The government intends to offer gas from one of its three gas fields to China from 2018 for $1.5 billion according to a Citi FM report. The supply is to last for a period of 19 years.
The finance minister, Seth Terkper, justifies the transaction as a way to avoid burdening taxpayers or adding to our public debt. He is right about that. With little ability to borrow or tax, signing a deal to supply gas is one way to secure funding.
However, there is one problem with deals such as this – unstable prices. Angola for example, tied a lot of future production into paying for loans it had taken when oil prices were higher. But as oil prices fell (as shown in the chart below) it had to supply more and more of its oil to China and multinational oil companies to repay the loans. This has left them with too little to sell in the open market and has resulted in economic hardship.
In making a deal to supply gas we are betting that gas prices would not significantly fall or that we would not become too dependent on gas sales to meet out future expenditure. As far as the former goes, natural gas prices have fallen significantly since 2014, an indication that major price volatility is possible with that commodity.
Nobody can know for sure if natural gas prices will rise or fall in future. Being a cleaner alternative to coal for example, more countries would like to use gas but then gas production has been rising consistently as shown below. And that could be a drag on prices.
The experience of collapsing oil prices and the resulting fiscal challenges should not so soon be lost now that we’re slowly crawling out of the fiscal hole with help from the IMF. With serious problems even forecasting the price of crude oil in a coming year, it is risky to make large bets over long periods of uncertainty. I just hope it pays off for us.