Developing a Sustainable Gas Economy: Fiscal Regime and Opportunities for Investment in the Nigerian Gas Sector

Transcription

1 and Opportunities for Investment in the Nigerian Gas Sector By Dr. Timothy OKon Group Coordinator, Corporate Planning & Strategy NNPC C O RPORATIO N April 2014

2 Outline Background & Nigerian Gas Aspiration Nigerian Gas Fiscal System o The Current Gas Fiscal Terms (AGFA/CITA) o Issues & Challenges of Current Gas Fiscal Terms Proposed Fiscal Changes in Petroleum Industry Bill o Key elements of Revised Fiscal Framework Opportunities for Investment in the Nigeria Gas Sector Concluding Remarks 2

3 Background 3

4 1 st Quarter 2014 Business Environment Review Global Energy Mix Natural Gas 23.3% Global Energy Mix 2012 Coal 27.4% Global Energy Mix 2013 Natural Gas 23.9% Coal 27.2% C OR PORATIO N Liquids 35.3% Nuclear 5.7% Renewables 8.4% Liquids 35.0% Renewables 8.3% Nuclear 5.7% Global Energy mix stands as follows ; 2011 VS 2012 VS 2013 Liquids,Coal& Natural Gas Renewable energy 2011=7%; 2012= 8.4% & 2013= 8.3% and nuclear power 2011= 6% 2012= 5.7% & 2013= 5.7% however nuclear power is no longer attractive because of the inherent risk e. g Japan s nuclear disaster Modern energy economy being highly influenced by; Rapid industrialization, Enhanced metropolitan life and Transport sector affluent. 4 Source: IEA/ BP/ERDM

5 C O RPORATIO N 5

6 NIG ER IAN NATIONAL PETRO LEUM Potential Impact of Global Shale Gas & Shale Oil Development on Nigerian Hydrocarbon Exports U.S. Strategy for oil and gas Export to Asia Panama Canal Expansion is to be completed in 2014 C O RP ORAT IO N Panama Canal handles an estimated 5% of world trade & about 20% of U.S. import from China Main goods traded are oil products, grains & container cargo Expansion Of Panama Canal to Accommodate Large Post Panamax Vessels is expected to boost trade between U.S. and Asia pacific 6

7 C O RPORATIO N 7

8 C O RPORATIO N 8

9 C O RPORATIO N 9

10 Background Nigeria s Gas Reserves & Production within Africa Until recently, Nigeria s oil and gas reserves have always been on the incline Source: OPEC/NNPC, BP Stat & DPR 10

11 Background - Historical Gas Production & Utilization in Nigeria Mmscfd, percent ~90% Not reaching Nigerian users 25% 27% 40% Flaring Upstream use Export Share of total gas production 100% % 60% Gas produced Power 40% 20% ~10% Reaching Nigerian users (less than 1,000 mmscfd) Industry & other % ,600 6,250 5,050 6,850 7,850 7,911 Gas production, mmscfd

12 Background - Nigeria s Strategic Aspiration for Natural Gas 12 Nigeria's Strategic Aspiration is enshrined in Gas Master Plan aimed at Growing the Economy using Natural Gas

13 Nigerian Gas Fiscal System 13

14 Nigerian Fiscal System Fiscal system or arrangement is the Host Government s most important tool for managing Oil and Gas resources. Fiscal regimes are some of the most critical factors to be considered for investment decisions Fiscal terms act as the contractual balance between the financial objectives of Government and the investor Company 14

15 Nigerian Fiscal System contd. Gas specific developments Project specific gas fiscal terms Non - statutory pronouncements on fiscal terms AG Re - Injection Decree Gas flare levy N LNG incentives Decree 39 M inpet letter on gas fiscal terms M inpet & NNPC letters on gas fiscal terms N LNG incentives modified Decree 113 Duties exemption for gas utili s ation Decree 16 Gas incentives Decree 18 & 19 Gas - to - liquid incentives Decree 30 3% NDDC budget tax on oil & gas processing CITA rate reduced from 40% to 35% Ed. Tax 2% VAT 5% PITA Dividend W HT reduced from 15% to 10% 15 Decree 31 Changed ITC to ITA CITA rate reduced from 35% to 30% Decree 32 New Democratic Constitution New state taxes Gas Fiscal reform deals with the development and legislation of fiscal systems for gas projects: o The Fiscal System should be Simple and flexible to implement o The System should also ensure that Nigeria receives an appropriate share of the economic rent generated from the production and utilization of natural gas resources. Proposed fiscal system is anchored on the principle of sustainability that will stimulate participation of new players and ensure that government revenues are aligned with expenditure in the sector for broader economic growth

