Natural Gas Utilization through Domestic Gas Consumption in Nigeria

Natural Gas Utilization through Domestic Gas Consumption in Nigeria Onwukwe S. I, Duru U. I and Ikpeka P.M. Department of Petroleum Engineering, Federal University of Technology, Owerri, Nigeria Email: mooremsi1@gmail.com ABSTRACT There has been persistent effort by the government and the operating oil companies to develop gas infrastructure in Nigeria. These have led to the steady reduction in gas flares in the oil producing areas. If the country is to practically eliminate gas flaring by 2020 when it envisage to be among the twenty developed country in the world (Vision 202020), then further avenues of gas utilization should be explored. This paper therefore examines the feasibility and technical aspects of increasing the domestic gas consumption through effective transmission and distribution of natural gas to indigenous local consumers. Assumed case study of natural gas distribution from an oil field of Izombe to Urban city of Owerri, Imo State, was also analyzed for economic viability. 1 Introduction Nigeria, with a population exceeding 150million people, has the largest natural gas reserves in Africa. Its natural gas reserves are estimated to be twice its crude oil reserves. According to the Department of Petroleum Resources (DPR) (2003), the regulator of the Nigerian petroleum industry, Nigeria s current proven natural gas reserves are estimated at 124 tcf. The estimated proved plus probable reserves are 158 tcf and a combined total of proved, probable and possible reserves are 300 tcf. Experts estimates that the reserves locked in the Nigerian soil is enough to last as long as 500 years, fuelling her industries, homes and international airports [Ogbe, Emmanuel (2010)]. Prior to 1999, exploration for gas in Nigeria was limited and much of the gas flared. Egbert (Egbert, 1998) noted that about 1000 scf of gas is produced with every barrel of oil. Although, approximately 42.6% of the associated gas was flared in 2004 versus 70% in 1999, Nigeria flares more gas than any other country in the world except Russia (Table 1). Recognizing the huge financial loss resulting from the flaring of associated gas and the resultant environmental damage, the Government of Nigeria promulgated the Associated Gas Re-injection Act and the Associated Gas Re-injection (Amendment) Act in 2004, which obligated all oil producing companies in Nigeria to submit detailed plans for gas utilization. The Government s target is to attain zero flaring by 2008 in order to reduce pollution and monetize its gas reserves. Unfortunately, this target was not met. 1

Table 1: World Bank GGFR 2011; Top Twenty Gas Flaring Countries Volumes in bcm 2007 2008 2009 2010 2011 Change from 2010 to 2011 Russia 52.3 42.0 46.6 35.6 37.4 1.8 Nigeria 16.3 15.5 14.9 15.0 14.6-0.3 Iran 10.7 10.8 10.9 11.3 11.4 0.0 Iraq 6.7 7.1 8.1 9.0 9.4 0.3 USA 2.2 2.4 3.3 4.6 7.1 2.5 Algeria 5.6 6.2 4.9 5.3 5.0-0.3 Kazakhstan 5.5 5.4 5.0 3.8 4.7 0.9 Angola 3.5 3.5 3.4 4.1 4.1 0.0 Saudi Arabia 3.9 3.9 3.6 3.6 3.7 0.1 Venezuela 2.2 2.7 2.8 2.8 3.5 0.7 China 2.6 2.5 2.4 2.5 2.6 0.1 Canada 2.0 1.9 1.8 2.5 2.4-0.1 Libya 3.8 4.0 3.5 3.8 2.2-1.6 Indonesia 2.6 2.5 2.9 2.2 2.2 0.0 Mexico 2.7 3.6 3.0 2.8 2.1-0.7 Qatar 2.4 2.3 2.2 1.8 1.7-0.1 Uzbekistan 2.1 2.7 1.7 1.9 1.7-0.2 Malaysia 1.8 1.9 1.9 1.5 1.6 0.2 Oman 2.0 2.0 1.9 1.6 1.6 0.0 Egypt 1.5 1.6 1.8 1.6 1.6 0.0 Total top 20 132 124 127 118 121 3.1 Rest of the world 22 22 20 20 19 (1.1) Global flaring 154 146 147 138 140 1.9 level Source: World Bank; NOAA Satellite data, estimated gas flaring for 2011 Natural gas is a clean, versatile fuel with abundant reserves in Nigeria, and for these reason, it is often a good substitute for other fossil fuel. The challenge is in the absence of adequate infrastructure and effective transmission and distribution network system to facilitate domestic gas utilization within the country, which can significant reduction the amount of gas been flared, thereby resulting to reduction in environmental pollution and increased revenue from the monetize gas reserves. 2

