A Review of the Nigerian Energy Industry

Time to put gas-to-power on track

Gas plant26 August 2014, Abuja – Relevant stakeholders in Nigeria’s power sector have initiated far-reaching measures to find lasting solutions to one of the industry’s foremost challenge- inadequate gas supply to thermal generation plants in the country.

Gas supply to power plants in Nigeria have overtime become so meager, thus resulting in low electricity generation profile that has perhaps messed up targets set in the Multi Year Tariff Order (MYTO) framework of the industry.

There is no gainsaying that the 6,000 megawatts (MW) MYTO target of NERC for the first half of 2014 was not achieved because gas supply to generation companies was inadequate.

Today, Nigeria has had to do with just about 3500MW of electricity generated from her mix of thermal and hydro power plants.
As it stands, inadequate gas supply to generation companies has not only reduced the industry’s electricity generation profile but now threatens to derail the momentum that was initially ignited by the sale of generation and distribution assets of defunct Power Holding Company of Nigeria (PHCN).

The industry, which ought to have set in motion the Transitional Electricity Market (TEM) as planned, following the conclusion of the privatisation exercise, has mainly for this reason stalled the declaration of TEM.
TEM, which is expected to bring operators in the sector to commit and trade under contractual obligations, is yet to take off for this reason.

However, with the exception of gas supply guarantee, some of the conditions precedent for the declaration of TEM has been met by the industry.

But its declaration has been kept in abeyance because issues around gas supply to the sector is still untidy until recently when stakeholders opted to cooperate in this regard.

To address this problem, key government agencies such as the ministries of power, and petroleum resources, Nigerian Electricity Regulatory Commission (NERC), Central Bank of Nigeria (CBN) and indeed, producers of gas in the country have come to terms on the need to collectively find a lasting solution to the challenge.

New efforts as game changers
Two very important developments have just taken place in the country’s electricity sector – the N25 billion CBN intervention in gas-to-power and a review of gas-to-power price by the NERC.

Both developments are meant to change the discussions in the gas-to-power sector.
The Chairman of NERC, Dr. Sam Amadi however, said that they were not happenstance but results of consistent discussions on the challenges.

Amadi explained in an interview with THISDAY that stakeholders in the sector have indicated their preparedness to make the most of the opportunity.

“The two initiatives are not happenstance, they didn’t just happen and they are parts of a long discussion and work by NERC with stakeholders. We have been worried about the problem of gas to power especially since it has thrown the Multi Year Tariff Order out of order. We have met with NNPC and decided to put up a working group involving owners of power plants and gas suppliers and we are working hard. Parts of the outcome of those initiatives and hard works are the collaboration between NERC, ministry of power and petroleum as well as CBN,” Amadi said.

He explained that based on such discussions, NERC had to review and approve $2.50 and $0.80 as new gas price and transportation cost in addition to the N25 billion put forth by the CBN to pay off legacy debts owed to gas producers by the defunct PHCN.

Amadi insisted that gas has remained an uncomfortable point in the sector.
“Let us make it very clear here; we do know that the only reason why gas has not been supplied sufficiently to power plants is not only because of pricing but there are issues of policy, weakness in project management and all that but we believe that price is the strategic point to start with. With pricing now, NERC is firmly demanding change; we do not want price to be another sweetener, we want it to totally change the taste of the whole meal and so with this commercial price, we are going to put pressure on the ministry of petroleum to end gas flare,” he explained.

Amadi further noted that the new commercial gas price regime is expected to act as a game-changer in the gas-to-power sector and that gas producers are now left without any commercial reasons to continue gas flare.
As part of the new price review, the regulator however said that it would demand that the price be contingent on improved commitment from the gas players.

“We had meeting with some of the gas players and the CBN and this was made clear. We expect improvement; the last domestic supply obligation showed that these gas suppliers failed woefully. The oil majors failed woefully to live up to their commitments and so they treated the domestic supply obligation cavalierly and without any sense of commitment.
“All that NERC is doing is to take away the excuses first; we want to make sure the price is good, we want to make sure that we create for them securitised guarantee in the value-chain of gas so that they will not say that they are dealing with delinquent buyers,” Amadi added.

