Using natural gas to meet latent energy demand in Nigeria and deliver economic advantage

Abstract

Nigeria was ranked second worst country in terms of gas flaring, its domestic energy demands keep increasing in the wake of inadequate alternative cleaner (compare to oil) energy sources like natural gas. This is why Nigerian gas master plan was proposed to develop the natural gas for domestic utilization. Consequently, this research studied the economics of different gas development projects that Nigeria can develop to meet latent energy demands and achieve the objectives of the gas plan. It also assessed the relationship between domestic gas consumption and real economic growth in the country. The research used gas pipeline models that already exist in literature to analyse the investment cost, gas deliveries as well as costs and benefits of six possible gas pipeline routes options in the country. The BSRO pipelines route option was found to be more viable and estimated to have an annual gas delivery of 37.25 bcm, investment cost of $1.15 billion, NPV of $2.43 billion, IRR of 50.38%, payback period of 2.60 years for forty years of operation. However, in terms of coverage and ability to supply more gas to more locations, the all gas pipeline route option is more recommendable. The pipelines are more sensitive to discount rate, cost of gas transportation and capacity. Other gas pipeline routes options are also viable except the NRO gas pipelines, and it is recommended not to consider this option alone, even in the future, the best recommendation is to combine it with the BRO pipelines option. Costs and benefits analysis of two other gas development projects (CCGT and GTL plants) were presented using net present value, internal rate of return and payback period accounting methods, and CCGT project was found to be viable and GTL project not viable in the country. Even though GTL project was found to be unviable at the market scenarios in the country, incentives are recommended to attract investment for this important gas development project. Both projects are more sensitive to their product prices. To analyse the effect of gas development on the country’s economy, an ARDL bound cointegration test, impulse response functions, variance decompositions and granger causality econometric methods were used in two different model specifications. The first model specification added real capital formation and real exports, and found no cointegration among the specified variables. However, it was found that among these variables, gas consumption has more influence to the movements in the real GDP than the other variables. Gas consumption is found to be highly and positively responsive to its own innovation, which means direct iii investment in the sector can result to significant improvement in the gas consumption in the country. However, in the second model specification, where oil production, gas consumption and real GDP were used, cointegration was found, and positive and significant long run relationship was found between gas consumption and real economic growth, where a persistent 1% increase in domestic gas consumption in the long run causes 2.89% increase in real economic growth in the country. It was also found that the country is likely to be facing the economic problem of resource curse due to the potential adverse effect of crude oil production on real GDP, even though this is not statistically significantly justified. The research also found that gas consumption cannot predict real economic growth in Nigeria and vice versa as both variables are independent of each other at the current trend. However, if gas flaring is stopped, and more investment as well as further infrastructures are provided in the gas sector in the country, the gas sector can then start to feed in more to the economic productivity, and thereby making the economy dependent on the gas sector eventually due to continues increase in gas consumption, and then the significant link between gas consumption and economic growth can be actualised. In addition, direct investment in gas development can lead to high positive impact on the gas consumption as discovered in this research. Natural gas should be supplied to residential and commercial sectors to stimulate more domestic gas demand through gas pipelines, CCGT and GTL. The country’s economy should be diversified to tackle the likely problem of resource curse. The findings of this research further justified the Nigeria gas master plan’s objective and serves as an academic guide toward actualizing and extending the objective of the plan in the country.