1.1 Background to study Globally, the energy mix has been experiencing an interesting dynamic. With more interest in energy security and environmental sustainability, cleaner energy resources have considerably gained prominence in the last couple of years. For instance, the International Energy Agency estimated that natural gas will lay a major role in the global energy supply mix. They opined that the share of natural gas in the global energy supply mix will grow from about 21% in 2010 to nearly 25% in 2035. This changing dynamism in the sources of energy supply orchestrated by concerns about environmental degradation and climate change challenges which have been attributed to fossil fuels use, especially coal and oil. Consequently, there has been a growing need for cleaner source of fuel, and interestingly, natural gas, which although is a fossil fuel, produces less amount of carbon compared with oil and coal. Given this advantage, natural gas has been termed the transition fuel. In this vein, natural gas, with its share in primary energy increasing is projected to become the fastest growing fuel (1.6 percent (%) per annum), overtaking by 2035(BP Energy Outlook, 2017). This growth is driven major by the increase in the use of natural gas for power generation, and as industrial feedstock, as well as for liquefied natural gas (LNG) projects. These global trends in gas demand have also been witnessed in Africa and Nigeria alike, albeit, in less quantity compared to the total global demand. Nigeria is acknowledged globally as one of the largest gas reserves holder, with estimated 182trillion cubic feet of gas, in addition to a potential 500 trillion cubic feet yet undiscovered. This level of reserves places the country in the 9th position in the league of gas resource holders. According to NNPC(2015), Nigerian total gas reserves consists of 48% associated gas (AG) and 52% of non-associated gas. Nigeria’s gas production has been increasing over the years, owing to demands from the Nigerian liquefied natural gas project (NLNG), the west African gas pipeline project(WAGP) as well as for power generation. Although, a large quantity of the gas produced is re-injected into the well for reservoir pressure and some others flared (figure 1). Figure 1: Nigeria Gas Production and Consumption (2006-2015). Although, gas flaring in Nigeria had continued unabated, owing to weak penalties placed on flare defaulters, as well as inadequacy of infrastructure for utilization of gas. This has constituted a major economic waste and environmental damage over the years; although, the quantity of gas flared have reduced drastically due to development of infrastructures (EIA 2012) and projects for domestic gas utilization. Therefore, with current interest in gas, it is expected that natural gas demand in Nigeria to meet her domestic and export obligation will rise. By how much will gas demand rise, given the anticipated projects that will come on stream is yet to be projected. This study is intended to fill this gap. 1.2 Statement of Research Problem There has been an increase in demand for gas especially for export (NLNG and the WAGP), and by the power sector. Recently, there has been a renewed interest by the federal government to diversify the economy through gas based industrialization. These industries, especially the petrochemicals and allied sector will require gas which will serve as a major feedstock (e.g. for fertilizer production industries) and for power generation. These will put pressure on the supply side of natural gas. Previously, studies on gas demand have been directed towards the power sector of domestic sector only. Importantly to, there has been an increasing interest in agriculture, implying that the need for fertilizer will also increase. With government interest in developing Nigerian economy on the back of the gas sector, as well as the increasing population growth, it is reasonable to assert that demand for industrial goods and products will increase. This implies that there will be increasing need for gas which is a major feedstock for these industries. In spite of this expectation, little attention has been given to this critical sector of our national economy. It is thus an imperative to project into the future, what the gas consumption for the industrial sector will be. Such outlook will aid in decision making for improved gas production in Nigeria. This study is set to bridge this knowledge and research gap. 1.3 Relevance of the Study Natural gas is one of the major indigenous sources of energy in Nigeria and accounts for less than 30% of all primary energy used in the country. Per capita and total energy use in Nigeria is still very small, and it is important to understand how energy, and natural gas demand in particular, will evolve in the future. There has been an increase in the production and consumption of natural gas in Nigeria. This growth is mainly driven by the power and industrial sectors of the economy. Additionally, natural gas is a relatively cleaner source of fuel and thus burns more efficiently, compared with coal and oil. Gas demand forecasts are used in decision making regarding how to achieve supply sustenance. It is also important for advancing alternative supply strategies geared towards mitigation of risk associated with disruption of supply. Importantly too, gas demand estimates are a good source of information for investors who may wish to engage in gas infrastructure projects in the country. Consequently, when this study is concluded, the result will not only be relevant to the government of Nigeria for decision making purposes, it will also furnish investors with requisite information for making informed investment decision. 