End of regime of “best endeavour”
Also embedded in the new price regime for gas-to-power, will be standard and enforceable gas supply contracts.
Such contracts amongst stakeholders as explained by Amadi, would be enforceable with some security to build the confidence gas producers and end-users.

The regime will also bring to an end the hitherto practiced “best endeavour” regime in which parties to a gas supply agreement are not bound by any form of commitment and so can afford to simply default in their obligations without any sanction.
“We will commit to timely payment for gas supplied and the converse of that is that unlike before, they will commit to volume that is certain and they will commit to financial and legal liability for failure to perform; we cannot give the gas suppliers the kind of leeway that they had where they are not bound by their commitment to supply gas and where the supply of gas was based on best endeavour and so they had legal rooms big enough to at the shortest inconvenience refuse to supply gas according to their commitment,” Amadi said.

“We are looking for a new regime entirely; we consider the crisis a good thing to waste because it should lead to a revision of the gas-to-power framework in terms of policy, regulation and commercial. We will not accept best endeavour. It has got us stuck where we are today,” he added.

THISDAY equally gathered that gas operators in the country are totally comfortable with the new measure considering the realistic approach that is adopted in pushing it through.

N25 billion CBN intervention
In addition to the price review of NERC, the CBN also announced its support of the sector with a N25 billion portfolio meant to offset extant debts owed to gas producers by defunct PHCN. But Amadi explained that the intervention should not be considered a windfall to the electricity sector.

He noted that the intervention is structured to serve as a quick confidence booster in the sector, adding that with such investments in gas-to-power could begin to trickle in.

“We are structuring it in a manner that we will have a quick confidence boosting, get clear and bankable gas supply commitment from suppliers to direct volumes to increase capacity in the sector, restructure and securitise the framework in a manner that will continue to attract investments and not in a manner that depends on the goodwill of the public officer or uncertainty.

We want it in a manner that somebody sees the market flow, global framework, transactions and understand how they flow with the confidence that this market can sustain itself; so we are looking at building a market that is sustainable and generating confidence that is sustainable as well as commitment that will last,” he said.

New projects to add 370mmscf/d of gas
In the light of the challenges and resolve of stakeholders to work together in addressing them, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke who addressed a joint press conference with the Minister of Power, Prof. Chinedu Nebo, NERC and CBN, stated that new gas supply projects will in the short term result to an addition of at least 370 metric million cubic feet per day (mmscf/d) of gas to power plants in the country.

Alison-Makueke stated that as part of the new strategy gas supply projects to cushion the effects of gas supply shortages in the short term have been initiated by the ministry and are at various stages of maturation.

The projects she said include, the Utorogu field expansion comprising accelerated workover of some wells and completion of the new gas plant that will give in 60mmcf/d, expansion of Oben gas plant and drilling of new wells to add 100mmcf/d as well as the re-entry of Odidi field and revamping of its processing plants and flow-lines to deliver 40mmcf/d.

Others are the hooking up of already drilled oil wells in Pan Ocean’s Oil Production License (OPL) 275 to add 40mmcf/d, as well as a total of 130mmcf/d from the Nigerian Gas Company (NGC) in the eastern axis, Shell and Seven Energy.

She also disclosed that gas supply to Nigeria’s electricity sector which now stands at 750mmcf/d and 4000MW was achieved from similar proactive measures, adding: “As you know, the problem of inadequate gas supply is one that has been ongoing for almost 20 years and was inherited by this administration. Since then, various interventions have been put in place to bridge the supply challenges.”

“Although, gas supply has grown significantly in the last two years to about 1500mmcf, demand growth continues to outpace supply both in the power and non-power sectors. This mismatch has created a short term gas supply crisis,” Alison-Madueke added.

The new strategies adopted by stakeholders to address the challenges of Nigeria’s gas supply to the power sector are expected to provide suppliers of gas with new incentives to produce and supply adequate gas while an additional 370 mmscf/d is expected in the shortest time to improve the country’s generation profile and perhaps push the sector into TEM.



– Chineme Okafor, This Day

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