INTRODUCTION
Energy is at the core of human existence. It is also the pillar of wealth creation.
As such, modern society cannot seriously address issues of development if such
consideration is not based on the foundation of effective energy planning and
management that enhances optimal utilization, regular supply and availability
of energy resources. Humans have been aware of the natural flammable gases from
the earth for at least several thousand years. Gas was not used extensively
as a fuel source until the nineteenth century. Although, natural gas was used
as early as 1821 to illuminate the town of Fredonia, New York; its widespread
use in the United States awaited the rise of the petroleum industry (Barnes
et al., 2006).
Nigeria is richly endowed with energy resources. These include coal, tar sand,
oil, natural gas, hydroelectricity, solar and so on. The commercial energy sector
is, however, dominated by oil and gas, both of which jointly account for 71%
of commercial domestic energy resources (Iwayemi and Adenikinju,
2001). Thus, oil and gas play significant role in the development of the
Nigerian Economy.
Oil production has been going on in Nigeria for over 50 years together with
the production of natural gas. Associated gases are routinely flared in the
course of producing and processing oil. Flaring is a means of safely disposing
of waste gases through combustion. This is carried out with an elevated flare
through the top of a pipe or stack where the burner and igniter are located.
This is a common practice in the oil production process. Hence, it is not necessarily
an ecological or social crime to flare gas. However, the Nigerian case attracts
more attention given the volume of gas flared since the beginning of commercial
oil production in the country (Evoh, 2002). Traditionally,
most oil companies do not like to find gas together with their oil Fields-Associated
Gas (AG). Rather, they prefer to find gas without it being mixed up with oil-so
called non-associated gas (non-AG). Finding AG means they have to find ways
to dispose of it in order to profit from the oil, the lucrative driver. But
while AG flaring has been increasingly frowned at in most parts of the world,
in Nigeria it has flourished. Hence, Nigeria is reputed to be among the largest
gas flaring country in the world. Therefore, understanding the sustainability
and economic impact of gas utilization have become areas of critical studies;
related to these is the government effort towards ending gas glaring. These
are the objectives of this study vis-à-vis the Nigerian experience.
This is more so because natural gas is rapidly gaining importance both as a
source of energy and as a feedstock for industry. This growth is being driven
by a number of factors including:
| • |
Growing energy demand from an expanding world economy |
| • |
An abundant resource base |
| • |
Environmental pressures for the use of gas which is a relative “clean”
fuel in comparison to oil or coal |
| • |
Improving technologies for the production, transportation and conversion
of natural gas |
Thus, currently, most economies of the world are diversifying away from oil
to gas as energy source (Barnes et al., 2006).
Generally, natural gas is a fossil fuel that contains a mix of hydrocarbon
gases, mainly methane (CH4), along with varying amounts of ethane
(C2H6), propane (C3 H8) and butane
(C4H10). Carbon dioxide, oxygen, nitrogen and hydrogen
sulphide are also often present. Natural gas is “dry” when it is almost
pure methane, absence of the longer-chain hydrocarbons. It is considered “wet”
when it contains other hydrocarbons in abundance. Those longer chain hydrocarbons
can condense to form valuable light liquids (so-called natural gas liquids,
or NGLS). “Sweet” gas possesses low levels of hydrogen
sulphide compared to “sour” gas. Natural gas found in oil reservoirs
is called “associated” gas. When it occurs alone, it is called “non-associated”
gas (Barnes et al., 2006).
Natural gas in Nigeria: reserve, production and utilization: Nigeria’s
reserve of associated and non-associated gas is estimated in excess of 160 trillion
cubit feet and that its reserves/production is estimated at 109 years. Geologists,
however, insist that there is a lot more gas still to be found, if companies
deliberately explore for gas, as opposed to finding it by chance whilst in search
of oil. In affirmation to the fact that Nigeria ranks among the top ten largest
concentrations in the world, Adenikinju (2008) and EIA
(2011) assert that the country has an estimated 187 trillion cubic feet
of proven natural gas.