1.4 Aim and Objective of the Study Generally, gas demand forecasting is used for making decisions regarding sustenance of supply strategy. Consequently, the aim of this study is to forecast future gas demand in Nigeria as a result of industrial development. The objective includes: To forecast industrial gas demand in Nigeria Assess the accuracy of forecasting model using MAPE, RMSE and the coefficient of estimation (R2). CHAPTER TWO LITERATURE REVIEW 2.0 Introduction In this chapter, we review both theoretical and empirical literatures on gas demand modeling and forecasting from a global, regional and country level perspective. We also discuss some stylized facts about the gas sector in Nigeria and the various demand sectors. We begin from the theoretical literature. 2.1 THEORETICAL REVIEW OF LITERATURE 2.1.1 Gas Based Industrialization The Nigerian government have envisaged development of its economy using natural gas, in what has been termed, ‘gas based industrialization’. Some major projects and infrastructures were earmarked for increasing local gas utilization. presently, the Nigerian liquefied Natural Gas(NLNG) as well as the West African Gas Project(WAGP) are the major export projects for gas in Nigeria. These projects are expected to push up the demand for natural gas in Nigeria. With recent policy development for gas sector development (the National Gas Policy, 2016), the demand for gas in Nigeria will surge rapidly in the near future. Hence, it is expedient to estimate future domestic gas demand, so as to furnish the government and the private sector with relevant information needed for making informed decisions that will guarantee sustainability in supply 2.1.2 Fertilizer Sector At the moment, Nigeria relies heavily on importation of fertilizer to meet its need. However, with Private companies, such as Notore chemical Ltd, taken over the National Fertilizer Company of Nigeria (NAFCON), and its gas sale agreement with the Nigerian gas company, the need for gas from this sector is expected to increase. The replacement of fertilizer imports by domestic production obviously will provide an opportunity for foreign exchange savings for the country, which will grow in volume and importance to the agricultural/food sector in the future. The possibility of an expansion of this facility and the establishment of other such gas-fired fertilizer plants have been enhanced by the Nigerian government statements that it intends to remove fertilizer subsidies and deregulate procurement. It is my opinion that a less visible but tangible savings in the food sector itself will result with increased fertilizer utilization, in addition to the earlier mentioned direct savings through import substitution. Presently, about US $ 1 billion is spent annually for import of food and live animals, thus any significant lessening of this figure will be noticeable. 2.1.3 Aluminum Sector The Aluminum Smelter Company of Nigeria (ALSCON) located at Ikot Abasi, Akwa-Ibom State, is the only aluminum smeltering plant in Nigeria. The plant was initially commissioned in 1996 but ceased operations in 1999 due to financial problems. The plant was configured to consume up to 130Mmcf/d of natural gas. Nevertheless, the plant has experienced challenges with production due to issues relating to inadequate natural gas supplies. For instance, the 193,000-metric tons a year smelter was only able to produce 15,000 metric tons of aluminum in 2011 (which is less than 10% of the total installed capacity) due to lack of gas. 2.1.4 Steel Sector For Nigeria to join the league of industrialized nations there is the need to have a sound industrial base. This would provide the fulcrum on which the industrial development will hinge. This industrial base is nothing more than a well-developed iron and steel industry, which will be producing such critical industrial raw materials as pipelines, cast iron, rods and bars, rails and wires e.t.c. Planning for the Nigerian steel industry started at the same time gas large quantity of gas was found in the country in (1958). This was heralded by contractual engagement between the Federal government of Nigeria and a German-Austrian company for construction of the steel plant in Aladja, Warri. The direct need from the coordinated expansion of the gas business thus necessitated the complete capacity of the current plants as well as many new plants. In fact, the steel demand requirement will enable the complete refurbishment of the current plants whilst still operating, given that the products or output from this company will be of international standard and at a comparative commercial price. However, these plants were to be connected to the gas system, as the project is only where there is available and adequate supply of gas. There are a couple of countries whose gas sector kick-tarted their steel industries, some of these countries include, Venezuela, Algeria and Mexico. 