How to grow Nigeria’s power, gas sectors, by Joe-Ezeigbo

Audrey Joe-Ezigbo is the Co-Founder and Executive Director, Commercial Operations of Falcon Corporation Limited and a member of the Executive Committee of the Nigerian Gas Association. She spoke with Business Editor, ADE OGIDAN at the recently concluded Power Conference themed “Powering Africa/Nigeria Investment Summit” on the challenges of the energy sector in Nigeria today, and the imperative for a concerted focus on natural gas production and transportation infrastructure development required to ensure a sustainable and profitable gas sector for the country. Excerpts

You spoke passionately about the opportunities for the power sector what are your thoughts on the recently concluded Powering Africa Nigeria summit? What are the new learnings?
I must say that the summit has been verythought provoking and impactful, with very high-level deliveries from top professionals from diverse energy background speaking directly to the issues at hand. The summit is themed around maintaining the momentum in Nigeria’s power sector, which is a critical discourse in the country today. Participants deliberated ongrowth opportunities for the industry, proffered solutions to the challenges of raising finance were highlighted and opportunities were identified for investorsparticipation in the very important sector. In all there was a lot of learning that can lead to maximizing the opportunities in the industry which is critical to realizing the country’s vision of a stable and sufficient power supply.

I believe the Powering Africa Nigeria Investment Summit is timeline as the new administration is trying to establish the direction for growth and development, particularly in our core strategic sectors, including power.

Your delivery dwelt on the building of a sustainable and profitable gas sector. What were the key issues that arose from that discussion?
I believe the primary focus include the need for a review of the pricing for gas in order to make it more cost-reflective and attractive to investors; the need to pay more attention to the development and commercial exploitation of our Non-Associated Gas reserves; and other imperatives to ensure we get adequate infrastructure on ground to support the various gas-based initiatives across the country.

The focus of the summit is of course on powering Nigeria, and so we looked at the need to develop the appropriate linkages in our gas transportation network infrastructure in order to ensure sufficient feed to the NIPP’s and IPP projects. The key considerations were centered around how best to gasify the Nigerian economy, looking at the Nigerian Gas Master Plan NGMP, and how best to secure the regulatory environment so as to incentivize investors – local and international to take up more active roles in growing the sector in a sustainable way.

Generally speaking, what is your take on the state of the Oil & Gas industry in Nigeria today?
The landscape of the Oil & Gas industry in Nigeria today is both exciting and challenging. In my view it is at a stage in which only the savviest of players will thrive. Over the past couple of years we have seen significant divestments of assets by the IOC’s as they move deeper offshore, and this in itself has presented clear opportunities for increased indigenous participation in the upstream space. Additional divestments are in play and there are some of us who have positioned to move into these emerging opportunities. There are upside and downsides to this development, but in the long run I believe this is good for Nigeria in terms of increasing investment by indigenous players, and beefing up our local content capabilities, capacity development and technology transfer.

On the gas side of the industry, what we see now is that essentially, it is a sellers’ market at this time, with demand far outstripping supply. This presents a major challenge to the various gas-to-power projects and initiatives that are ongoing. While we see many of the new players progressing to monetize their gas reserves, we are a long way off from having sufficient molecules available to support the projects that demand gas as fuel or feedstock.

Do you believe the new leadership of the NNPC is on the right track?
The current restructuring within the NNPC is for me a very welcome development. It is clear to me from the appointment of Dr. Kachikwu and the strategic approach which he has marshaled out for the restructuring of the NNPC that we are finally on the right track to input the much needed efficiency and refocusing that is long overdue in the industry, from the regulatory elements and across the entire value chain. I am personally looking forward to a remodeled industry wherestrategic gas development will feature prominently and in which there will be more concerted focus on gas value addition.

Energy security is a big conversation within countries in Sub Saharan Africa in particular, and Nigeria is certainly no exception in this regard.The huge drop in crude oil prices and the current instabilities and uncertainties in the market globally is a major wake-up call for us as a country. It is clearly a call on Nigeria to draw our focus more on the side of our Non-Associated Gas reserves, to see how we can fast-track a more aggressive investor focus in that terrain.

