ECONOMIC FRAMEWORK FOR GAS PIPELINE DEVELOPMENT IN NIGERIA

: The paper present an economic model and framework for the development of natural gas pipeline for sustainable economic development in Nigeria. The study reviewed the economics of natural gas pipeline development in Nigeria. The research formulated an economic model for a case study of Calabar to Ajaokuta 417km gas pipeline project and a discounted cash flow for an economic life of 40 years. The project economics indicates a Net Present Value (NPV) of 12.5 billion USD with a discounted payback period of 7 years and 9 nine months, Profitability Index (PI) of 7.30, Internal Rate of Return of 23.05% and Growth Rate of Return 26.97% and these project economic indicator shows that the gas pipeline investment is viable. This study provides an economic model that would guarantee security of gas supply, provide access to clean energy and provides an economic framework to support long term natural gas pipeline development in Nigeria.


Introduction
There is no economic model for the long term development of natural gas transmission gas pipeline for socio-economic development in Nigeria and this has resulted to having few natural gas pipelines spread across the various regions or geopolitical zones (DPR, 2017). There is currently about 1,500 to 2,000km of natural gas pipelines spread across Nigeria with the majority of pipeline within the eastern and western Nigeria (NGC, 2017). The inadequacy of these natural gas pipeline has resulted to poor domestic gas supply obligation to support economic activities in Nigeria (DPR, 2017). Odunuga (2016) stated that about 400 trillion cubic feet (tcf) to600 trillion cubic feet(tcf) of natural gas in Nigeria is still to be discovered, which is about 7.7 percent to 11.5 percent of the total global quantity of natural gas that is yet to be discovered and this is a huge economic gain with respect to When natural gas is produced from the reservoirs and wellheads, they are transported through pipelines to a gas hub or centre for processing or further usage. The gas buyer popularly known as off takers are usually connected with processing facility to buy these raw dry or wet gas ; Gas distribution is done also through onshore pipelines in other various processed forms such as cooking gas cylinders, compressed natural gas trucks (Hilyard, 2012).
Nwaozuzu (2018) also explained that the cost for transportation of natural gas is a critical element that determines the natural gas economics and it is driven by economics of scale that shows the more the volumes, the cheaper the unit cost of supply. Carol and Hudskin (2010) posit that the main cost associated with gas pipeline development are the cost of capital and the operating cost of the pipeline system, it indicates that a pipeline that is well designed, would experience an optimized annual cost of compression and fixed cost of the pipeline. The total cost of the pipeline development also includes the fixed charges as shown in The capital cost comprise mainly of the initial cost of the pipeline material and the compressor station, therefore the optimum size of pipeline is relevant in achieving an effective and economic gas pipeline system, this study also assumes that the pipeline and compressor are in operation for 350 days in a year and that translate to 0.95 utilization factor or 95% efficiency (Carol and Hudskin, 2011). The purpose of this study is to present an economic model and framework for the development of natural gas pipeline for sustainable economic development in Nigeria.
This study is significant, because it will support the optimal utilization of domestic gas in the form of Liquefied Natural Gas (LPG) in Nigeria and would support economic development (Oluwabunmi, 2014).
The scope of this research covers the proposed onshore gas pipeline from Calabar to Enugu to Ajaokuta (417km) as shown in figure 1.1. This proposed Calabar to Ajaokuta Pipeline (CAP) project is a critical infrastructure that would spread and increase the gas pipeline transmission and distribution networks in Nigeria and it is a necessary project that will support the optimization of the domestic gas supply obligation The aim of this paper is to present an economic framework and model required for the development of natural gas pipelines in Nigeria.