Gas production in the country is undertaken by the major oil companies (Shell,
Chevron, Agip, Texaco, Mobil, Elf, Ashland and Pan Ocean). Natural gas production
has increased enormously from 125.55 Million Tones (MT) (310 million cubic metres)
in 1961 to 14472.11 MT (36,036.6 million cubic metres) in 1998. It further increased
to 101,976 million cubic metres in 2002. However, it is important to note that
there is virtually no exploration for gas in Nigeria. Most gas reserves were
discovered while exploring for oil. Therefore, high oil production implies that
additional high volumes of associated gas will be produced (Okoh,
2001).
The main driver of gas utilization projects in Nigeria had been the government’s
desire to create more wealth and diversify the economy of the country. Since,
the 1980s, there has been increasing utilization of gas in Nigeria for power
generation, industrial heating, fertilizer and petrochemical manufacturing and
as feedstock for direct steel reduction. But the largest gas users are the Liquefied
Natural Gas (LNG) project and the Aluminum smelting industry. Nigerian’s
LNG project had been on the drawing board since the 1960s. It was not until
1990 that the NNPC concluded financial arrangements for the project. Established
in 1992, the Nigerian Liquefied Natural Gas Company commenced execution of the
project in 1993. The shipment of gas from the Bonny Plant to overseas buyers
in Europe commenced late in 1999.
The National Gas Company (NGC) currently supplies gas for power generation,
as source of fuel or as feedstock to current industries, etc and the demand
is increasing. A large potential market exists for investors in this area. Domestic
gas demand is about 400 million cubic feet a day (MMcf/d) which is very low
compared to the size of Nigeria’s population and its gas resources (Kareem
et al., 2012a). The domestic market is limited by the low level of
industrialization and the inadequacy of the gas transmission and distribution
infrastructure. The power sector currently accounts for almost 90% of gas sales
(ECC, 2006).
Unlike what obtains in Nigeria, where power sector consumes about 90% of the
total gas supply, industrial 4% and the chemical feedstock about 3%, the pattern
of gas consumption in advanced economies such as the United States of America
is entirely a different scenario. The consumption pattern for residential, industry,
power plants and others includes chemical feedstock stands at 45, 25, 17 and
13% of the total gas supply, respectively. In the Eastern Europe, the situation
is quit closer to what is obtainable in the USA (Kareem
et al., 2012b). Consumption for residential stands at 45%, industry
30%, power sector 13% while others take 12% of the total gas supply (Douglas,
1996).
|
| Fig. 2: |
Nigerian gas (mcm): 1970-2010, data from NNPC
(2010) |
Gas is a close substitute for other fuels in electricity generation, a complement
to crude oil in revenue earning, a feedstock for fertilizer and petrochemical
industries and environmentally more friendly, being cleaner than crude oil or
coal. But natural gas in Nigeria has a problem and that is, most of it is flared
(Ojinnaka, 1998). This leads to adverse effect on the
environment (Fig. 1, 2).
Why gas flaring in Nigeria?: Historically, gas flaring in Nigeria began
simultaneously with oil extraction in the 1960s by Shell-BP. Although, the British
government subsequently acknowledged that the flaring was unacceptable, it was
allowed to continue without any real efforts to change infrastructure and prevent
the waste of the gas. This is in contrast to Britain’s
policies on gas flaring in their own territory where gas flaring has been reduced
to a minimum. In fact, in Western Europe 99% of associated gas is used or re-injected
into the ground. Gas flaring is generally discouraged and condemned by the international
community, as it contributes greatly to climate change.
In an effort to encourage better use of natural gas and minimize adverse environmental
impact of its flaring, government imposed fine on flares and has periodically
adjusted it upwards. Government has, however, not sufficiently followed through
with its decision to have more industries convert to the use of natural gas
as a way of increasing demand for the product and making flaring less desirable
(Kareem et al., 2012c).