2.1.5 Gas as Feedstock for Petrochemical Industry Natural gas is a major feedstock for the chemical industries. Liquids from natural gas, especially the alkanes (Methane through to Butane) constitutes a major input for the industries. When processed and transformed, these could yield final or intermediate industrial products (American Chemistry Council, 2011). According to Prindle, (2010), chemical industries or companies are major users of natural gas as a feedstock, and thus consume large volumes for their processes. In USA for example, most of the chemical companies utilize gas as their major feedstock (American Chemistry Council, 2011). Because of the lower price of gas relative to petroleum products, chemical industries in the united states have benefited from huge competitive advantage in international markets for intermediate and final products (Denning, 2011). Additionally, because natural gas is credited for low emissions implications, it’s use for power generation and as a feedstock for industrial processes vary. 2.1.7 The Petrochemical Industry in Nigeria The petrochemical market is the foundation of many chemicals industry, as it provides the building blocks for most chemical products. For instance, Olefins. (ethylene, propylene, butadiene) and aromatics (benzene, toluene, xylene) are used in end-user markets such as paints, plastics, explosives and fertilizers. In a recent survey and analysis on the importance of refinery capacity to petrochemical markets in Nigeria and South Africa by Frost & Sullivan (www.chemicals.frost.com), strategic analysis of the South African and Nigerian petrochemicals markets, found that the Nigerian petrochemicals markets (excluding export of crude oil) was worth $14.03 billion in 2008 and forecasts it to reach $29.7 billion by 2015. South Africa’s petrochemicals market was worth $18.37 billion in 2008 and Frost & Sullivan forecasts it to increase to $24.5 billion by 2015. The demand for petrochemicals products is highly driven by activities in the end-user segments, which include well developed manufacturing sector that provides a ready market for end-products of the petrochemicals industry. South Africa’s petrochemicals market is more developed than other sub-saharan markets, with the capacities of the local refineries exceeding domestic demand. South Africa refineries operate at optimum capacity and this enables the country to export to other countries in the region. The South African market is unique because of the production of petrochemicals from coal and gas feedstock using coal-to-liquid (CTL) and gas-to-liquid (GTL) technologies. On the other hand, Nigeria depends on imports of petrochemical products, despite the presence of large crude reserves and four refineries. Obviously, the low refinery capacity utilization negatively affects the yield of petrochemical products, and hence the need for import. In south Africa, coal to liquid (CTL) technology is used to produce petrochemicals from coal, and the gas produced is used as feed stock. The choice of this alternatives arises from low capacity utilization of their refineries, and hence low production of petrochemicals to meet the high demand of the products. This makes the south African market a unique one. A restructuring of the operation of Nigerian refineries, with greater private sector participation, is likely to increase the capacity utilization of the refineries. Once this is instituted, the cost structure of the Nigerian petrochemicals market is set to improve crude is the main feedstock for the production of Olefins and aromatics in Nigeria and South Africa. Although Nigeria has an abundance of crude oil deposits, the cost of production of petrochemicals is high. This is due to issues such as disruptions in supply of crude to the refineries due to militants’ activity, general corruption in the country and inefficiency in the way refineries operate. Steps by the Nigerian Government to increase the benefits derived by communities in the oil regions are expected to bring stability and minimize disruptions. Consistent with the declining price of gas, and its increased used, regional consumptions of gas as feedstock have also increased (figure 2). Figure 2: Regional Demand for Natural Gas as Feedstock for Industries Source: Hossein (2017) – 13th Iran Petrochemical Forum Teheran, April 22-23rd 2017 Observe from the figure that Asia Pacific is the largest consumer of natural gas as feedstock: 27% (52 Bcm) in 2015 & a projected 30% (74 Bcm) by 2040. This is followed by the Americas, the second largest consumer of natural gas as feedstock: 23% (45 Bcm) in 2015 & 26% (64 Bcm) by 2040 respectively. This is particularly important against the background that t hese economies are large consumers of petrochemical products. Africa and Europe are however on the lower side in terms of gas demand for petrochemical production. It is however interesting to observe that there is a projected increase in the demand for gas for petrochemicals in as with the America, Asia-Pacific, CI and the Middle East. This trend again justifies the need to estimate the potential future demand of gas by the industrial sector, so as to make well informed decisions. 