Introduction 

The impact of global energy policies on gas project financing has become a crucial topic in the wake of increasing environmental concerns and shifting energy paradigms. As nations worldwide strive to reduce carbon emissions and transition towards sustainable energy sources, the financing landscape for gas projects is undergoing significant changes. Stricter regulatory frameworks, incentives for renewable energy investments, and evolving market dynamics are influencing the availability and cost of capital for gas-related ventures. These policies, aimed at promoting cleaner energy, are reshaping the strategic decisions of investors and project developers, necessitating a careful balance between environmental goals and economic viability.

Global energy policies refer to the regulations, measures, and guidelines implemented by governments and international bodies to manage energy production, consumption, and environmental impact. These policies aim to ensure energy security, promote sustainable development, reduce greenhouse gas emissions, mitigate climate change, and transition to cleaner energy sources.  These policies significantly affect the financing of gas projects by influencing regulatory compliance costs, market demand, cost structures, and investment risks. While supportive policies can enhance project viability, stringent environmental regulations and the global shift towards renewable energy can increase risks and costs, impacting the overall attractiveness of gas projects. 

Key Policies Affecting Gas Projects

The Paris Agreement, an international treaty on climate change, was adopted by 196 Parties at the UN Climate Change Conference (COP21) in Paris, France.  Its primary objective is to limit the global average temperature increase to well below 2 degrees Celsius above pre-industrial levels, with efforts to restrict the increase to 1.5 degrees Celsius. The Paris Agreement obligates countries to reduce their greenhouse gas emissions in accordance with their Nationally Determined Contributions (NDCs). Through these commitments, countries delineate the measures they will undertake to lower the greenhouse gas emissions and fulfil the objectives of the treaty. This policy exerts pressure on gas projects, as natural gas, while cleaner than coal and oil, remains a fossil fuel that emits carbon dioxide (CO2) when burned. 

In addition, the agreement promotes a transition to cleaner energy sources, prompting countries to prioritize renewable energy projects over new gas projects to meet their emission reduction targets. As nations increasingly invest in renewable energy sources such as solar and wind, gas projects may encounter competition and diminished demand. Furthermore, gas projects might face difficulties in securing funding due to investor concerns regarding stranded assets and climate impact. 

Additionally, to achieve the targets set forth in the Paris Agreement, many countries are considering implementing carbon pricing mechanisms, including carbon taxes and cap-and-trade systems. These mechanisms increase the operational costs of fossil fuel projects, including those involving natural gas, due to the added expenses associated with carbon emissions. This can diminish the financial attractiveness of gas projects relative to renewable energy sources. 

Governments worldwide have implemented various subsidies and incentives to promote the adoption of renewable energy. In Germany, the Feed-In Tariff (EEG) aims to promote renewable energies by increasing the share of renewable in the electricity mix and producing no greenhouse gas emissions. This policy ensures investment security and financial support for all types of renewable energy, leading to a significant increase in Germany’s electricity consumption. This approach fosters widespread citizen participation, as demonstrated by the fact that the EEG allows households producing renewable energy to sell any excess electricity to the national grid. This policy pays renewable energy producers a set rate per kilowatt-hour for the electricity they feed into the grid. Germany also provides homeowners with tax incentives for energy-efficient renovations. This means that households can claim back 20% of renovation costs up to $44,000 if they replace inefficient doors or windows or invest in new heating systems and insulation.

In the United States, President Biden’s Inflation Reduction Act represents the largest investment in climate and energy in the nation’s history, setting the US on a path to achieve the Biden-Harris Administration’s climate goals, including a net-zero economy by 2050. The IRA establishes an Energy Infrastructure Reinvestment (EIR) program, which guarantees loans for projects that repurpose or replace non-operational energy infrastructure or enable existing infrastructure to avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases. The IRA’s focus on accelerating the transition to clean energy increases the risk of gas projects becoming stranded assets. As the U.S. moves towards a net-zero economy by 2050, gas infrastructure investments may face reduced demand and lower profitability over time, making it more challenging to justify long-term financing for new gas projects. 