Thus, the neglect of Nigerian natural gas was due to institutional and policy
lapses. The joint venture comprises’ primary preference was to extract
crude oil and make their profit. Consequently the gas associated with crude
oil was seen as a nuisance and had to be flared. Nigerian government enacted
a law (Associated Gas Re-injection Act, 1979) which allowed some conditions
for specific exemptions or the payment of a fee of US $0.003 (0.3 cents) per
million cubic feet with effect from 1984 which increased in 1988 to US $0.07
per million cubic feet and in January 2008 to US $3.50 for every 1000 standard
cubic feet of gas flared. This fine is still considered meager and not a deterrent
for companies which find it easier to just pay the fine. The augment that there
was no market for selling Nigeria’s gas or the technology for developing
the gas turned out to be baseless as a number of projects later put in place
to develop gas resources indicate (JINN, 2010).
Friends of the Earth (2004) states that several other
reasons that have been put forward for continuing to flare, could be categorized
into economic, commercial and technological issues. On the other hand, Evoh
(2002) emphasized that the entire issues of gas flaring in Nigeria boils
down to one question; who manages natural resources exploitation in Nigeria-the
government or multinational corporations? It is quite astonishing that gas flaring
has continued in the country despite the fact that flaring has been in general,
illegal since 1984 pursuant to section 3 of the Associated Gas Re-injection
Act, 1979.
Climate Justice (2006) asserts that the SPDC’s
(Shell) strategic plan states that it seems that the industry was seeking clearer
guidance from the Federal Government of Nigeria (FGN) in meeting the 2008 zero
flaring deadline and it is trying to “guess-out” true FGN intentions
as meaning business this time or just another down the road deadline that this
government would not live to see.
Gas flaring and environmental issues: Gas flares can have potentially
harmful effects on the health and livelihood of the communities in their vicinity,
as they release a variety of poisonous chemicals. Some of the combustion by-products
include nitrogen dioxides, sulphur dioxide, volatile organic compounds like
benzene, toluene, xylene and hydrogen sulphide, as well as carcinogens like
benzapyrene and dioxin. Humans exposed to such substances can suffer from a
variety respiratory problems which have been reported amongst many children
in the Delta but have apparently gone uninvestigated. These chemicals can aggravate
asthma, cause breathing difficulties and pain, as well as chronic bronchitis.
Of particular note is that the chemical benzene which is known to be emitted
from gas flares in undocumented quantities, is widely recognized as being a
causative agent for leukemia and other blood related diseases.
Often, gas flares are located close to local communities and regularly lack
adequate fencing or protection for villagers who may risk nearing the tremendous
heat of the flare in order to carry out their daily activities. Many of these
communities claim that nearby flares cause acid rain which corrodes their homes
and other local structures, many of which have metal roofing. However, whether
or not the flares contribute to acid rain is debatable, as some independent
studies conducted have found that the sulphur dioxide and nitrons oxide content
of most flares was insufficient to establish a link between flaring and acid
rain (Friends of the Earth, 2004).
The problem of flaring gas is not debatable Ojinnaka (1998)
states categorically that the problem has to do, mainly, with its adverse environmental
impact on immediate communities whose corps and poultry and fishing activities
are damaged due to pollution. This is part of what Stiglitz
(2000) calls negative externalities.
Gas flaring and Nigerian economy: Iwayemi and Adenikinju,
(2001) identify the theoretical condition linking resource rents to economic
sustainability. However, despite the various ways in which natural gas can be
used in Nigeria, approximately 75% (by 1998), 63% (by 2000) and 24.30% (by 2010)
of the total gas output were flared. For instance, if you take gas which is
flared in Africa which is around 40 billion cubic meters each year, with Nigeria
contributing 46% and if you used that to generate power in efficient modern
power plants, you could actually double the power production in sub-Saharan
African, excluding South Africa (Kareem et al.,
2012c).
Ojinnaka (1998) describes flaring gas as enormous loss
of revenue that could have been realized. However, he notes that some percentage
of gas is sold in the domestic market to industries like cement, brewery, glass
and aluminum as complement to the use of diesel and fuel oil to operate private
generators. As liquefied natural gas, there is high demand for gas in the international
petroleum market. Therefore, investors are showing more interest in gas production
in Nigeria because of its high economic potential and higher efficiency when
compared with other fuels.
In his discussion on gas flaring as an economic loss, Ogbonna
(1999) asserts that against the massive economic loss, natural gas should
and can play some vital roles in the Nigerian economy. These roles include stimulant
for industrial development, foreign exchange earner, improved capacity utilization
of Nigeria industries and provision of employment opportunities.
