industry is gradually developing into an important sector of the nation's energy economy. Proved natural gas reserves is known to be substantially larger than oil potential in energy terms and it is estimated to be about 180Tcf. Globally, natural gas has continued to displace other forms of fossil fuels for power generation due to its abundance, low carbon content and efficient technology. Gas, therefore presents the most viable option to bridge the existing gap between power generation capacity and demand in Nigeria. Despite Nigerian's huge potential in terms of gas resources and market, the gas sector is still plagued with perennial underdevelopment, principally caused by lack of clear fiscal regulatory framework and non market based gas pricing. This paper, analyzes the economics of harnessing upstream natural gas for power generation using discounted cash flow model. Inputs for the model include a proposed PSC fiscal regime for offshore gas development; benchmark gas price for the power sector; cost estimates, production profile; discount and inflation rates. The estimated result in terms of the profitability indicator (NPV & IRR) and the discounted host government take (DHGT) shows the impact of the fiscal regime and gas price on profitability of upstream gas investment. IRR and NPV shows investment to be profitable at a base case gas price of $2.5/mcf. Further analysis carried out with respect to low, medium and high cost gas fields for associated and non-associated gas reveals that low and medium costs associated gas field and low cost non associated gas fields are profitable at a gas price of $2.5/mcf. Sensitivity analysis showed that high cost associated and non-associated gas fields are profitable at a gas price of $4.5/mcf. Stochastic analysis was also carried out to capture uncertainties associated with some variables used as input in the initial cash flow.