16 Nigerian Fiscal System-Current Gas Fiscal Terms (AGFA/CITA) Current applicable Fiscal Regime for Upstream gas development is the Associated Gas Fiscal Agreement (AGFA) incentives under section 10A of the PPTA which allows for the following: o Investments required to separate crude oil and gas from the reservoir into usable products shall be considered as part of oil field development; o Capital investment on facilities & equipment to deliver associated gas in usable form at utilization or designated custody transfer points shall be treated, for tax purposes, as part of capital investment for oil development. o Capital allowances, operating expenses and basis of tax assessment shall be subject to the provisions of CITA and the tax incentives under the revised MOU. 16

17 Nigerian Fiscal System-Current Gas Fiscal Terms (AGFA/CITA) 17 Applicable fiscal terms for Downstream Gas is CITA (Companies Income Tax Act) Section 28G CITA incentives (Decree 18, 1998): o Tax free period of up to 5 years, the minimum being 3 years (Decree 30, 1999). o Alternative to the initial tax free period (above), an additional ITA (Investment Tax Allowance) of 35% which shall not reduce the value of the asset. Such company not entitled to the ITA of 15% stated below. Accelerated capital allowance after the tax free period, as follows o An annual allowance of 90% with 10% retention for investment in plant and machinery (Decree 19, 1998) o An additional investment allowance of 15% which shall not reduce the value of the asset; (Decree )

18 Nigerian Fiscal System-Current Gas Fiscal Terms (AGFA/CITA) Tax free dividend during the tax free period where: o The investment for the business was in foreign currency, or o The introduction of imported plant and machinery during the period was not less than 30% of the equity share capital of the company. Interest payable on loan obtained with prior approval of the Minister for a gas project shall be deductible. The tax free period of a company shall start on the day the company commences production as certified by the Ministry of Petroleum resources. Gas utilization under CITA is defined as : the marketing and distribution of natural gas for commercial purpose and include power plant, liquefied natural gas, gas to liquid plant, fertilizer plant, gas transmission and distribution pipelines. 18

19 Issues and Challenges of Current Nigerian Gas Fiscal Systems Current Gas Fiscal incentives (AGFA) which allows for consolidation of Gas investment with Oil PPT earnings are discriminatory against new gas investors and non oil producers. It Encourages gold plating of costs as recovery of investment is from Oil income with high tax rate. No incentives to control cost. Effective Government Share of the economic rent from Gas is currently negative since oil earnings are used to subsidize gas investment. Non clarity of some provisions such as gas condensates not spiked into crude oil 19

20 Issues and Challenges of Gas Fiscal Terms contd,. Nigeria has very large resources of relatively low cost gas but the developed gas is mainly targeting the export market via LNG due to discriminatory nature of the fiscal system. At the same time the country has an enormous need for electric power. Without rapid expansion of power generation and gas based industries such as fertilizer, methanol and petrochemicals, on the basis of cheap natural gas the nation will not achieve its full economic potential. Nigeria has been notoriously unsuccessful in creating large scale electric power based on natural gas so far 20

21 Proposed Fiscal Changes in Petroleum Industry Bill 21

22 Key Elements of Revised Fiscal Framework For Gas In Nigeria: The framework for change is indicated by the rebalancing of Government s fiscal posture to capture the entire oil & gas value chain:- Capturing the full gas value chain (upstream, midstream and downstream) within and without Nigeria Developing a fiscal regime for gas that is decoupled from oil thereby creating a level playing field for all investors in gas 22 Promoting the effective management of costs across the industry and maximising Government take Developing a fiscal system that is responsive to the significant shift in energy prices Clarifying inconsistencies and/ or conflicts in the application of fiscal terms for oil and gas and Developing a fiscal rule of general application based on a body of fiscal laws rather than incentive letters.