2.1.8 Future of Natural Gas in Nigeria There is no doubt that the evolution of unconventional gas (shale gas, coal bed methane, tight gas) in the U.S., Europe and China has had some implications for the Nigerian gas sector whose major markets have traditionally been the US and Europe. For instance, in 2007, Nigeria exported 97 TCF of gas to the U.S. representing about 12% of the total imports by US that year, while in 2011, Nigeria exported to the U.S. just 2.3 bcf of gas (Oyekunle, 2013) and in 2012 Nigeria exported no gas to the U.S. This loss of an export market, as well a forecasted further decline in Europe has prompted the Nigerian government to encourage investments that will improve local consumption and utilization of natural gas. Though LNG projects have been delayed due to the delays in agreeing the Petroleum Industry Bill and the unconventional gas evolution, several gas development projects are either on-going or proposed such as: IPP’s, NIPP’s, CNG, GTL, GTM, and GTF. Such developments mean that the natural gas industry in Nigeria is going to undergo significant change, diversification and expansion during the next few years. The pace of this will be influenced by politics and international gas market developments that are largely beyond the control of the major foreign investors in the Nigerian natural gas sector. With government renewed interest in the gas sector, as enshrined in the recently approved national gas policy, as well as the ‘Seven Big Wins’ initiative, and the already established domestic gas obligation and the Nigerian gas master plan, it is expected that the future holds great prospects for increased domestic and industrial consumption in Nigeria. 2.9 Domestic Gas Supply Obligation Policy Energy consumption is essential for the growth of an. Gas has remained one of the major sources of world Energy accounting for about 20% of the world energy needs. The International Energy Agency (IEA) projected in May 2012 that global demand for natural gas could rise more than 50% by 2035, from 2010 level (Wood, Nwaoha, and Towler, 2012) Nigeria is blessed with abundant energy resources like Solar, Coal, Tar sand, Natural Gas, Oil, hydroelectricity just to mention but a few. The commercial energy sector is, however dominated by Oil and Gas, both of which jointly account for about 71% of commercial domestic energy resources (Iwayemi and Adenikinju, 2001) Natural Gas’s abundance and its clean burning quality as opposed to other fossil fuels make it the favourite as fuel for electricity generation plant (Gas to Power) and industrial use. The Nigeria power industry is probably one of the most inefficient in meeting the dual needs of generating power supply and boosting investments because of insufficient Gas supply for power. Interestingly, Nigeria is a gas resource country with huge gas reserves. Nigeria’s natural gas proven reserve is estimated at about 188 trillion cubic feet (Tcf) as at January 1st 2015; broken into 90Tcf associated gas and 98Tcf of non-associated gas which makes Nigeria the world’s 9th largest gas reserves holder (Okorie, 2010), The development of gas sector in Nigeria has been constrained majorly by the absence of appropriate pricing, contractual agreements, integrated and robust gas pipeline infrastructure system, fiscal terms, legal and regulatory structures/institution and financing. 2.10 The major Domestic Gas supply sources are in the Niger Delta area of Nigeria. The major existing and planned domestic gas supply sources are Utorogu, Oredo, Oben, Obiafu/Obrikom, Okoloma, Obigbo, Alakiri, Uquo, Idu,AssaNorth,Erha, Okan,Odidi, Ogbainbiri, and Oso. It is pertinent to note that Nigeria has about 27 existing gas plant, namely, the Oben gas plant which has a supply capacity of about 240mmscfd, the Uquo gas plant supplycapacity200mmscfd, the Chevron-Escravos gas plant supply capacity of about 430mmscfd and Utorogu NAG 1 gas plant with a supply capacity of 360mmscfd, etc. Below is the existing domestic gas supply capacity by plant across the western and eastern part of the Niger-Delta; 2.11 What is Domestic Supply Obligation? In simple terms, domestic supply obligation is a gas supply provision concerned with the dedication of a stipulated gas reserve and production for the purposes of supply to the Domestic market. The concept of a Domestic Supply Obligation demonstrates the desire of the Nigerian state to cater for the needs of the home front by mandating an obligation on gas producers (IOCs) to provide certain needed supplies domestically. The Obligation create an imposition on certain products producer to provide their product in definite or calculated quantities for the consumption of person and industries within the state(Domestic Gas supply and Pricing Regulation,(2008),) In essence, a domestic supply obligation tend to reflect government efforts towards ensuring the sustainability of domestic sectors that require a particular product for growth so that the constant and adequate supply of that product is guaranteed for on-going and efficient operation of the sectors. For instance, some hydrocarbon laws or International Petroleum Agreement (IPAs) in developing countries commonly stipulate that local production first meet the domestic demand for petroleum (Nwaoha & Wood,2014) Within the context of Nigeria state, the DGSO is the obligation of person licensed to produce petroleum to dedicate a specific volume of natural gas towards the domestic gas requirement and to deliver the Gas to a (domestic) purchaser in accordance with a specified nomination procedure.