For significant reduction of gas flaring in Nigeria, new market for natural gas should be explored. The key to achieving this lies in encouraging investors to independently own and operate natural gas distribution systems. These investors would purchase natural gas from the Nigeria Gas Company (NGC) at various city gates and distribute same through pipeline to individual home for commercial consumption. Harnessing gas through the domestic front via gas distribution network system is been considered in the paper. 2. Natural gas utilization projects Several gas projects are currently operational in Nigeria, some of them are: 2.1. Nigeria LNG (NLNG) project A joint venture project between NNPC (49%) Shell Gas BV (25.6%), Totalfinaelf LNG Nigeria ltd (15%) and Agip International BV (10.4%). The plant employs 5 parallel units, which consume about 2.5 bcf/day of gas while producing 16.7 million metric tons of LNG for export. 2.2. Escravos gas gathering project This is a joint venture project between NNPC (60%) and Chevron Texaco (40%) to recover associated gas from offshore fields. The Escravos Gas-to-Liquid (EGTL) plant is expected to produce 34,000 barrels per day of GTL diesel, GTL naphtha and a small amount of Liquefied Petroleum Gas (LPG). 2.3. Oso NGL project This is an NNPC (49%) and ExxonMobil (51%) joint venture project that converts associated wet gas into natural gas liquid (NGLs). This project produces about 50,000 barrels per day of NGL. 2.4. West Africa gas pipeline project The project is a joint venture between chevron Texaco, Shell, NNPC, Nigeria Gas Company (NGC,) Societe Beninoise de Gas, Societe Togolaise de Gas, and Ghana s National Petroleum Corporation for the extension of the existing Escravos-to-Lagos pipeline to Takoradi, Ghana. The total length of the pipeline is 1.033 km. The ultimate capacity is estimated to be 580 mmcf per day with additional compression at Lagos and Lome. The pipeline is expected to deliver gas to Benin, Ghana and Togo. 3. Domestic gas demand The power sector is the single largest consumer of natural gas in the domestic market. It is estimated that about 80% of natural gas utilized in Nigeria is consumed annually by Power Holding Company of Nigeria PLC and Independent Power Producers. The remaining 20% is utilized as industry fuel in the cement, fertilizer, rubber, manufacturing, aluminum and steel industries. Recent aggregate level of demand in these dominant sectors is summarized in Table 2. It is expected that domestic gas demand will grow from less than 500 MMCFD to 1800 MMCFD by 2010 and almost 3