Adaptation Strategies For Gas Project Financing 

Gas project financing involves complex considerations due to the volatile nature of energy markets and increasing emphasis on sustainable practices. Some of the key adaptation strategies to enhance the viability and resilience of gas projects: 

Diversifying Investment Portfolios: Diversification involves spreading investments across different assets or sectors to reduce risk. In the context of gas projects, diversification means not relying solely on traditional gas investments but also exploring complementary sectors. Besides natural gas, companies can invest in related sectors such as LNG (liquefied Natural Gas), compressed natural gas. This broadens the revenue base and reduces dependency on a single segment. Furthermore, investing in projects at different stages of development- exploration, production, transportation, and distribution helps manage cash flow and spreads risk. Early-stage investment might be riskier but offer higher returns, while later-stage investments tend to be more stable. Also, utilizing various financial innovative instruments such as green bonds or sustainability-linked loans can attract environmentally conscious investors. 

1.     Integrating renewable energy components into gas projects can enhance sustainability, reduce carbon emissions, and meet regulatory requirements. This approach can also make financing gas projects appealing to investors focused on Environmental, Social, and Governance (ESG) criteria. Developing hybrid energy systems that combine gas and renewable energy sources, such as solar or wind, can ensure a more reliable and sustainable energy supply. For instance, a gas-fired power plant supplemented with solar panels can reduce operational costs and emissions. 
2.        This involves surplus renewable energy to produce hydrogen or synthetic natural gas. These gases can then be stored and used in gas infrastructure, facilitating a transition towards a hydrogen economy. 
3.        Integrating carbon capture and storage technologies in gas projects can significantly reduce greenhouse gas emissions. This technology captures CO2 emissions from gas-fired power plants and stores them underground, helping meet environmental regulations and enhancing project appeal. 

Case Studies on Gas Projects adapting to Changing Policies

Flowing from the above, it is markedly obvious that the international community is more focused on facilitating the use of renewable sources of energy. However, the infrastructure and the policies within the energy sector in Nigeria is only primed for the transition from heavy reliance on crude oil to gas. The Nigerian 2021 Energy Transition Plan maps a pathway to reduce Nigeria’s dependence on fossil fuels, emphasizing renewable energy. The plan aims for net-zero emissions by 2060 and proposes gas commercialization until 2030, then a gradual fossil fuel phase-out. The Decade of Gas Initiative (“DGI”) was created to grow value from gas assets while eliminating gas flaring and accelerating industrialization.

President Bola Ahmed Tinubu (the “President”) has recently inaugurated three (3) critical gas infrastructure projects in Nigeria, which are the expanded AHL Gas Processing Plant, the ANOH Gas Processing Plant, and the 23.3km ANOH to Obiafu Obirikom-Oben Custody Transfer Metering Station Gas Pipeline. These projects are in line with the Decade of Gas Initiative and upon completion, these projects are projected to boost domestic gas supply by about 500 million standard cubic feet per day, creating a conducive environment for investment and contributing to economic development over time.

The Domestic Gas Delivery Obligation (DGDO) is another policy framework that mandates gas producers to allocate a percentage of their total gas production for sale to the domestic market. This policy is aimed at increasing the supply of natural gas to the domestic market and encouraging the growth of the domestic gas industry. In compliance, Seplat Energy has plans to ramp up its gas production capacity by an additional 390 million standard cubic feet per day (MMSCF) by the end of the year, to boost domestic output.

The Presidential Directive on Local Content Compliance Requirements, 2024 (the “Local Content Directive”) emphasizes the implementation of the Nigerian Oil and Gas Industry Content Development Act, 2010. The Nigerian Liquified Natural Gas Project, a joint venture involving NNPCL, Shell, Total and Eni, adapted by increasing the use of local manpower, materials, equipment, and services in their operations. In addition, we can now see indigenous oil and gas companies such as Seplat and Oando competing directly with the IOCs, leading the way in promoting local content development around the regions they operate in.