Materials and Methods
The study adopts an economic analysis, analytical framework and spreadsheet model to determine relationship between key variables and the model developed would be used to determine the long run relationship for a typical gas pipeline infrastructure in Nigeria.
The case study pipeline is the Nigerian National Petroleum Corporation proposed CAP gas pipeline (Calabar to Ajaokuta), as this pipeline has been identified as a critical gas infrastructure in Nigeria.
The key steps in this research are as follows: 1) Definition of the problem / Gas pipeline route 2) Specification of the gas delivery volume / Pipe Material Mian (2011) states that the growth rate of return is used to establish a more reliable measure of profitability that is superior to the profitability index and internal rate of return. The growth rate of return for continuous compounding is given by equation 2.4 Where: GRR: Growth rate of return : reinvestment rate, fraction PI: Profitability index t: time or period (years) According to Ahmed (2017), the discounted payback period shall be determined with equation 2.5 = + 2.5 Where: A = Is the period where last negative discounted cash flow was recorded B = Is the absolute value of the last negative cumulative discounted cash flow at period A C = Is the discounted cash flow value after period A To establish the probabilistic nature of the dependant and independent variables, sensitivity analysis using the Pallaside @ Risk software is used to establish stochastic nature of the variables (dependent and independent variable) using the Monte Carlo technique. Seba (2008), states that the Monte Carlo simulation is a technique of dealing with uncertainty that requires a mathematical model of the situation as the study recognizes all the important factors. According to http://www.scratchapixel.com(2019), Monte Carlo approximation is expressed mathematically as shown in equation 2.6.

2.6
Where the mathematical sign ≈ shows that the formula on the right side of this indicates an "approximation" of what the random variable X expectation E(X) actually is. The model assumption and input data for this economic analysis is shown in Appendix B and Appendix C respectively. The major sources of data in this study include the following: 1) Department of Petroleum Resource Annual Reports 2) Central Bank of Nigeria 3) Nigerian National Gas Policy (2017)

Economic Analysis of Calabar to Ajaokuta 417km Natural Gas Pipeline
The economic analysis is carried out basically in two perspectives and these are the deterministic economic analysis and probabilistic economic analysis. The gas pipeline material that is considered in this study is carbon steel in accordance with the international standard or specification (such as API 5L and ASME B31.8) for gas pipelines. The deterministic analysis uses equations 2.1 to equation 2.5 and the formulae in Appendix A to obtain the endogenous or dependent variable, which includes the Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), Growth Rate of Return (GRR) and Payback Period. These parameters are considered in this study as profitability and economic indicator for the Calabar to Ajaokuta 417km gas pipeline. The exogenous or independent variable in the economic modeling and analysis of this gas pipeline includes; the annual net revenue revenue, tax payable etc. The pipeline system description is shown in table 3.1 and this shows a total gas volume of 1950mmscfd (Calabar to Enugu with 700mmscfd and Enugu to Ajaokuta with 1250mmscfd). The specified gas pipeline diameters is 48inches for Calabar to Enugu and from Enugu to Ajaokuta has a diameter of 36inches. The total pipeline length is 417km (179km from Calabar to Enugu and 238km from Enugu to Ajaokuta).  (2017) Pipeline materials cost is calculated using equation 6.4 and the parameters are coded into the excel spreadsheet or worksheet. The basic assumption for pipeline materials cost is based on $800 per metric tonne of carbon steel and this is as per historical gas pipeline project cost (Ahmed, 2017).The calculated cost of the carbon steel pipeline materials (12.7mm thickness) is One hundred seven million six hundred fourteen thousand four hundred sixty-eight dollars sixty-four cents ($107,614,468.64) as shown in table 3.2. The compressor station is built at every 64km based on historical gas pipeline design premise or information. The number of compressors station required from Calabar to Enugu is three (3) over a distance of 179km and from Enugu to Ajaokuta is four (4) compressor stations over a distance of 238km. The total cost for installing the compressor stations is obtained using an excel worksheet with horse power required and other parameters coded in equation 6.4 and thereafter a total cost of seven million dollars and zero cents ($70,000,000.00) is obtained as shown in table 3.4. The pipeline system economic analysis is for an economic life of fourty years (40yrs) and the summary and details is shown in table 3.7. The variables are coded in an excel workshop to obtain each values at each of the project. The utilization factor or availability of the pipeline is considered to be 80% in this study. [54] The pipeline system shall be available for 292 days in a year in accordance with equation 3.1 Pipeline Availability =Utilization factor x 365 days 3. The depreciation is important in this study, because the corporate income tax rate is calculated against the depreciated value of the assets. There is a tax holiday for the first three (3) years and then the next two (2) years; this is in accordance with the fiscal incentive for midstream and downstream gas project development in Nigeria; The tax rate of 30% is applied in the subsequent phases of the project in accordance with corporate income tax policy in Nigeria. The gas pipeline economic analysis is based on a three years free interest rate period (moratorium) in order to accommodate the detailed engineering, procurement and construction phase of the project. The interest rate applies on the second phase of the project and throughout the economic life as in table 3.7. The transportation cost of $0.85 / mcf is applied in the second phase (2022 -2023) and further transportation cost considered in the study is as follows: Operating cost associated cost after the commissioning of the gas pipeline system and these includes: maintenance cost, cost of wages/salaries and miscellaneous cost. The operating cost is calculated as follows: Operating Cost =Percentage x Capital Cost 3.4 The percentages considered in this study for the various phases of the project investment is as follows: • 2019 to 2021 (3 years period) with operation and maintenance rate of 0% • 2022 to 2023 (2 years period) with operation and maintenance rate of 2% • 2024 to 2033 (10 years period) with operation and maintenance rate of 3% • 2034 to 2043 (10 years period) with operation and maintenance rate of 4% • 2044 to 2053 (10 years period) with operation and maintenance rate of 4.5% • 2054 to 2058 (5 years period) with operation and maintenance rate of 5 % The initial phase (2019 to 2021) has an operation and maintenance rate of 0%, because there was no operation as the project is in detailed engineering, procurement and construction/installation phase. The operation and maintenance rate of 2% applies in the second phase (2022 to 2023), because the gas pipeline is in operation. The operation and maintenance rate is increased by 1% in the first three phases and in the last phase by 0.5% due to ageing of the pipeline system over the economic life of 40 years.
The annual revenue in each phase of the gas pipeline economic model as shown in table 3.7 is given by equation 3.5: The obtained values for the annual cash flow in each phase of the gas pipeline as shown in table 3.7 is coded into the excel model using equation 3.5