Ending gas flaring in Nigeria: The federal government of Nigeria had
extended the zero flaring deadline to 2008, replacing the previous apparent
date for ending the flaring of 2004.
|
| Fig. 3: |
Gas produced utilized and flared by select oil firms in Nigeria,
2010, data from NNPC (2010) |
This was done after the major operators argued that the earlier deadline was
not feasible. In May 2000, representatives of the major oil companies operating
in Nigeria had announced that they would be able to meet the required phase-out
by the following dates: Chevron Texaco-2008; Total Final Elf-2008; Shell-2008;
Agip-2005; and ExxonMobil, 2004 (ECC, 2006). Although,
some oil the major oil companies made significant efforts towards meeting the
deadline, flares has continued. The efforts made by SPDC, Mobil and Chevron
to end flaring can be seen in the reduction of the proportion flared in 2010
in Fig. 3.
However, Social Action (2009) insists that there is
a form of conspiracy theory practiced by the oil company in disclosing information
on flared gas in Nigeria. For instance, Social Action insists that the oil majors
are reluctant to sincerely disclose how much associated and non-associate gas
they produce and how much they flare. They believe that flaring of associated
gas has not reduced significantly; rather, it is the increase in non-associated
gas production that makes the percentage of volume of gas flared to fall.
Previous empirical studies: Climate Justice (2006)
carried out an extensive study on “Gas flaring in Nigeria.” According
to that report, more gas is flared in Nigeria than anywhere else in the world.
Again, they opine that estimates are notoriously unreliable, but roughly 2.5
billion cubic feet of gas associated with crude oil is wasted in this way everyday.
This is equal to 40% of all Africa’s natural gas consumption in 2001 while
the annual financial loss to Nigeria is about US$2.5 billion. This is unlike
the British attitude to flaring North sea gas where flaring of associated gas
was over 90% at the start of crude oil production, but has decreased over the
last 25 years to around 2%, with onshore flaring at between 6-14% since 1991.
Furthermore, they observed that despite its oil and gas, Nigeria is one of
the poorest countries in the world. This is difficult to believe. Until it is
recalled, for example that 28 of the 45 years since independence have been under
military rule and that the Economic and Financial crime commission estimates
45% of Nigeria’s oil revenues are reported wasted, stolen or siphoned away
by corrupt officials.
In addition, with reference to the OPEC figures for Nigeria for 2001-16.8 bcm
y-1-they assert that Nigeria comes out as the world’s
number one flare on both absolute and proportionate bases. Estimating the total
world flaring volume in 2001 at 84.87 bcm, Cedigaz data indicates that Nigeria
accounted for 19.79% of the global amount. The Nigerian amount is more than
the second and third countries combined and four times higher than the nearest
African country, Algeria which is recorded as having flared and vented 4 bcm.
European flaring is put at 2.54 bcm, or 0.76% of gross production, US flaring
at 2.92 bcm, or 0.43% of gross production. According to them, a recent study
carried out for the Bureau of public Enterprises of Nigeria estimate that each
year the country losses between US$500 million and US$2.5 billion to gas flaring.
Iwayemi and Adenikinju (2001) applied the Computable
General Equilibrium (CGE) model framework to evaluate Energy-Environment-Economy
linkage in Nigeria. They observe that the share of petroleum products in energy
consumption declined from 74.6% in 1970-46.5 percent in 1992 and further to
37.7% in 1999. On the other hand, the share of natural gas increased from about
5% to 29.3 per cent in 1992 and to 53.2% gas flaring between 1965 and 1987 amounted
to 3.15x1011m3.
A cost-benefit analysis of gas production in Nigeria carried out by Okoh
(2001) reveals that during the project horizon of 38 year (1961 to 1998),
Nigeria lost a total of 234.02 billion tones of gas valued at N936.09 trillion
(at N4000/tonne;1997 government price) to gas flaring. According to her findings,
the NPV for gas production in Nigeria over a 38-year project horizon (1961-1998)
at the interest rate of 7 per cent was -N759.30 trillion in constant 1998 naira.
