Petroleum Industry Act (PIA)—Natural gas pricing: Implications for gas measurement and system operations
This article is the writer’s inferences of the PIA (section 167 (6), 168 (2), third and fourth schedule) with regards to buying/selling natural gas based on energy delivered (US$/MMBtu) as against the old way of buying/selling based on the volume delivered (US$/Mscf).?
The context
The Petroleum Industry Act, 2021 (referred to as PIA) is the first legal framework in Nigeria that expressly touched every aspect of the natural gas business. In the PIA, the technical and commercial regulation of natural gas processing, storage, and transportation is under the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the Authority). It is delightful that the PIA recognises the energy content of natural gas as the basis for billing customers.?
Before the PIA, natural gas was bought and sold based on volume (in thousand standard cubic feet (Mscf)) of gas delivered by the seller and not based on the energy (in Million British thermal unit (MMBtu)) content of the gas delivered. For example, the official price of gas to power was pegged at U$2.5/Mscf (recently reduced to US$ 2.18/Mscf). All the regulations and policy documents relating to the natural gas business in Nigeria recognised gas prices in US$/Mscf. In the PIA, the price of natural gas is now based on US$/ MMBtu. The provisions are in sections 167 (6), 168 (2), third and fourth schedule of the PIA. In most natural gas markets, US$/MMBtu is used for gas pricing or billing. This means that the PIA recognition of US$/MMBtu is in line with international best practices.
Pricing of natural gas based on volume delivered vs energy delivered
In natural gas pipeline transportation, both quantity and quality measurements are critical to the operation of the pipeline. The energy content of the natural gas is specified in terms of heating value. The heating value (measured in Btu/scf) of a natural gas stream is the amount of energy released when a known volume of the natural gas is completely burnt under specified conditions. The heating value of the gas depends on the components of the natural gas and their respective compositions. The method for calculating the energy content of natural gas is provided in ISO 6976. Though methane is the primary component of natural gas, it coexists with other components like ethane, propane, butane, carbon dioxide, etc. The natural gas composition varies depending on the gas source and other factors.?
Some people may argue that it does not matter whether natural gas is sold based on Mscf or MMBtu because the general assumption is that the heat release when 1 scf of natural gas is burnt is equivalent to 1000 Btu. This assumption is incorrect when dealing with pipeline gas with a variation in gas composition. The gross heating value of a natural gas stream is obtained by summing up the products of the heating value of the gas components and their respective compositions. Methane has the least heating value among the hydrocarbon gases mentioned above, while carbon dioxide has zero. Hence, the total heating value of the natural gas increases with an increase in composition (percentage fraction of the total quantity) of the heavier hydrocarbon components of the natural gas. To bill a customer for natural gas delivered, the volumetric quantity (in Mscf) must be multiplied by the gross heating value (MMBtu/Mscf) and the gas price (US$/MMBtu). See a hypothetical illustration below.
If a seller supplies 10 MMscf of gas with an average daily heating value of 1100 Btu/scf and sells it at US$2.5/Mscf (equivalent to US$2.5/MMBtu), the buyer would be billed US$25,000 (if the gas is sold based on volumetric price, US$/Mscf) as against US$ 27,500 (if the gas is sold based on energy price, US$/MMBtu). If the daily average heating value drops to 1050 Btu/scf, the buyer would be billed US$26,250.
Implications for natural gas measurement and system operations
What are the implications of the PIA provision for gas pricing in US$/MMBtu on natural gas measurement? Determining the heat content of natural gas requires accurate measurement of the composition of each component of the gas and the total volume flow rate. While the provisions of PIA are in line with international practices, there are few implications for gas infrastructure owners, especially gas processing plants, transmission, and distribution pipeline operators. The implications are summarised as follows:
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1.????Increase in gas flow measurement requirements and complications.?With the PIA, fiscal measurement of natural gas must consist of both flow rate and composition measurement. Also, additional calculations would be required in the flow computer for total energy delivery. Overall, there would be an increase in audit and system verification requirements.
2.????Investment in online gas analyser:?Installation of gas chromatography (GC) or other calorific measurement devices would now be a critical part of the fiscal measurement of natural gas. Previously, when you talked about the fiscal measurement of gas, the central focus was on the flow meter. With the gas now sold based on the heating value, the gas producers must install an online GC to continuously measure gas composition. GC is the equipment that separates the natural gas mixture into its compositions and measures the percentage composition of the components.?
