At $30m Drilling Cost Per Gas Well, Operators Push for Review of Fiscal Policies in Sector

Peter Uzoho

Nigeria’s quest to increase its gas production and utilise the natural energy product to pursue its industrialisation and development agenda  appears to be a mirage with the cost of drilling a gas well ballooning to as high as $30 million due to increasing fiscal burdens and other disincentives to the operators.

Operators under the aegis of the Nigerian Gas Association (NGA) raised the concern yesterday, in Lagos, at a one-day media parley and training session for energy reporters.

The lamentations by oil and gas industry operators in Nigeria over unbearable fiscal constraints, regulatory misalignment and other operational challenges have refused to settle despite the enactment of the Petroleum Industry Act (PIA) over two years ago.

Successive governments had taken several initiatives to unlock the potentials of the country’s vast gas resources through increasing gas production for both domestic use and export for foreign exchange earning. The recent of such initiatives and policies were the declaration of 2021 to 2030 as Nigeria’s Decade of Gas, the launch of the Autogas Policy, the National Energy Transition Programme as well as the declaration of 2060 as Nigeria’s NetZero target among others.

The current President Bola Tinubu, recently gave further impetus to the Autogas policy with the funding supports to activate the roll out of Compressed Natural Gas (CNG) vehicles to deepen the adoption of gas as a cleaner source of fuel for transportation, a move intended to cushion the adverse effect of high transportation cost.

Lack of attractive fiscal terms to encourage producing companies to invest in drilling large gas wells and bring large volumes of gas to the surface has become a big encumbrance to the country’s aspiration to use its gas resources to attain industrialisation and socio-economic development.

Nigeria is endowed with abundant natural gas, with over 206 trillion cubic feet (TCF) proven gas reserve waiting to be brought to the surface and over 600TCF still yet to be proven which requires investments to unlock.

However, highlighting the challenges at the session, the Chair of Study Group on Diversity, Equality and Inclusion, NGA, Chichi Emenike, urged the federal government to urgently review the fiscal terms in the PIA to encourage investment into the gas sector.

Haven spent over 25 years in the Nigerian oil and gas industry, Emenike, who is the Head of Gas Ventures at Neconde Energy Limited, operator of the Oil Mining Lease (OML) 42,  said companies need money to bring out the gas from the ground.

Also explaining that operators need funding to invest in infrastructure to distribute that gas, she insisted that the fiscal terms must be good enough to attract the needed investment.

 “You have a challenged economy. You have FX issues. You have gas you are selling in naira. You have a government that tells you that you have to do domestic supply obligations. We are talking of multiple taxation,” she said.

She criticised the multiple taxes and fees being imposed on the operators by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA).

Emenike stated, “Today, you have DPR (Department of Petroleum Resources) that has been split into NUPRC And NMDPRA.

“The gas business is a value chain.  So, from that upstream all the way to downstream, you still have to repatriate what you have invested from upstream (down to the other chains).

“Now, if the chain is broken anywhere like you see most times, I have gas that I have supplied two, three years ago, I don’t even have the money for it. What do I tell my partners?

 “Today, at the upstream where I operate in the heart of the Niger Delta, to drill one gas well, it’s about $30 million. Now, when you bury that money in the ground, of course, you have your plus or minus what your reservoirs are telling you, or you do all your work and to a great extent estimate your volumes, you bring it up, you need infrastructure.”

She also expressed  displeasure with the current regulated pricing regime for gas, which allows the  government to set prices rather than introducing a market-based pricing regime that would allow producers to sell their gas to the willing offtakers.

While welcoming the current government’s focus on Autogas, she advised that Nigeria should refrain from looking at gas from a rent-seeking perspective and think of how to use it to transform the country.

“Unfortunately, all the fiscal’s that we are talking about, and that is where the real economics is.

“There are so many taxes, royalties. So, how do you cope with your investors and then how do you repatriate those funds? It’s a good resource. And when you travel to the rest of the world and you see the development they have done with resources they’ve taken from us, you just wonder what are we doing?”, Emenike added.

Earlier in his remarks, the President of NGA, Mr. Akachukwu Nwokedi, urged the federal government to begin an immediate and critical review of the PIA after wide stakeholder engagement and consultation to address impediments hindering investment and ease of doing business in the gas sector.

The NGA president, who is the General Counsel and Company Secretary of the Nigeria Liquefied Natural Gas Limited (NLNG), acknowledged the PIA’s enactment in 2021 as a welcome development that provides regulatory clarity for the petroleum sector and specific provisions for the gas industry.

 He also commended the fiscal aspects of the law for its potential to transform the gas sector.

However, Nwokedi emphasised the need for a swift review of the PIA to address gaps currently hindering the gas sector’s growth.

He listed those gaps as the multiplicity of taxation within the PIA, noting that such taxation requirements increase the cost of doing business and, in some cases, result in higher end-user gas prices, reducing the attractiveness and rapid adoption of natural gas.

Nwokedi, said another critical issue posing a challenge to the operators was the requirement to pay royalties, fees, penalties, licenses, and permits in the United States dollars without providing a naira payment option.

He said while the oil and gas industry was internationally denominated in dollars, the NGA suggests that allowing payments in naira equivalent would help alleviate pressure on the Nigerian currency, especially in this period of extreme FX fluctuations.

He further said, “The need to develop Commercial & Fiscal terms for Gas development (offshore and deepwater), to propel competitive investment. There is also the need to review the Fiscal Incentives and develop Commercial & Fiscal terms for Gas development (offshore, deepwater and across the value chain), to propel competitive investment. This will boost and sustain gas supply to meet the nation’s needs.”

 Nwokedi emphasised the crucial role the NGA plays in advocating for the Nigerian gas industry, promoting new investments, protecting industry interests, and facilitating a just energy transition.