4800 MMCFD by the year 2020. The current domestic gas demand is estimated at about 1800 MMCFD. This demand estimates includes about 1400 MMSCFD for power generation while the remainder is concentrated in a small number of other sectors by a few consumers. Table 2: Domestic Gas Demand in Nigeria (MMSCFD) Utilization Year 2000 Year 2010 Year 2020 Power 225 1390 3770 Cement 25 82 275 Fertilizer 70 80 172 Aluminum 15 39 102 Iron and Steel 02 15 129 Others 86 200 358 Total 423 1806 4806 Source: DPR Report [1] The limited natural gas utilization in Nigeria is due to her low level of industrialization coupled with the current importation of liquid distillate fuel to sustain the high demand for liquid fuels. This sets the scenario for the prospect of effective transmission and distribution network system as a means of a sustainable domestic gas utilization option. Domestic gas utilization option seeks to bring gas to the door steps and homes of commercial and domestic consumers respectively. The vast potential in the domestic gas energy consumption will contributes to the elimination of flared gas and reduces the country s over-dependence on imported refined petroleum products. 4. Gas Transportation Network The Nigeria gas sector services include production, transmission, distribution and sales of natural gas. Gas is transported mainly through a pipeline network. Gas transportation is divided into two classes: transmission and distribution. Transmission of gas means moving a large volume of gas at high pressures over long distances from a gas source to distribution centers. In contrast, gas distribution is the process of routing gas to individual customers. For both transmission and distribution networks, the gas flows through various devices including pipes, regulators, valves, and compressors. The focus of this study is limited to transmission and distribution networks. 4.1 Gas Distribution The transport of natural gas from a gas flow station to homes and businesses mainly requires an extensive network of interconnected pipelines designed to move natural gas quickly and effectively, sometimes over great distances. There are essentially three main types of transportation pipelines: gathering pipelines, transmission pipelines, and distribution pipelines. 4

Figure 1: Natural gas transportation system showing vital installations. (Mokhatab et al 1999) Figure 1 show that natural gas produced from wells can be collected through a series of lowpressure pipelines referred to as a gathering system and in turn processed to the city gate from where it can be distributed to large volume, residential and commercial consumers. From the transmission pipelines, the gas flows into a low-pressure distribution system. Local natural gas distribution pipelines are usually smaller in diameter than natural gas transmission pipelines and many are constructed out of plastic rather than steel. They consist of smaller service lines that are normally installed underground, usually along or under streets and roadways. The initial condition of the gas from the wellhead determines to a large degree the type and extent of processing undertaken before transmission to the city gate, from where the gas can be distributed to residential and commercial consumers. Thus a gas containing; free liquids such as crude oil, water and condensates, condensable hydrocarbon vapors, water vapor, undesirable components such as hydrogen sulfide, carbon dioxide etc., would require a more complex processing in order to meet sales gas specifications. 5

5. Proposed Case Study This study considered the transmission and distribution of natural gas from Izombe oil field to an adjoining city of Owerri, of about 35 km from the oil field, both located in the south eastern part of Nigeria. Figure 2 shows key locations of the network area. Figure 2: Proposed transmission pipeline from Izombe to City Gate Station(Owerri). {Google maps} The purpose of city gate station is to bring the gas to the door-step of the consumers; meter gas volume delivered; control pressures by regulation; and introduce the proper quantity of odorant into the gas stream. Proper selection of the capacity and location of city gate stations depends on the overall storage and distribution-system design. A city gate station must be designed carefully. It is the source of supply to the distribution system and the cash register for the local utility gas purchase. 6

6 ECONOMIC ANALYSIS There is no concrete infrastructure established for any potential gas distribution project in the considered region. However the model adopted for this study entails numerous hypothetical assumptions to cover uncertainties arising from the various risk factors associated with gas distribution project economics. Table 3 through 7, shows hypothetical assumption made In order to develop a cash flow analysis for economic evaluation of a case study of domestic gas distribution project of an optimum annual gas throughput of 1.07 MMscf. The cash flow assumed project construction and equipment installation period of 5 years and a project life of 20 years. The gas price is put at $5.96 per Mscf 6.1 PROJECT COSTING The project costing is subdivided into Capital Expenditure (CAPEX) cost and Operating Expenditure (OPEX) cost. Looking at the design overview shown in figure 1, the capital expenditure for this project is further broken down into Pipeline construction cost (both transmission and distribution) and City gate station costs. 6.2 Pipeline Construction Cost Pipeline construction costs are broken into four major categories; Material cost, Labor cost, right of way cost and miscellaneous cost. 6.2.1 Material cost: This refers to the actual pipeline cost per inch diameter per mile. The material cost of this project can be estimated using an equation given by Parker (2004). The average percent error is 31.4%. Material Cost [Diameter, Length] = [330.5(Diameter) 2 + 687(Diameter) + 26960] (Length) + 35,000 Where; Diameter is in inches, Length is in miles, and Cost is in dollars. Table 3: Summary Pipeline Material Cost Pipeline diameter, inches Length, mile Material Cost, $ 16 21.75 2,700,680 1,852,666 12 24.23 2,041,147 1,400,227 8 27.96 1,533,880 1,052,242 Total 73.94 6,275,707 4,305,135 Material Cost - Error Allowance (31.4%), $ 7