You made reference to theNational Gas Master Plan, however, there are some who posit that the NGMP has not made progress or added to the development of the industry in way. What is your view on this?
It would certainly not be correct to state that no progress has been made to the industry with the implementation of the Gas Master Plan. Going by the quantum of progress and how appreciable this is viz-a-viz the huge need and infrastructure gaps in the country as envisaged to be addressed by the NGMP, progress has certainly been made. One significant area of impact has been with respect to the domestic supply obligation (DSO) and the level of compliance by the producers. We can also attest to a reduction in the level of flaring. On the pricing side, we have seen some movement towards achieving a strong commercial and more cost-reflective pricing framework, and certainly the scope of the Gas Master Plan itself has created several investment opportunities that we expect to begin to see movement in over time.

In the first place, the NGMP was put in place to address the issue of long-term energy security which as I said earlier is critical to national development. It was set to address three strategic objectives- the delivery of gas-to-power targeted at ensuring about threefold increase in generation capacity by 2015; to achieve a reasonable level of gas-based industrialization and thereby positioning Nigeria as the undisputed regional hub for industries such as fertilizer, petrochemicals and methanol which require Natural Gas as feedstock; and of course to ensure we deepen our export gas market making it more robust and profitable.

What then do we need to do differently if the National Gas Master Plan is to achieve more tangible results?
Key things that we still need to address include the issue of pricing and of deregulation.We must address the pricing issue across the value chain to attract investment into the sector. This is the only way we will be able to ramp up the pace of investment in gas field development to be at par with investments in power generation – a situation which has led to the current demand supply mismatch.

Similarly, the issue of policy needs to be addressed. This indeed is where the PIB discourse comes into play.We need to allow private investment to drive the industry, while the government sticks with providing an enabling environment and regulatory oversight. The government must give attention to enabling policy to drive investment by the private sector.Investors need to be certain of returns that are secure and sustainable over the long term. Investors need to be assured of sanctity of their contracts. Investors want to be certain that the regulatory environment is stable, and they will not have to contend with regulatory undulations and outright summersaults that have potential to cripple their investments or threaten their revenues. And then of course, due attention,must be paid to the reduction of undue bureaucratic bottlenecks and systemic redundancies that impinge on the close-out timelines for project reviews and approvals, in order to minimize cost escalations and distortions. The issue of multiplicity of agencies must be addressed and streamlined to enable smooth process flows.

What are your thoughts about funding the projects outlined for delivery under the NGMP?
Funding is another major enabler that is required to be given adequate attention if we are to achieve those projects. The current landscape of our money and capital markets, the banking sector, and the economic constraints the nation faces, do not support ease of access to cost-competitive long-term funding opportunities by investors, neither is it necessarily a smart move to access dollar-denominated funding at this time. One of the things I would like to seetherefore,is government putting in place a special purpose fund specifically directed at gas sector infrastructure development projects. We have seen such interventions for the power sector – more recently the N213 billion Nigeria Electricity Market Stabilization Facility,and it is important that we make such intervention funds available for gas infrastructure development as well. Otherwise, we will continue to see a mismatch between the power sector-led demand for gas, and the supply side which can only deliver based on available production and delivery infrastructure.

What is your view on the proposal that the Nigerian power sector should be managed under the same regulatory structure as the oil & Gas sector?
I am aware that the NERC Chairman has advocated this pointing out that the model adopted by Nigeria for the power sector reform is that of the US and UK where there is one regulator for electricity which also regulates gas transportation and supply to power plants. This is not the case in Nigeria. And yes, I do agree that given that 80percent of our power plants are thermal and dependent on gas, it is imperative that we look at the gas-to-power linkages from the regulatory front and see how best to tighten and streamline the process to achieve greater coordination and efficiencies.

However, one thing that is clear is that we cannot always borrow models in totality. We need to look at our own particular landscape to establish the workability of whatever model we propose to adopt. Ultimately, we might be able to achieve this in the long run, but I do not think our system is mature enough to handle this yet. The bigger issue I see is one of systemic inefficiencies that must be addressed, as well as ensuring that adequate processes are put in place to effectively manage the regulatory and operational handshakes that must necessarily happen – be they internal or across functional bodies. I believe this is the approach the current leadership of the NNPC has adopted and we can already feel some of the results in the industry.

