Views of our experts

THE TOPIC: NIGERIA’S DASH FOR GAS

How does a country like Nigeria manage their development and growth in circumstances of energy scarcity and power outages?

Nigeria’s power deficit has long acted as a handbrake on the pace of development in Africa’s largest economy where less than half the population has access to the grid. Increasing power supply is therefore essential to achieving a universal access to electricity. The country’s power sector is dominated by state-owned firms and comprises 12.5 GW of installed capacity, most of which is powered by gas. Due to chronic underinvestment and poor operational oversight, Nigeria’s power sector distributes just 3.1 GW of electricity to end customers –a fraction of overall demand – and supply is subject to regular outages. As a consequence, large chunks of the country’s economy rely on costly diesel gensets, preferring to pay a premium for more reliable sources of power.

Figure 1: Nigeria power sector energy flow diagram

In response to the power crisis, Nigeria has introduced a package of policy reforms, under its Power Sector Recovery Programme (PSRP), to ensure the financial viability of the power sector, improve capacity utilisation rates and encourage investment in new supply. The Government is also seeking to prioritise the exploitation of the country’s vast natural gas reserves – estimated at 189 trillion cf (BP, 2019) – in the hope of expanding gas-to-power generation, reducing wasteful gas flaring and displacing the diesel power market. These initiatives are designed to put the power sector on a path to long-term sustainability.

THE STOCK: SAVANNAH PETROLEUM

UK-listed Savannah Petroleum is at the forefront of Nigeria’s gas-to-power revival as a supplier of gas feedstock to local industry. In November 2019, the company secured its entry into Nigeria through the acquisition of Seven Energy’s gas business, transforming itself into a major gas producer. The principal assets acquired from Seven Energy comprise the Uquo gas field and the Accugas midstream pipeline network, which plumbs Uquo’s gas stream into local industrial hubs around the Niger Delta town of Calabar. This substantial integrated gas project contains almost 100 million boe of 2P reserves and delivers ~150 million cf/d of gas from the wellhead to end users.

Figure 2: Savannah’s integrated gas business, offshore Nigeria

Savannah’s anchor gas customers are the state-run Calabar and Ibom power stations, which together account for around one-tenth of Nigeria’s total operating electricity capacity. Broadly speaking, Savannah’s growth strategy is to ramp up gas volumes under its existing supply contracts and add new industrial users which are currently burning diesel for power. Replacing diesel-based self-generation with grid electricity and increasing gas supply will lead to a net reduction of greenhouse gas (GHG). As the only significant gas infrastructure owner in the Calabar region, the company is ideally placed to deliver on this promise. In our view, this strategy should generate significant rewards for Savannah’s shareholders, with the company forecast to generate in excess of US$170m of EBITDA in the coming financial year.

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Mirabaud Securities
Oil & Mining

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