Discounted Cash Flow Analysis of The Gas Pipeline Project
The discounted cash analysis is obtained based on the discount rate (WACC+1%) and annual cash flow throughout the economic life (40 years) of the project and this is coded in an excel worksheet.

Profitability Analysis of The Gas Pipeline Project
The study and project profitability analysis is based on the

Sensitivity Analysis
Stochastic modeling is done in this study using @risk pallaside software to determine the uncertainties associated with the long-term development of Calabar to Ajaokuta gas pipeline. The pipeline economic analysis model (table 3.7) and discounted cash flow model (3.2.1) is subjected to 100 iterations. Appendix D shows the Probability Density Function (PDF) of the net present value (NPV) indicating a mean NPV of $12,470,000,000 minimum obtainable NPV is $4,320,000,000 and maximum obtainable NPV is $20,410,000,000. The standard deviation of the NPV is $3,663,000,000.00. [57]

Conclusion and Recommendation
The economic analysis in this research paper provides an approach to model natural gas pipeline infrastructures for policy analysis in Nigeria and investors can use this approach to determine the short term, medium term and long term profitability of their investment. The analysis estimated the discount rate, annual operating and maintenance cost, annual revenue, tax revenue to the government, annual cash flow et cetra. The discount rate and annual cash flow is used to obtain the discounted cash flow analysis for the gas pipeline project. The Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), Growth Rate of Return (GRR) and discounted payback period is obtained from the cash flow analysis respectively. The outcome of the deterministic economic analysis shows that the gas pipeline project is profitable throughout the economic life of forty (40) years. The stochastic or probabilistic analysis shows that the capital cost and operation / maintenance cost is highly correlated with the Net Present Value. This research helps correct the limitation in long term economic planning for gas development in Nigeria using steel pipeline infrastructures which has constituted a major problem resulting to poor domestic gas supply obligation in Nigeria. The research is based on a private sector financing model (35% equity and 65% debt) inorder to ensure efficiency and optimal utilization of the Calabar to Ajaokuta 417km critical gas pipeline infrastructure. Where; D= Outside Diameter (mm), L= Length of the pipeline, T= pipe wall thickness (mm) and C = pipe material cost ($/metric ton).

5) Labour Cost (LC)
The labour cost for the pipeline construction is given by equation 6.5 and from historical data, a fixed amount is used for pipe diameter and pipeline distance and this usually $15,000 as an average labour cost (Adamu and Darma, 2017). LC = $15,000 x diameter x length (miles) 6.5 6) Expected Cost of constructing and Installing Compressor E(CCMS) The expected cost of constructing and installation of a compressor is given by equation 6.6. According to Menon, 2005, the unit compressor cost of $2,000 is adopted in this study considering, the intervals of 64 km and 161km to maintain high pressure in gas pipe. According to Mian (2011), the expected value of a decision alternative is the mean or average value per decision that would be realised, if the decision maker accepts the alternative.