Impact of Global Energy Policies on Financing for Gas related Projects

The resultant effect of global energy policies on gas project financing is profound and multifaceted, reshaping the landscape for investment in this sector. Several key factors must be considered to understand this impact comprehensively:

1. Environmental Regulations and Climate Commitments: Global energy policies, increasingly shaped by climate change imperatives, have led to stringent environmental regulations. International agreements such as the Paris Accord compel countries to reduce greenhouse gas emissions, which in turn influences financing for gas projects. Investors and financial institutions are increasingly adopting Environmental, Social, and Governance (ESG) criteria, prioritizing projects with lower carbon footprints and sustainable practices. This shift means that gas projects now face greater scrutiny and must demonstrate strong environmental credentials to secure funding.
2. Transition to Renewable Energy: The global push towards renewable energy sources significantly impacts gas project financing. Developed countries are implementing policies that favor renewables through subsidies, tax incentives, and favorable tariffs. These policies make renewable energy projects more attractive compared to gas projects, potentially diverting investment. Furthermore, technological advancements in renewables and energy storage are reducing costs, increasing the competitive pressure on gas projects to demonstrate economic viability.
3.  Economic Factors and Market Dynamics: The economic landscape also plays a critical role. The fluctuating price of natural gas, driven by market supply-demand dynamics and geopolitical events, affects project financing. In regions like Nigeria, where gas is seen as a bridge fuel in the transition from fossil fuel (particularly crude oil) to renewables, policies may provide financial incentives for gas infrastructure development. However, global economic shifts, such as the increasing cost-competitiveness of renewables, can make gas projects less financially attractive, impacting their ability to secure international financing.
4. Technological Advancements: Although not a policy issue, this is also a key consideration. Technological developments in gas extraction and processing have enhanced the feasibility and cost-effectiveness of gas projects. However, rapid advancements in renewable energy technologies present a competitive challenge. Gas projects must now integrate cutting-edge technologies and consider carbon capture and storage (CCS) solutions to meet environmental standards and attract investment. 
5. Policy Uncertainty and Risk Management: Policy uncertainty is a significant challenge in gas project financing. Frequent changes in energy policies due to political shifts and evolving environmental targets especially in developing countries like Nigeria, create an unpredictable investment climate. Investors and financial institutions must incorporate robust risk management strategies, including hedging and diversification, to navigate this uncertainty. Long-term policy stability and clear regulatory frameworks on the part of governments and regulatory bodies are essential to provide the confidence needed for sustained investment in gas projects.
6. Regional Variations and Market Specifics: The impact of global energy policies varies across regions. In developed economies with strong commitments to decarbonization, the financing landscape for gas projects is more challenging. Conversely, in emerging markets where energy demand is growing and infrastructure development is a priority, gas projects may still be viewed favorably as a cleaner alternative to coal. Understanding these regional differences is crucial for financiers looking to optimize their investment strategies and align with local policy frameworks.

 Conclusion

In conclusion, global energy policies significantly influence gas project financing by shaping environmental regulations, economic incentives, technological competition, and market dynamics. As the world transitions towards a more sustainable energy future, gas projects must adapt to evolving policy landscapes and demonstrate strong environmental and economic credentials to attract investment. Stricter environmental regulations and the global shift towards renewable energy sources have increased the scrutiny and risk associated with financing gas projects. As a result, financial institutions and investors are becoming more cautious, often demanding higher returns to compensate for perceived risks or turning towards more sustainable energy investments. This shift is reshaping the landscape of energy financing, pushing gas projects to innovate and adapt to align with the evolving global energy policies that favour greener alternatives in line with the United Nation Sustainable Development Goals (UN SDG).