The negative sign indicates that gas production in Nigeria at this current state
is not economically or socially worthwhile. That is, it is not profitable to
the society.
Deckor (2002) equally did a research on the impact of
gas flaring. But he was rather interested in the impact of gas flaring on the
wetland soils of the Nigeria Delta.
On the other hand, Egbuna (1987) studied the environmental
hazards of the natural gas industry. He observed that in 1986, the total gas
flared from over 300 fields in Nigeria yielded a wasted heat equivalent of about
60x109 kwh which is approximately equal to all the total Electric
Power PLC (NEPA) that year from all sources. He states that the economic loss
estimates puts the price of flared natural gas at about fifty million naira
(or over 30 million dollars, indexed at 1985), per day.
MATERIALS AND METHODS
Data and analytical technique: Our analyses are confined to the period
1970-2010 due to data availability. The data were drawn from Central Bank of
Nigeria (CBN, 2010) Statistical Bulletin and Nigerian
National Petroleum Corporation (NNPC), apart from the dummy variable which was
generated by the researchers given the theory underlying. The estimations were
carried out using the Eview. The variables were used at the order of their stationarity
at 1% level of significance.
Methodology: The theoretical framework adapted in this work is the neoclassical
augmented production function-solow model as stated below:
| Where: |
| Q |
= |
Output |
| L |
= |
Labour |
| K |
= |
Capital |
| A |
= |
Exogenous productivity term |
The above equation states that output is a function of capital and labour including
a productivity term. Thus, in this paper energy resources are considered as
a form of capital and so they are expected to be positively associated with
national output.
Model 1: Distributed lag model:
| Ho: |
Gas utilization has no significant effect on the performance
of Nigerian economy: |
| Where: |
| O |
= |
Gross Domestic Product (N'm); Gu = Gas utilization (mcm);Co
= Crude oil export (mcm) |
| Ir |
= |
Inflation rate; μ = stochastic term; i = lag length |
| n |
= |
Maximum lag length (determined during the estimation) |
Model 2: Dummy variable regression model:
| Ho: |
The imposition of fine on flared gas has no significant effect
on the level of flares: |
| Where: |
| Gf |
= |
Flared gas |
| Gp |
= |
Gas produced: |
Recall: From the reviewed literature, it was observed that fine on flared
gas was introduced in 1984 in pursuant to section 3 of the Associated Gas Rejection
Act, 1979. (Climate Justice, 2006).
Co-integration analysis: Co-integration test was used to ascertain if
gas utilization can sustain the Nigerian economy or not. The test was conducted
between GDP and gas utilization. According to Gujarati, 1995),
co-integration implies the existence of long-run relationship-that is, sustainability.
RESULTS AND DISCUSSION
Model 1: Distributed Lag (DL) model a.
This model evaluates the following hypothesis:
| Ho: |
Gas utilization has no significant effect on the performance
of Nigerian economy |
The above result (Table 1) shows that the gas utilization
impacts Nigerian economy positively at lag 3. For instance, the result shows
that a unit increase in gas utilization will lead to about 109 units increase
in the gross domestic product (O). The negative significant impact of gas utilization
(in its current year) on GDP can be explained by the fact that as a production
input, it could take some time before its positive effect will be felt by the
economy. On other hand, it is evidence that crude oil export has positive significant
impact on Nigerian economy. The hypothesis (I) was therefore rejected as we
since gas utilization has significant impact on the Nigerian economy.
Model 2: Dummy Variable Regression (DVR) model:
| Ho: |
The imposition of fine on flared gas has no significant effect
on the level of flares |
| Table 1: |
DL model |
 |
| R2: 0.912499, F-statistic: 35.19590, Durbin-Watson
stat: 2.012782, p-value (F-statistic): 0.000000 |
The Table 2 above shows that the imposition of fine in 1984
did not significantly impact on the level of flared gas. Rather, the total volume
of produced gas has remained the significant determinant of the level of flares.
Therefore, we accept the null hypothesis (II) and affirm that the imposition
of fine on flared gas has not significantly affected the level of flares. This
is further illustrated in Fig. 4 below where the trend of
gas flaring maintains upward slope, though not as much as gas utilization.