( Domestic Gas supply and Pricing Regulation, 2008).The DGSO reflects the Nigerian government’s deliberate and conscious regulation of gas industry to ensure that domestic gas industries (especially the power and industrial sector) adequately benefit from the natural gas being produced in the country(Nwaoha & Wood,2014). This is aimed at promoting a public-private sector partnership for the orderly and rapid commercialization of Nigeria’s Natural gas resources for power generation and diversification of the domestic economy. 2.12 Context for the Domestic Gas Supply Obligation (DSO) Policy The gas sector has to be in a position to respond to many time critical challenges including: Potential imminent explosive growth in demand from the power sector; A limited market window to entrench its position as a dominant player in global fertilizer, petrochemical and related industries. There is a need to rapidly attract and secure investors in these sectors; Urgent need to diversify the domestic gas market portfolio from the earlier scenario dominated by PHCN to one with a wider group of possible off-takes as a route towards market competition; Urgent need to develop the necessary gas infrastructure. These near term challenges required a minimum gas supply flow that was significantly higher than the 300 mmcfd market that existed at the time. However, achieving a rapid growth in supply to drive the market was unlikely to happen on its own with the current structure of the sector which was dominated by oil-centric IOCs with little appetite for domestic gas market development. The DSO Policy was necessitated to jump-start supply to the domestic market. 2.13 The DSO Policy Objective The primary objective of the policy is to jumpstart gas supply availability to a level that will: Enable immediate response to the rapid growth in demand from NIPP and PHCN power plants; Create a base load of supply that could enable diversification of the market and jumpstart industrialization, Provide sufficient supply to underpin the commercial development of the extensive pipeline infrastructure required to support the market. Based on the above, it was established that at a minimum, the domestic gas market be underpinned by about 5 bcfd of gas – enough to support at least 15GW of power, achieve about 4-5% global market share in fertilizer/petrochemical/methanol industries, and enable reasonable commerciality for investment in over 2000 km of gas pipeline infrastructure. The thrust of the DSO is to create a base load of supply by intervention. However, beyond this threshold, it is expected that the basis for a fully competitive market would have been established and market forces will thereafter drive the growth of supply and demand in the market. In essence, the DSO Policy is a transitional policy intervention aimed in the short term at driving supply availability to a level that could sustainably support a fully competitive gas market. The figures below show the summaries of Nigeria Domestic Gas Supply Obligation and performance from 2008 to 2015. Figure 3: Domestic Gas Supply Obligation Source: Department of Petroleum Resources (DPR) It is obvious from the figure, that performance have lagged the stipulated volume. However, it is interesting that there is an improvement in performance from 2014, with expectation that supply to meet the stipulated obligations will increase in the near future. 2.14 The Key Elements of the DSO Policy The DSO Policy stipulates that during the transition and subject to the Federal Ministry of Petroleum Resources (HMPR) subsequent assessment of the state of the nation’s requirement: All oil and gas suppliers in the country will be mandated to set aside a certain amount of pre-allocated volume of gas for the domestic gas market; The mandatory obligation (called DSO) will be for a fixed volume of gas contributing to an overall base load determined by the HMPR for the purpose of transitioning the market only; It is intended that beyond this initial allocation, supply growth will be on a ‘willing buyer, willing seller’ basis, but the HMPR will retain the right to impose additional obligations, if considered necessary to do so in the interest of the nation; The DSO will be deployed for specific strategic purposes towards transitioning the market rapidly. This includes, but is not limited to, achieving a diversified off-take across sectors (power, industries, etc.), and stimulating the growth of backbone gas infrastructure across the country; The DSO will be administered centrally in order to ensure that FGN’s strategic objectives for the transition are realized. The Gas Aggregator