Do you support the proposal that there should be a dedicated ministry for gas?
We must keep in focus the fact that gas-to-power is only one leg of the strategic thrust of the NGMP. If we do not think it through properly, and try to lump the regulation of electricity and gas transportation together, other regulatory issues will arise in terms of how to disaggregate available gas molecules due to each of the other sectors and managing the process efficiently. In a sense, I see this question as being on the same plane as the debate as to whether to pass the PIB in its full form or to split it and manage it as smaller separate bills. And before you ask, my response is that while that could work, the bigger issue is one of ensuring that there is a full commitment to effectiveness and efficiency in delivering on the objectives of any one or all sections of the PIB when it is eventually passed. Minus this commitment, the whole or the part will be no better for the split.

So yes, as a player in the gas space, I look forward to Nigeria having a dedicated ministry for gas, which would then be charged with the responsibility for providing regulatory oversight for export gas, gas-to-power, and the domestic gas-based industrialization segments. My expectation is that such a ministry will address the major bottlenecks, overlaps,and inconsistencies that are not at all helping the sector develop at its full potential.

Do you see any prospects for deepening of the industry with the placement of the National Gas Transportation Network Code?
Certainly! It is clear that as we work towards building an integrated system of gas transportation infrastructure, the adoption of a framework that allows for open access to the country’s network of gas pipelines is an imperative for growth and transformation of the industry. The National Gas Transportation Network Code (NGTNC) is designed to provide the contractual framework between transporter and network users where this open access can be operated. Our industry must necessarily move into the space where it is driven by an unambiguous interplay between competitiveness and capacity all through the value chain, from gas producers to transporters that operate the network, to shippers that use the gas, and right across to the commercial agents that feed the ultimate end-users.

I believe that with the NGTNC and the build-up to an open access system, we are also likely to see increased private sector-led investment in gas transmission and transportation infrastructure being attracted into the gas sector. The NGTNC is also designed to ensure equity in entry and exit, transparency in the tariff mechanism, and of course as I said earlier, ensure fair competition. These are essential to the build-up of a robust and efficient gas industry. Properly managed, the code should also portend nearer-term investment return timelines as it encourages the use of the integrated monopoly franchise model and tariff plans under the new regime are expected to address the cost of service, thereby also enhancing the recovery of investment. This kind of development is always a welcome one for investors.

Has the industry seen manifest benefits from the National Gas Transportation Network Code?

We are a way off yet from seeing the full benefits of the NGTNC. It is very much in its early days yet. And as I have said earlier, we do not have the pipeline infrastructure network that is the fundamental consideration underpinning the full implementation of the code. And there is still a lot of work to done towards streamlining the various existing commercial agreements in place with various stakeholders along the value chain, in order to ensure the necessary alignment required for a seamless implementation. Though the NGTNC promises to sustain existing legacy agreements, the existing concerns around how this affects the legacy considerations and current constraints on existing contracts and arrangements cannot be wished away and must be effectively addressed if the code is to succeed.

Of course the market is going to have to make an adjustment as the implementation of the code begins to unfold in real terms. The industry is moving towards deregulation to allow for the market to be driven fully by the forces of demand and supply, on a willing buyer-willing seller basis. This has implications for the price at which Natural Gas is currently available to various buyers. We cannot continue to maintain the artificial pricing structure that exists as a result of regulation, not if we want the kind of investment and development that we desire to turn the fortunes of the industry and nation around going forward. As an industry and as a country, we must not lost sight of the end objective of long-term energy security which is the bedrock of industrial transformation of any economy.

You have spoken about the pricing issue quite a bit. However, even with NERC having accepted the willing buyer and willing seller concept, and with increase in gas pricesto $2.50 and transportation costs of 0.80cents, we have not seen an appreciable level of new investments in the gas sector, and particularly in the domestic gas-to-power sector? What more do investors want? Are there other considerations?
The increased prices were certainly a welcome development and a giant leap towards building investors’ appetite in gas projects. But if you would speak to the producers, they would tell you that nothing short of $3.30 – $3.50cents/mmbtu for gas production processing makes investment sense.