The Nigerian Energy Challenge

“All that gas and nowhere to go”

An Insights Feature from David Simonson, Managing Partner

Nigeria has a gas problem. It has a lot of gas. But it has very little pipeline infrastructure to take it anywhere. At the same time it has the largest population in Africa, but only a minority have access to the energy grid. And of those who do, the majority suffer from recurrent black-outs and interruptions. However, with big problems come big opportunities.

A few facts illustrate the scale of the challenge. Only 14% of the country’s gas production reaches the domestic market with the majority being exported, flared or used in E&P. The country’s current inability to monetise gas has resulted in Nigeria becoming the second largest gas-flaring nation in the world behind Russia. Nigeria flared 14.6 billion cubic metres of gas in 2011, equating to over 20% of gas production. This is roughly equivalent to twice the gas demand of Italy in 2013 and accounts for 10% of the total amount flared globally (World Bank; Edison). Nigeria currently has 2,000km of gas pipelines installed, compared with 28,000km in the UK. With domestic access to gas and broader energy supply limited, noisy, polluting diesel generators have become a part of everyday life in the country.

Whilst the blame for this state of play can be laid at the door of central government and to some extent the international oil and gas majors who have failed to invest in the mid-stream, there are signs that change is in the air with recent political commitment to the issue and a new generation of home-based entrepreneurs ready to take on the challenge.

In August President Goodluck Jonathan opened the new $550 million Uquo Gas processing facility in Esit Ekit, one of the first steps in addressing the infrastructural issues. At the same time he made a public commitment to make gas flaring in Nigeria a thing of the past by 2020. The builders of the Uquo facility, Seven Energy and Frontier Oil, are good examples of the new generation of energy independents who have spotted the opportunities to kick-start development of the midstream. Others leading the charge are Century Group, Oando and Seplat, all of whom are either addressing domestic supply, constructing gas processing facilities or are involved in building the pipeline network.

There has simultaneously been an uptick in institutional investment in this opportunity – Temasek, the Singapore sovereign wealth fund, recently took a $150 million stake in Seven Energy. Blackstone and Carlyle also recently announced multi-billion dollar commitments to invest in sub-Saharan and Nigerian energy needs.

With the Nigerian elections just around the corner in 2015, energy supply will be an important campaigning issue. If the Nigerian government can live up to its stated support for a gas revolution the mid-stream gas market should offer attractive long-term returns for Nigeria’s new generation of entrepreneurs and the braver international investors.