Company will be established to manage the DSO; Supporting commercial policies will be developed to assure commercial viability of the supply; Suppliers who meet their obligation will be able to supply excess gas above the DSO on a ‘willing buyer, willing seller’ basis; The obligation will be set based on a target 5-year realization frame The DSO legislation requires all associated and non-associated gas reserves holders to dedicate a specific volume of gas supply to the domestic market based upon their gas reserves, their total production and their level of flaring. Domestic supply obligations are broken down annually to a production obligation by year based on the reserve entitlements of each player. The sum of all obligations equals the planned domestic requirement for the stated period. Figure below summarizes the domestic obligations, as issued by the DPR to all IOCs in 2009. Figure 4: Domestic Gas Obligation on Producers in Nigeria. Source: Department of Petroleum Resources (DPR) Figure 4 show the Nigeria Domestic Gas Obligation allocation to companies and their performance from 2008 to 2015. The approach government has taking to enact a policy that will ensure that the IOC used some portion of the allocated gas for domestic uses are commendable. Although, the majors Gas industry players are not too thrilled about this, but it is a price they have to pay if they want to remain in the Nigerian Gas market. 2.1.15 Challenges to increased Industrial Gas Utilization 184.108.40.206 Associated Gas Notwithstanding the earlier drive for gas utilization in Nigeria, the utilization of gas was low compared to the amount that was being produced in association with the production of crude oil. This is because while, oil is a stable and relatively inert liquid, which is readily capable of production, storage, transportation and sale. Gas, on the other hand, in terms of transportation and storage is a far less accommodating commodity18. As a result, downstream projects for gas utilization are expensive, need high front-end capital investment, and also require immediate off-takers. Coupled with the above challenges faced by natural gas, the most important reason why international oil companies were not interested in the utilization of gas was the high costs of the extraction, processing and separating of associated gas production. The costs involved in associated gas use have been estimated to be ten times higher than those for the non-associated variety (Davidson, Hurst and Mabro, 1998). Non-associated gas is cheaper to use because the capital costs involved, include drilling and treatment without any extra outlay on compression and/or re-pressurization for transport (Khan, 1994). Furthermore, these costs are spread over a larger reserve base compared to those in associated gas production. There is also the perennial problem of using associated gas, which is that the reliability of supplies is heavily 220.127.116.11 Infrastructure Inadequacy In terms of capacity and reach, the natural gas distribution pipeline network is extremely limited. As stated earlier, the gas reserves are concentrated in the South-South and South-Eastern part of Nigeria, however, the main demand centers are located in the south-west of the country. Connectivity between these geographical regions is limited, also there is virtually no pipeline infrastructure serving the northern parts of the country. This situation has adversely affected the development of the domestic gas market, as several companies that are willing to use gas in areas outside these areas of operation cannot be connected. Even within areas with pipeline infrastructure, the Nigerian Gas Company Limited (NGC), the government company with monopoly over transmission and distribution of natural gas in Nigeria, has been unable to deliver gas to several companies that want to be connected, due majorly to the paucity of funds to meet these demands(NGC 2012). This would not have been the case, if the federal government had drawn up a well thought-out policy for gas infrastructure development from the very beginning. This is as a result of the fact that, financing was clearly not an issue for Nigeria until the early 1980s (before the drop in oil receipts). Nigeria’s oil revenues increased between 1969 and 1974 by twenty-eight times, from about $480 million to $12.1 billion per year27. During the 1970s and well into the 1980s project expenditure remained well below budgeted targets. However, while money was available in this period, th e government did not simply allocate it to gas development. For example, during the second five-year NNPC’s development plan (1970-74) nothing was allocated to gas investment. In the third five-year plan (1975-80), out of the total 1.757 billion Naira that was allocated to NNPC, only 10 million Naira was set aside for gas infrastructure development (Davidson, 1998). Regrettably, by 1977 nothing at all had been spent out of this budgeted sum. Likewise, in the fourth five-year plan, of the meager amount that was allocated for gas development only a relatively small amount was actually spent. The desire to develop the domestic gas market only came after the oil boom period, and by then the federal government had to resort to borrowing to fund domestic gas project. A case in point was the construction of the 240-mile Warri- Lagos gas pipeline, in 1988 NNPC had to obtain third party financing from export credit agencies and multilateral banks (the World Bank and the European Investment Bank) to construct this pipeline. 