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Gas commercialisation requires huge investments — Mama

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Despite awareness of its huge potential, commercial gas is still flared in Nigeria. In this interview with PRINCE OKAFOR, Co-Founder and Senior Project Advisor at Meiracopp Nigeria Limited (MNL), Chijioke Mama, a Doctoral Researcher in Business Management and consultant with the Sustainability Policy Commission of the Nigerian Economic Summit Group (NESG) speaks on a wide range of issues, including the need for investors to invest in the gas sector.

Chijioke Mama

What is involved in the commercialization of flared gas and why should it be of interest to investors?

The planned flared gas commercialization initiative is a laudable step that is directed at solving environmental challenges related to gas flaring. However it creates, simultaneously, several attractive investment opportunities by utilizing what would otherwise be a wasted resource. The good aspect of the initiative is the expected investment facilitation frameworks that could be made available from government on a structured programme – the NGFCP. This will enable third party procurement and monetization of gas resources, through the use of emerging gas flare commercialization technologies such as Gas-to-Liquid (GTL), Gas to Chemical (GTL) and Gas to Power.

I think it’s a programme laden with several economic and sustainability benefits, even social gains since it is poised to attract significant resource development benefits; open up the market for related output products such as methanol, ammonia, diesel, gasoline (PMS), LNG, CNG and also create some socio-economic benefits (jobs) along the entire value chain. The industry is still awaiting the full programme details and bid guidelines.

What are the technology and resource implications of promoting a flared gas commercialization project?

A project developer will procure flared gas under terms and condition which the programme will define in the awaited bid process. And then deploy any preferred and proven technology to monetize the gas. The business case or use-case of the procured gas will be dependent on specific project settings since the available technologies for monetizing flared gas could have different utility, with respect to the nature of the plant, mode of operation, expected output products, operational risks and other considerations.

But some of the conspicuous features of these projects include; consumption/use of moderate to small volumes of gas, that is feedstock around 1 -25 MMscfd. Because the flare commercialization initiative targets the monetization of relatively small, but nevertheless profitable gas yields, its technology has been purposely modular, simple and automation focused. Conceptually, the projects steps entail; technology selection and deployment, raising project finance and then operational adaptation of each technology/plant to the project-use environments.

What is your assessment of the overall viability of flared gas monetization projects in Nigeria?

It is viable! It’s actually very viable and there seems to be some interest from the industry. But that’s not to say that there are no constraints or that profitability is guaranteed. Flared gas commercialization as an initiative is relatively a fledgling business around the world which leads to several gaps.

There are many technological, economic and regulatory issues that could affect the delicate economics of flared gas monetization projects. One such gap being the necessity to leverage project historical data, technology risks mitigation and accessing the right kind of human capacity/skills (although the plants mostly have lean labour requirements).

While the Procure Gas-Monetize Gas model may appear overly simple, developing these projects may not be plug-and-play as it appears. Ensuring viability may require that any available data and project experience is Nigeria-adjusted in order to capture the finer issues of technology risks/costs and product output/marketing. It’s good that the programme has a strong regulatory backbone in the form of the Flare Gas (Prevention of Waste and Pollution) Regulation 2018.

It’s anticipated that the programme would provide sufficient incentives to attract the right kind of developers and secondly guarantee profitability.

Does current flared gas monetization ecosystem in Nigeria encourage investment?

The overriding risk statement on flared gas monetization at this stage -from a global perspective – is that most of the technologies for small scale gas conversion are relatively new. In addition, the number of commissioned, commercial-scale, flared gas monetization project around the world is statistically insufficient for the purpose of generating a long term, reliable, project performance forecasts/models. This implies that midlife and late phase plant behaviour and economics cannot be confidently modelled.

That adds a layer of risk to any investment in flared gas projects. In spite of the fact that large scale GTL and GTC plants have been successfully deployed for many decades around the world; the necessity for modularization and other necessary technical adaptations in the case of small GTL capacities (1-25MMscf/d), adds a new set of challenges and alters the operational context. This includes integration and operation on an FPSO for example.

In addition to the technology risks, there are product demand risks and operational risks too which can threaten the financial viability of projects directly. But it might be safe to say that technology risks will dominate. In spite of that, the right risk management strategy will ensure proper identification, characterization, mitigation, transfer and bearing of risks in a manner that will still deliver profitability.

Do you see financing constraints as a hindrance to the overall success of these kinds of projects?
I suppose that promoters will have sufficient and demonstrable equity capital to push the project and which may be augmented by debt capital. Finance is indeed a recurrent issue for these kinds of project, since you may be looking at investments around $15 million to $100 million. I hope there will be some other kind of financial soft landing from the programme, given the Nigerian oil and gas sector’s current reputation within the debt capital market.

As a viable and profitable project, it’s the duty of the promoters to prove bankability by structuring the project properly. It’s also the duty of debt (or even equity) capital providers also to analyze flare commercialization projects properly to see where the credit risks and the benefits lie. You may expect some financing apathy for these projects, especially where there is limited understanding of the project dynamics. That should not really be so, in my opinion. I have said that if I am a debt capital provider looking to put about $10 million or so in a gas monetization plant/project, for example, there are key steps I will take. I will kind of focus on the future cash flows of the project in structuring the loan as opposed to the value of the asset or the borrower securing it.

I will model the plant’s performance and technical risks for 8-10 years and haircut any estimation of future cash flows accordingly to reflect that. I will look at the reserves report of the asset producing the feedstock gas, for evidence of reliable/sufficient feedstock supply for the life of the gas conversion plant. I will seek smart ways of transferring the reserves risks and the commodity price risks to the promoter (which may otherwise lie with the debt capital provider). I will demand credit security over the plant and the project company’s shares and not the borrower’s properties.

Providing debt capital to this kind of project may not fit the traditional Corporate or Project finance model, so some insightful innovation may be required to protect lender’s interest in structuring the loan.

Are there any unique macroeconomic considerations that should interest investors?

There are many, but the nascent state of the flare commercialization ecosystem means there will be plenty of room for first movers to learn, make adjustments and iterate. It’s expected that the proposed programme will provide a lot of macroeconomic investment cushioning. The numbers may look good in terms of revenues, since the potential plant outputs are in fairly good demand in Nigeria and moderately well priced too. But a potential limitation that is noteworthy is the fact that each flare site can only produce a relatively limited volume which may hinder the needed economies of scale.

Consequently, promoters may need to hold sufficient number of flare sites (if the bid guidelines provides for that) with sufficient gas yield as well, in order to deliver good financial returns. From a macro-economic perspective, since the flare conversion plants are relatively expensive, the governing fiscal regime (taxes and royalties) for the projects within the NGFCP will either hurt or enhance returns.

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