23 The Fiscal Landscape for Gas AGFA CITA Oil Pipelines Act PIB Fiscal Terms Gas specific upstream fiscal terms Definition of upstream gas operations CITA Section 39 Elimination of project specific incentives Development of fiscal rules of general application Downstream Gas Bill Network code, Open access, Tariffing, Transportation & Marketing 23 The fiscal system is applicable to all players as project by projects incentives are no longer allowed. Open access regime is provided in the PIB to ensure accessibility to market by small producers Government Take from gas will also improve as only viable projects will be encouraged Proposed Fiscal Changes in the PIB

24 Gas Fiscal System In The Proposed Petroleum Industry Bill (PIB) The PIB proposes a new comprehensive strategy to deal with issues in the current Gas Fiscal System: Non Consolidation of Gas Investment with Oil Income to create level playing field for all gas investors Attractive fiscal terms for the production of gas and condensates through royalties which are capped at 12.5% and substantial production allowances on the Nigerian Hydrocarbon Tax creating an overall government take of about 65%, Application of these new fiscal terms to new projects that eliminate gas flaring or develop deeper gas reservoirs, A comprehensive gas pricing framework, with substantially higher domestic gas prices, linked to international market indicators, that will encourage producers to rapidly increase gas production. Gas pipeline and processing tariffs, to be regulated by a downstream regulatory agency, which are the most attractive in the world, in order to provide strong incentives for investments in gas infrastructure, under strong fiscal incentives. Open Access provision in Gas Pipelines and Processing Facilities to encourage commercialization of gas for small producers 24

25 Opportunities for Investment In Gas Sector 25

26 Capturing the full gas value chain The revised fiscal framework seeks to enable the economic transfer of upstream gas to downstream gas utilisation projects (CITA Section 39) either for domestic or export markets. It also seeks to define the scope of participation of investor parties in downstream infrastructure development (distribution) and marketing Fiscal framework that defines the value to be captured in each of the sub-sectors within the gas value chain Significant untapped gas resources and the growing importance of gas in the world energy mix both from environmental benefits and power generation (economic growth) makes it imperative for Nigeria to capture a stake in this important energy resource market. 26

27 The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. Developing a Sustainable Gas Economy: Fiscal Regime Capturing the full gas value chain (PIB) NHT + CITA CITA SECTION 39 PIB 27

28 The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. Developing a Sustainable Gas Economy: Fiscal Regime and Opportunities for Investment in the Nigerian Gas Sector Nigeria s Gas Sector Success Stories Tremendous progress has been made in the Gas Sector in the last few years Lack of infrastructure hitherto the major impediments to gas market development in Nigeria being handled Additionally, gas is being leveraged as the fuel to power Nigeria s economy through Power and industrial sector Proposed Gas Industrial Park to host fertilizer Plants, Polypropylene Plants, Methanol Plants etc. in focus. Regionally, the West African Gas Project (WAGP) to deliver gas to Benin, Ghana and Togo is operational Nigeria is growing LNG capacity rapidly, 3,000 th Cargo recently exported Windows of opportunities still exist for Brass LNG & OKLNG 28 Proposed Gas Based Industrial Park, Ogidigben

29 Investment - Key Drivers in Nigeria s Oil & Gas Industry Investment Drivers Favorable Fiscal Environment Key Opportunities Exploration & Production Activities Petroleum Industry Bill Huge Oil & Gas Reserves Supply Gap Gas Transportation and Storage LNG & Deepwater Projects Gas Infrastructure Expansion Projects Increased demand for E & P Service Companies Gas Industry Revolution Industry Transformation Development of Fertilizer & Petrochemical Plants 29

30 Investment Opportunities in Midstream 30

31 Gas Pipeline and Processing Infrastructure 31

32 Investment Opportunities Gas Pipeline Infrastructure & Processing Plants Gas Pipeline Infrastructure Pipeline Capacity Growth and Extensions: o Expand existing ELPS throughput capacity o New pipeline linkages from South to North o Inter-connector between East and Western grid o Connectors between domestic and export Gas Processing Plants Central Processing Facilities (CPF) o About 3-4 gas processing plants are required to support growth o Plants will be able to strip NGLs o Plants may be tolling / merchant plants or owned by the equity owners of the gas

33 Investment Opportunities Aggressive Gas Pipeline Infrastructure Expansion in Progress Oben- Geregu The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. Itoki - Pipeline Olorunshogo Permanent Gas Pipeline Ob/Ob Oben (Ob3) Pipeline Calabar-Ajaokuta & Planned Ajaokuta gas - supply Kano availability Pipeline Systems Imo River Alaoji Pipeline Expansion of Oben - Lagos Pipeline Expansion of Escravos Oben Pipeline 33