18.104.22.168 Gas Pricing For there to be meaningful development of the domestic gas market, the price must be right for both the consumer and the producer to allow for the huge investment that is required to develop and maintain facilities. The government controls the price of natural gas for the domestic market, and the price is usually not viable for development of domestic gas consumption (Akpan, 1997). The price does not cover the costs of maintenance of facilities, let alone provide money for new projects or even profit. Gas pricing for consumers in Nigeria was set in a discretionary and non-transparent manner. State corporations, which constitute the bulk consumers of gas in Nigeria, receive gas at very low prices in comparison with private consumers of gas. For example, at a point Power Holding Company of Nigeria PLC (PHCN), the government owned utility company that accounts for over 85% of domestic gas demand, was paying 3 Naira/Mscf, whilst, NGC the seller was paying 3.143 Naira/Mscf to the gas producers and this does not include the cost of transmission, maintenance and other operating costs (Adefulu, 2000). Notwithstanding the low price, PHCN was unable to make payment for gas received as and at when due (NGC, 2008). The irregular and short payment to NGC, who as a result were unable to meet their financial obligations to the gas producers, made both parties unhappy with the price setting mechanism, as it was not market-based. The unsustainable price setting mechanism and the inability of the largest consumer of natural gas to pay for gas off-taken, therefore did not provided the right signals for investors to develop the required gas infrastructure. 2.2 Review of Empirical Literature Several published particles on forecasting of consumption, demand and production of natural gas deployed varying tools and techniques for forecasting. Among the first models established for forecasting natural gas consumption was the Hubbert curve model. In this study, Hubbert (1949), and Hubbert, (1956) investigated annual statistics of fossil fuels production, and after plotting production over time, noticed that the curves had similar characteristics and strong relationship among them: each curve starts slowly and then rises more steeply until finally it reaches an inflection point after which it becomes concave downward. The model was based on two basic considerations: 1. For any production curve of finite resource of fixed amount, two points on the curve are known on the outset, namely that t = 0 and again on t =1. The production rate will be zero at the beginning, whereas at the end of exploitation, when the resource is exhausted, with one or several maxima in between. 2. The second consideration derives from the theorem of the integral calculus, that: “if there is production curve plotted against time on a scale, such that P = dQ/dt, where dQ is quantity of resource produced in time dt, then the total area under the curve, production-versus-time graph, will represent ultimate production of an exhaustible source. Taken cognizance of these considerations, he estimated ultimate reserves of fossil fuels and then forecasted the rates of production into the future. A modified version of that model was used by Al-Jarri and Startzman (1997), Al-Fattah and Startzman (2000), Siemek (2003), Cavallo (2004). In addition to the Hubert Model, statistical models for natural gas consumption have been developed and used in the 1960s and since then, various statistical models have been adopted for forecasting in past and current researches (Bozˇidar, 2012). Among the first reported, Balestra and Nerlove (1996) used statistical tools and time series data in forecasting demand for natural gas. In order to estimate the demand for electricity and natural gas in northeastern United States, Beierlein (1981) used seemingly unrelated regression estimation. Piggott (1991) used Box–Jenkins modeling in time series analysis. Herbert et al. (1987) used regression analysis, whereas regression analysis, residual analysis and linear regression equation were used in Herbert (1987). Also, Liu and Lin (1991) estimated the residential consumption of natural gas in Taiwan using linear transfer function method. Brown and Matin (1995) employed feed-forward artificial neural network models to forecast daily gas consumption in Wisconsin, United State. Similarly, Khotanzad (2000) used the artificial neural network (ANN) forecasters in the prediction of daily natural gas consumption needed by gas utilities. Durmayaz (2000) estimated the residential heating energy requirement and fuel consumption in Istanbul based on degree-hours method. Gumrah, (2001) also analyzed the factors theta influence gas consumption in Ankara, and their relationships. They suggested a model based on degree-day concept including annual number of customers, average degree days, and the usage per