6.2.2 Labor Cost: The labor cost is the largest portion of the total construction cost, on average 40 to 50 percent. The labor cost represents the cost associated with human effort and expertise. The labor cost is estimated using the equation given by Parker (2004): Labor Cost [Diameter, Length] = [343(Diameter) 2 + 2,074(Diameter) + 170,013] (Length) + 185,000 The average percent error is 49.4%. Table 4: Labor cost summary Pipeline Diameter, Inches Length, Mile Labor Cost, $ Labor Cost - Error Allowance (49.4%), $ 16 21.75 6,154,359 3,114,106 12 24.23 6,104,219 3,088,735 8 27.96 6,016,254 3,044,225 Total 73.94 18,634,832 9,429,225 6.2.3 Right of Way cost: This represents the cost associated with pipeline route selection, Compressor/Regulator and City Gate Station locations. Parker s equation for determining the right of way cost is used and is given as; Right of Way Cost [Diameter, Length] = [577(Diameter) 2 + 29,788] (Length) + 40,000 The average percent error is 83.6%. Table 5: Summary of Right of Way cost Pipeline diameter, inches Length, mile Right of Way Cost, $ 16 21.75 3,900,625 639,703 12 24.23 2,774,985 455,096 8 27.96 1,905,379 312,482 Total 73.94 8,580,989 1,407,282 Right of way Cost - Error Allowance (83.6%), $ 6.2.4 Miscellaneous Cost: Miscellaneous costs are all costs not included in labor, material, or right of way. They generally include surveying, engineering, supervision, contingencies, allowances, overhead, and filing fees. The miscellaneous cost is estimated using the equation given by Parker (2004): Miscellaneous Cost [Diameter, Length] = [8,417(Diameter) + 7,324] (Length) + 95,000 8

Table 6: Summary of Miscellaneous cost Pipeline diameter, inches Length, mile Miscellaneous Cost, $ 16 21.75 3,183,413 1,317,933 12 24.23 2,719,787 1,125,992 8 27.96 2,182,494 903,553 Total 73.94 8,085,694 3,347,477 Miscellaneous Cost - Error Allowance (58.6%), $ Total cost of Pipeline construction = Labor cost +Material Cost + Right of way cost + Miscellaneous cost Total cost of Pipeline construction = $9,429,225 + $4,305,135 + $3,347,477 + $1,407,282 6.3 City Gate Station Cost = $18,489,119 The purpose of city gate station is to meter gas volume delivered, control pressures by regulation and introduce the proper quantity of odorant into the gas stream. Table 7: Hypothetical cost of building a CGS Description Cost, $ Land 4,500,000 Mechanical 2,000,000 Instrument 6,000,000 Electrical 1,500,000 Fire fighting system 500,000 Any other item 2,000,000 Total 16,500,000 Source: Natural Gas Pipeline Development in Asia specific, April 2000. Total Capital Expenditure = City Gate Station Cost + Pipeline Construction Cost Assumptions: Interest rate 20% Tax rate 30% = $16,500,000 + $18,489,119 = $34,989,119 9