34 Investment Opportunities Gas Pipeline Infrastructure & Processing Plants 34

35 Gas to Power 35

36 Investment Opportunities Gas to the Wider Economy Increased Power Supply

37 Investment Opportunities Gas to the Wider Economy Increased Power Supply - Longer Term View

38 Gas to Industry 38

39 The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. Developing a Sustainable Gas Economy: Fiscal Regime Investment Opportunities Gas to the Wider Economy: Industrial Hub 3D Imagery of Proposed Gas Industrial City - Fertilizer, Petrochemicals, Methanol, Power, Gas Processing, Housing

40 Investment Opportunities Gas Based Economic Development for Nigeria 96 industries (across 470 sub-industries) Primary agriculture (8) Oil & Mining (7) Manufacturing (35) Services (46) 12 gas-consuming industries selected (out of 35 manufacturing industries) Excluded sectors that typically do not consume significant amounts of gas (total of 61 industries): Primary agriculture (8) Oil & Mining (7) 1 Services (46) Excluded manufacturing industries that do not required gas (total 21 industries), e.g.: Electronics industry Furniture manufacturing Equipment manufacturing Transportation equipment assembly Fabrics Industries across an industrial value chain have been clustered Glass & Glass products Paper (Pulp & Paper products) Iron & Steel products Food (Fertilizers; agroprocessing) Petrochemicals (Ethylene; Plastics; Rubber) Aluminum and aluminium products Methanol production Cement 1 Upstream gas use is excluded as not relevant for industrial development SOURCE: McKinsey analysis 40

41 The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. Developing a Sustainable Gas Economy: Fiscal Regime Investment Opportunities Gas to the Wider Economy: Industries 41

42 Gas to Petrochemicals 42

43 Investment Opportunities Gas for Petrochemicals-Value Chain The petrochemical cluster in Nigeria is comprised of traditional petrochemicals alongside finished plastic goods and rubber C2 chain Detailed in next page C3 chain C4 chain C5 chain A viable petrochemical industry would require inputs of Naphta from crude as well as LPGs from natural gas to function fully

44 Investment Opportunities Gas for Petrochemicals C O RPORATIO N Room for additional domestic supply capacity Ethylene Feedstock for plastics, rubbers, petchem 1 (000 s tonnes, industry) Potential demand Net Imports Current domestic production Feedstock as LPGs would require ~ t of butane or propane per t of ethylene Gas needs mmscfd Jobs, FTE Direct Total GDP impact $ mn Current Consumption <1 plant Consumption ~1 plant Consumption Example of a typical plant Capex, USDm Capacity mmtpa Gas needs mmsfcd Direct jobs FTE Time to build years 1bn-3bn USD, some projects dip below 1bn to 800 million Recent projects included: PE: kt/y Ethylene: kt/y HDPE: kt/y Aromatics: 500 kt/y LDPE kt/y MEG 550 kt/y A small/mid-sized ethylene cracker of 450kt/y would require mmscfd From Middle-East comparables, a 1bn USD cracker might employ people 2-4 years depending on size and complexity 1 Includes ethylene and inferred feedstock needed to replace plastic, rubber, and chemical imports by ethylene feedstock needs 2. Assumes average plant size is 450K mpta, no need for large dedicate natural gas feedstock as most would come from LPGs SOURCE: TECHNON, press clippings, expert interviews SRI; Team Analysis

45 Gas to Fertilizers 45

46 Investment Opportunities Gas to Fertilizer C O RPORATIO N Room for additional domestic supply capacity 1 Million tons, Urea fertilizer Potential demand Imports Current domestic production plants 90% capacity utilisation 2.4 Example of a typical plant Capex, USDm Capacity mmtpa Gas needs mmsfcd US$1.2bn US$1.8bn $1,200 per ton of annual capacity 1.0mm 1.5mm tons/annum MMSCFD Current Consumption 2015 Consumption 2020 Consumption 2 Gas needs mmscfd ~ Jobs, FTE Direct Total GDP impact $ mn ,650 +3,700 3,700 +7, , Direct jobs FTE Time to build years 1 Assumes that kg/ha urea usage increases from 21 kg/ha to 40 kg/ha in 2015, to 60 kg/ha in 2020, and that area harvested increases 20% by In a Green Revolution scenario, Nigeria would need 4.4mm tons per annum, or the equivalent of 4 new plants SOURCE: IFDC Africa Report, FAOStat as of 2009; Team analysis; Fertecon Limited (Nov 2009); Based on comparables direct jobs (regional avg.) 3,000 total jobs from bagging, marketing, and distribution 3-4 years