customer. Consequently, Sarak and Satman (2003) forecasted the residential heating natural gas consumption in Turkey by using degree-day method. Although, there had been deficiencies in the methods above. In this regard, Aras and Aras (2003) have described an approach to obtain appropriate models for forecasting residential monthly natural gas consumption in terms of time series analyses and degree-day method. Viet and Mandziuk (2003) analyzed and tested the several approaches to prediction of natural gas consumption with neural and fuzzy neural systems for natural gas load in two different regions of Poland. In another study, Siemek, (2003) implemented the Hubbert model based upon Starzman modification to describe the possible scenario of the development of the Poland gas sector; while Liu (2004) used the support vector regression (SVM) technique for natural gas load forecasting of Xi’an city, and they compared their result with a 7-lead day forecasting using neural-network-based model. Although Brown et al. (2005) presented mathematical models for gas forecasting in their study, they fell short of accounting for gas consumption in the various sectors that utilize gas as feedstock. Hence, the Gil and Deferrari (2004) generalized model which predicts mainly the residential and commercial natural gas consumption in urban areas of Argentina, for the short and intermediate ranges of time was preferred. In furtherance, Gutiérrez et al. (2005) used Gompertz-type innovation diffusion process as a stochastic growth model of natural gas consumption in Spain and compared stochastic logistic innovation modeling and stochastic lognormal growth modeling of a non-innovation diffusion process; whereas in 2006, Al-Fattah presented a methodology for developing forecasting models for predicting U.S. natural gas production, proved reserves, and annual depletion to year 2025 using time series modeling approach(Al-Fattah, 2006). Ivezi (2006) showed the results of investigation of an artificial neural network (AN N) model for short term natural gas consumption forecasting. This methodology uses multilayer artificial neural networks to incorporate historical weather and consumption data. In their study, Potocnik (2007) proposed a strategy for estimating and forecasting risk of natural gas consumption in Slovenia. This strategy combined energy demand forecasting model, and economic incentive model and a risk model. However, the report by Sanchez-Ubeda and Berzosa (2007) was a model based on decomposition approach to capture demand patterns in a very large number of different historical profiles. In other reports, Ediger and Akar (2007) used ARIMA and SARIMA methods to estimate the future primary energy demand for Turkey from 2005 to 2020; while Kizilaslan and Karlık (2009) used neural networks algorithms to find the best solution for forecasting of monthly natural gas consumption. Erdogdu (2010) also deployed ARIMA model in forecasting natural gas consumption in turkey. Bhattacharya and Timilsina (2009), Jebaraj and Iniyan (2006) and Urban et al (2007) recently reviewed the existing energy demand models for application in developing countries. Bhattacharyya and Timilsina (2009) identified four simple approaches, including growth rate, elasticity based, specific consumption and energy intensity for forecasting energy demand in developing countries. The advantages of these methods are less data and skills requirements, although the methods can be widely off-the-mark in practice. Among the relatively sophisticated models used for energy demand, are trend models, econometric models, engineering economy models, hybrid models. Also, Wadud (2011) posited that there are other models for forecasting natural gas demand. They include, but not limited to dynamics models, scenario approaches, input-output models and artificial neural network models. In their study, Junchen, Xiucheng, Jianxin, and Mikael, (2011). Used the system dynamics model to create a possible outlook of gas consumption in china. The report showed that the gas consumption in China will continue to increase fast to 89.5 billion cubic meters in 2010; 198.2 billion cubic meters in 2020, before finally reach 340.7 billion cubic meters in 2030. They used scenario analysis to assess the accuracy of their result. However, this method is data intensive, which is a major challenge for gas forecasting for developing nations like Nigeria. Faheemullah, (2016) developed the logistic and logistic-population model based approach to forecast the medium- (2020) to long- (2035) term natural gas demand in China. The adopted modeling approach according to the authors is relatively simple, compared with other forecasting approaches. To improve their forecasting precision, the implemented the Levenberg–Marquardt Algorithm (LMA) to estimate the parameters of the logistic model. The forecasts results showed that China’s natural gas demand will increase to 330–370 billion m3 in the medium-term and by 500–590 billion m3 in the long-term. Moreover, the forecasting results of this study were found close to studies conducted by the national and international institutions and scholars. This lends credence to the effectiveness of the model.