5 years equipment installation period Table 8: CAPEX Outlay Schedule for project Years Supply Build Up CAPEX OUTLAY SCHEDULE PIPELINE, % CITY GATE STATION, % 1 25% 10 10 2 50% 25 25 3 75% 30 30 4 85% 20 20 5 100% 15 15 6.4 OPERATING EXPENDITURE, OPEX This includes all expenses incurred in the course of the daily running of the plants. Typically, it consists of the fuel costs to power the stations, pipeline maintenance cost, and equipment maintenance cost. For the purpose of this analysis a fixed operating expenditure of $200,000 per year is assumed. Please note that this is an estimated from Natural gas Pipeline Development in Asia specific, April 2000. Summary of project costing Gross Revenue = Gas Sales Unit Price of LPG NCR = Revenue (CAPEX +OPEX +TAX) Price of gas @ City Gate Station = $5.96/MCF CAPEX Capital Expenditure, OPEX Operating Expenditure, NCR Net cash recovery 10

6.5 CASH FLOW ANALYSIS YEAR ANNUAL GAS SALES,MMSCF REVENUE, $1000 TAX, $1000 CAPEX, $1000 OPEX, $1000 NCR, $1000 0 0 0 0 3498.9 0-3498.9 1 0 0 0 8747.3 0-8747.3 2 0 0 0 10496.7 0-10496.7 3 1000 5960 1788 6997.8 140-2965.8 4 2000 11920 3576 5248.4 180 2915.6 5 3000 17880 5364 0 200 12316 6 3300.5 19670.98 5901.294 0 200 13569.686 7 3300.5 19670.98 5901.294 0 200 13569.686 8 3300.5 19670.98 5901.294 0 200 13569.686 9 3300.5 19670.98 5901.294 0 200 13569.686 10 3300.5 19670.98 5901.294 0 200 13569.686 11 3300.5 19670.98 5901.294 0 200 13569.686 12 3300.5 19670.98 5901.294 0 200 13569.686 13 3300.5 19670.98 5901.294 0 200 13569.686 14 3300.5 19670.98 5901.294 0 200 13569.686 15 3300.5 19670.98 5901.294 0 200 13569.686 16 3300.5 19670.98 5901.294 0 200 13569.686 17 3300.5 19670.98 5901.294 0 200 13569.686 18 3300.5 19670.98 5901.294 0 200 13569.686 19 3300.5 19670.98 5901.294 0 200 13569.686 20 3300.5 19670.98 5901.294 0 200 13569.686 Total 55507.5 330824.7 99247.41 34989.1 3520 193068.19 The cash flow considered for this gas transmission project is based on the assumption that it took 5yrs for full production to begin. The Cash flow analysis was prepared in an excel worksheet as shown in table above. 11

6.6 PAY OUT PERIOD Payout is an absolute indicator that tells how long it takes to earn back the initial investment i.e. the payout occurs when the cumulative net cash recovery goes positive. To estimate the payout of our pipeline transmission project, we tabulate the values of NCR against year. YEAR NCR, CUMMULATIVE NCR, $1000 $1000 0-3498.9-3498.9 1-8747.3-12246.2 2-10496.7-22742.9 3-2965.8-25708.7 4 2915.6-22793.1 5 12316-10477.1 6 13569.686 3092.586 7 13569.686 16662.272 8 13569.686 30231.958 9 13569.686 43801.644 10 13569.686 57371.33 11 13569.686 70941.016 12 13569.686 84510.702 13 13569.686 98080.388 14 13569.686 111650.074 15 13569.686 125219.76 16 13569.686 138789.446 17 13569.686 152359.132 18 13569.686 165928.818 19 13569.686 179498.504 20 13569.686 193068.19 TOTAL 193068.19 1373738.92 From chart 4.2, it can be deduced that the payout period for this project would be in approximately 5years 9months and 8days. 12