Using 1988 as the intervention year, when the fine on flared gas was increased
from US $0.003 (0.3 cents) per million cubic feet in 1984 to US $0.07 per million
cubic feet, Table 3 above shows that the probability of the
imposed fine causing a structural change on flared volume increased about 0.056
point from 1984. However, the impact remained insignificant-though with negative
slope. (Fig. 4).
Co-integration analysis: Sustainability of fine on flared gas:
| Ho: |
Gas utilization is not sustainable in Nigerian economy |
The result co-integration test between the gross domestic product (O) and gas
utilization established evidence of co-integration between the two variables.
Therefore, we reject the null hypothesis and conclude that gas utilization is
sustainable in Nigerian economy.
|
| Fig. 4: |
Utilised and flared gas in Nigeria, data from NNPC
(2010) |
| Table 2: |
DVR Model (with 1984 as intervention point) |
 |
| R2: 0.495411, F-statistic: 18.16347, Durbin-Watson
stat: 1.874395: p-value (F-statistic): 0.000003 |
| Table 3: |
DVR model (with 1988 as intervention point) |
 |
| R2: 0.498764, F-statistic: 18.40876, Durbin-Watson
stat: 1.909319: p-value (F-statistic): 0.000003 |
| Table 4: |
Co-integration test |
 |
| *,**R rejection of the hypothesis at 5% and (1%)
significance level, respectinety, L.R.: Test indicates 2 cointegrating equation(s)
at 5% significance level |
In other words, if this industry is developed, it can sustain Nigerian economy
in the long run just as crude oil is doing at present. This implies that in
the light of economic diversification, natural gas can be considered as one
of the major sources of national income even in the long-run. Thus, any investment
towards the development of gas industry in Nigeria will be worthwhile (Table
4).
CONCLUSION AND RECOMMENDATION
This study examined the implications of the availability and utilization of
gas resource in Nigeria by using econometric models. The results reveal that
gas utilization has significant positive impact on the economy and it is also
sustainable. On the other hand, it reveals that since the imposition of fine
on flared gas in 1984, no significant structural change has been observed on
the level of flares.
Therefore, there is an urgent need for the government to provide environment
that is conducive for investment in the gas industry as this will lead to additional
income to both the people and government of Nigeria. The passage and signing
into law of the proposed Petroleum Industry Bill (PIB) could as well be the
answer to the puzzle obstructing the development of Nigerian gas industry as
it will enhance investors’ confidence in the industry.
Based on the findings from these analyses, the researchers make the following
recommendations:
| • |
Gas flaring should stop immediately since its continuation
is not only humanly and environmentally harmful, but also constitutes a
huge source of revenue loss to the people and government of Nigeria |
| • |
Approval for exploration and new oil field development must be at the
conditionality of providing facilities for the utilization of associated
gas |
| • |
Effective legal obligations must be imposed to require associated gas
to be used at Bonny LNG plant and in the West African Gas Pipeline before
any non-associated gas is used |
| • |
Government should continue to promote private investment and ownership
in major gas facilities |
| • |
Nigerian government should adopt a pricing regime more conducive to providing
companies with an incentive to find and produce gas. If gas is able to compete
on price with alternative energy forms in the market, the full value and
potentials of Nigerian gas reserves will be realized. However, consumer
subsidy for gas should be considered to keep the product affordable |
| • |
The on-going improvement on international market access for gas should
be pursued vigorously |
| • |
Government should investigate any possible need for subsidies (may be
in the form of tax exemption) for flaring reduction projects at remote fields |
| • |
Kareem et al. (2012c) that the progress
which Indonesia and Malaysia (two countries that were on the same level
of economic development as Nigeria in early 1960s) have made in recent times
is attributable mainly to political and economic stability brought about
by credible, consistent and visionary leadership. Government should, therefore,
provide investment-friendly environment as investors will naturally like
to go to areas where their assets are safe and profits can be easy to repatriate |
| • |
Government should always endeavor to fulfill its obligations, such as
cash payment and so on, in the operations of the joint venture partnership.
Else, it cannot credibly enforce gas flaring laws or penalize any defaulting
oil company |
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