3.????Maintenance and condition-based monitoring of existing GC:?When natural gas is sold based on heating value, the performance of a?GC has a significant impact on gas revenue. For that reason, the performance of the GC must be monitored to identify any errors, diagnose, and correct the problem before it eats deep into the revenue profile of the seller or buyer. The procedure for achieving the high performance of a GC is set out in ISO 10723. Also, the use of condition-based monitoring software is highly recommended to ensure optimal performance of the GC. The GC is not a fix and forget piece of equipment. Lack of routine maintenance of the GC and performance monitoring can result in huge revenue loss to either the seller or buyer because of errors from the measurement.
4.????Adjusting gas plant operation to meet market conditions:?Operators could adjust gas plant operating parameters to produce pipeline quality gas of a higher heating value during high gas demand. This operational strategy can increase returns while ensuring that the heating value is within the range specified in the gas sales agreement. This plant operation strategy is only beneficial if the gas is sold based on its heating value rather than volume.
5.????Operationalisation of the Nigerian Gas Transportation Network Code (NGTNC).?The NGTNC aims to allow multiple shippers to flow gas into the network. Gas delivery into the pipeline network and exit from the network is specified in Mscf. The NGTNC’s requirements for the heating value of the natural gas allowed into the network is for monitoring purposes rather than for billing. The NGTNC specifies that the heating value of natural gas must be within a range of 1000 Btu/scf and 1150 Btu/scf. All the charges stated in the NGTNC are US$ per Mscf based. With the provisions in the PIA, it is expected that the Authority would update the NGTNC before operationalising it.?
6.????Pipeline allocation and balancing:?Pipeline losses could also be computed and allocated back to the shippers based on the input and commingled energy content.
7.????Skill upgrade for technicians to understand how gas composition measurement relates to revenue performance:?On natural gas pipeline locations where equipment like GC is not installed before now or is installed but not operational, personnel must be trained on maintaining the equipment. The personnel must be up-to-date with new gas measurement technologies and practices. This would help sharpen their decision-making skills in case of any technical issues and understanding the implications of each decision.
Concluding remarks
Though it comes with additional investment, selling/buying natural gas based on the amount of the heating value of the gas is fair for both sellers and buyers. Determination of daily heating value averages for all input gas is needed to calculate the energy delivered by the seller and the billing to the buyer. The use of gas chromatography, at least at the inlet of the pipeline for measurement of the gas compositions, is now a fiscal measurement infrastructure. Large customers like power plants could have their GC and account for energy delivered. It must be noted that periodic proving of the gas flow meters and performance evaluation of the gas chromatography is needed for reliable energy flow measurement and minimisation of losses.?
Principal Process Engineer |Technical and Engineering Services| Project Management| Gas Contract- Commercials & Regulations| Financial and Business Analysis
1 年Dear Dr, Thank you for your insightful article. It was indeed a very educating one as always. I am happy to see an Engr delivery a content such as this. However, in my company, we had been in GSAAs in which gas is sold in MMBTU since 2019.
CEO SITCO AFRICA
2 年My take is simply that as exporter of natural resources that are often not processed we almost always will end up loosing value to buyers ….the principal focus is often sadly not full value realization but is raising money/revenue from the resources….if Hydrocarbon to value considerations and Is of any significant consideration to us we surely would have domesticate the vale chain of the product Ling ago….so great as this work is to the industry sadly to policy makers the margin seems not a critical consideration, even though it should considering the loss the nation suffers over time. Hopefully the PIA regime brings commercial sense back into the industry. That’s the politics in it all that used to drive the entire industry. Great work indeed.
Lead, Process Excellence & Change Management |Efficiency |Renewable Energy Curiousness |Maintenance & Reliability Savvy |Asset Management Neophyte.
2 年Weldon Sunday Kanshio, PhD. ! This is a good research job with rich and well analyzed contents. I do have some reservation here Sir! From commercial veiw points and considering the below extra from the article: "If a seller supplies 10 MMscf of gas with an average daily heating value of 1100 Btu/scf and sells it at US$2.5/Mscf (equivalent to US$2.5/MMBtu), the buyer would be billed US$25,000 (if the gas is sold based on volumetric price, US$/Mscf) as against US$ 27,500 (if the gas is sold based on energy price, US$/MMBtu). If the daily average heating value drops to 1050 Btu/scf, the buyer would be billed US$26,250." Since it is well known globally and inline with international best practice, US$/MMBtu is used for billing Natural gas. Don't you think, Nigeria is being short-changed all this while (years) for using US$/MMscf. For example: International marketers buying from Nigeria using US$/MMscf and selling at international market using US$/MMBtu. From the above analysis the marketers will be making Thousand folds profit and vice-versa for our local gas importers of LPG. Thanks for sharing Dr.