CUMMULATIVE NCR, $1000 250000 200000 150000 100000 50000 0-50000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 CUMMULATIVE NCR, $1000 Figure 1- Chart of NCR vs Year 6.7 DISCOUNTED CASH FLOW RATE OF RETURN METHOD YEAR NCR, $1000 PV, 5% PV, 10% PV, 15% PV, 20% PV, 35% 0-3498.9-3498.9-3498.9-3498.9-3498.9-3498.9 1-8747.3-8330.76-7952.091-7606.3478-7289.417-6479.481 2-10496.7-9520.82-8674.959-7937.0132-7289.375-5759.506 3-2965.8-2561.97-2228.249-1950.0616-1716.319-1205.426 4 2915.6 2398.671 1991.394 1667.00376 1406.0571 877.79452 5 12316 9649.908 7647.267 6123.22867 4949.5242 2746.6343 6 13569.686 10125.91 7659.734 5866.54973 4544.4604 2241.6468 7 13569.686 9643.722 6963.3945 5101.34759 3787.0503 1660.4791 8 13569.686 9184.498 6330.3587 4435.95442 3155.8753 1229.9845 9 13569.686 8747.141 5754.8715 3857.35167 2629.8961 911.09965 10 13569.686 8330.61 5231.7014 3354.21885 2191.58 674.88863 11 13569.686 7933.914 4756.0922 2916.71204 1826.3167 499.91751 12 13569.686 7556.109 4323.7201 2536.27134 1521.9306 370.30926 13 13569.686 7196.294 3930.6547 2205.45334 1268.2755 274.30316 14 13569.686 6853.614 3573.3224 1917.78551 1056.8962 203.18752 15 13569.686 6527.251 3248.4749 1667.63958 880.74687 150.50928 16 13569.686 6216.43 2953.159 1450.12137 733.95572 111.48835 17 13569.686 5920.409 2684.69 1260.9751 611.62977 82.583966 18 13569.686 5638.485 2440.6273 1096.50009 509.69147 61.173308 19 13569.686 5369.986 2218.7521 953.47834 424.7429 45.313561 20 13569.686 5114.272 2017.0474 829.1116 353.95241 33.565601 TOTAL 193068.19 98494.77 51371.062 26247.3803 12058.57-4768.435 13

REVENUE PRESENT VALUE, $1000 DCF-ROR = 30.7% DCF-ROR PLOT 120000 100000 80000 60000 40000 20000 0-20000 5 10 15 20 35 DISCOUNT RATE, % PRESENT VALUE, $1000 6.8 REVENUE YEARLY REVENUE, $1000 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 YEAR REVENUE, $1000 14

Expenses, $1000 6.9 YEARLY EXPENSES YEARLY EXPENSES 12000 10000 8000 6000 4000 2000 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year TAX, $1000 CAPEX, $1000 OPEX, $1000 7 TECHNICAL FEASIBILITY OF THE PROJECT Technical feasibility of the project is established since the gas reserves at the various wells in Izombe field are sufficiently capable of meeting the gas demand for transmission over the next 20years. Also the gas inlet pressure available is more than enough to take the gas through the network to the various district regulatory stations. Furthermore, the gas properties at the field are quite moderate and require very little conditioning to meet sales gas specification. 8. ECONOMIC VIABILITY Results from economic analysis carried out in section 6 reveal that; Net cash recovery = $ 193,068,190 Profit per dollar invested = 5.518 Payout = 5years 9months and 8days Net present value = $26,247,380.3@ 15% Discounted cash flow rate of return = 30.7% The value of $193,068,190 for the NCR indicates that a total of $193,068,190 would be recovered after all expenses and cost has been incurred. It also tells us that a profit of $115,475,170 would be made on an investment of $34,989,119. 15

Profit per dollar invested as an economic indicator reveals that for each dollar invested into this project, an equivalent of $5.518 is made. This further explains how commercially viable the project is. Also, it takes 5years and 9months, which is less than half the projection year, to recover the initial expenses. A positive net present value as shown above indicates that the project is economically viable and in fact should be undertaken. The DCF-ROR value is the interest rate which discounts all net present values of a project to zero. Current bank lending rate stands at 16%, whereas the DCF-ROR value is at 30%. Thus the project is viable since the DCF-ROR value is greater than the current bank lending rates. 9. CONCLUSION The benefits of natural gas to our economy are quite numerous to mention. Market surveys and other areas of study have shown that there is a potential market for natural gas and its versatile products in Owerri. The result of this work shows that a large potential market exists for investors in the area of gas distribution in Nigeria. 16

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