47 The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. Developing a Sustainable Gas Economy: Fiscal Regime Investment Opportunities Gas to Fertilizer-Value Chain C O RPORATIO N 47

48 Gas to LNG 48

49 Investment Opportunities Gas to LNG Source: NLNG 49

50 Investment Opportunities Gas to LNG Nigeria became an LNG exporter in 1999 and since then, LNG exports have rapidly grown to 22 MTPA to date. Nigeria s LNG strategy involved: Capture & retain global LNG market share (which was 10% in 2008) as part of our overall gas monetisation programme which consists of both domestic utilisation and export of gas. Prioritising LNG projects based on their global competitiveness to meet the international LNG marketing window Following the gas molecules to destination markets through distribution and marketing of gas in destination countries. Diversifying the market to supply and capture value in both Atlantic and Pacific basins Evacuate high cost deep offshore gas for export while utilising onshore and shallow water gas for the domestic market. 50

51 Impact of Job Creation from Gas Sector Opportunities 51

52 Gas Master Plan - Potential Job Creation & Import Substitution Opportunities

53 Gas Master Plan - Potential Job Creation & Import Substitution Opportunities (2) 53

54 Investment Opportunities Overview of job creation, GDP impact and import substitution potential of shortlisted clusters Gas supply Potential additional gas consumption to substitute imports (no export stimulation considered) Mmscfd, 2020e Glass Glass 10 Jobs multiplier jobs/mmscfd 1100 Additional total local employment 12, Potential additional total GDP impact GDP multiplier Job, 2020 $m/mmscfd $m, Paper Pulp & Paper , , Steel Iron & Steel , ,800 Fertilizer to food Fertilizers 104 Agro-processing (Corn) , , ,700 Petrochemicals Ethylene from LPGs Plastics downstream Rubber , ,000 75,000 35, ,000 1,550 Aluminum Aluminum smelting , ,000 Cement Cement , ,800 Methanol Methanol Pulp and paper industries gathered due to insignificance of current Nigerian pulp industry 2 Paper job multiplier 3 Corn milling most gas intensive agro-processing industry, local production only SOURCE: NNPC, US RIMS II Multipliers (2005), industry reports, expert interviews, MGI; McKinsey analysis 54

55 Investment Opportunities Nigerian Investment Landscape: The enabling environment for Oil and Gas investments Foreign Direct Investment (FDI) to Nigeria (US$M) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Top Ten FDI inflow in Sub - Saharan Africa (US$M) Nigeria South Africa Ghana Congo Mozambique Zambia Sudan Chad Congo DR Guinea 0 4,000 8,000 U p d a t e Nigeria has the highest FDI Inflows into Sub-Saharan Africa(SSA). Sub-Sahara Africa hosts many of the worlds most prolific and exciting petroleum basins. Spectacular exploration successes have raised expectations of transformational revenues in the past five years Nigeria has massive opportunities for growth and remains the investment destination of choice in Africa Source: 55

56 Concluding Remarks Nigeria is currently endowed with vast gas resources that can be used to propel industrialization along the same path that other gas resource-rich countries have followed. Fiscal regimes are some of the most critical factors to be considered for investment decisions and Government revenue expectation Proposed Gas fiscal system is anchored on the principle of sustainability that will stimulate participation of new players and ensure that government revenues are aligned with expenditure in the sector for broader economic growth & development 56 Government's aspirations for the gas sector include creating new industries out of the old oil industry; capturing economic value and generating as much revenue from gas as from oil Tremendous progress has been made in the Gas Sector in the last few years with the Gas Master Plan, Gas to Power and Gas to Industry as articulated under Mr. President s Agenda. The Gas Sector of the Nigerian petroleum industry is attracting new players which will increase competition and stimulate more gas supply and utilization system in Nigeria Nigeria has massive opportunities for growth and remains the investment destination of choice in Africa

57 Thank You