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Addressing obstacles to domestic gas optimisation for power generation

By Femi Adekoya
20 March 2019   |   4:05 am
Despite Nigeria’s potential of being a key player in the global natural gas market due to its huge gas reserves, not much has been accomplished with respect to the effective exploitation and utilisation of these reserve.

A gas plant PHOTO: MYNAH Technologies

Despite Nigeria’s potential of being a key player in the global natural gas market due to its huge gas reserves, not much has been accomplished with respect to the effective exploitation and utilisation of these reserve. While some of the reserves remain ‘stranded’ and often considered as non-commercial and difficult to exploit, inability to agree on a pricing model and regulation in some cases continue to impede the optimisation of the available reserve.

With well over 187 trillion cubic feet of gas reserves, Nigeria is believed to have more potential in gas than in oil, especially if diversity in global energy consumption is considered. The nation’s gas reserves, estimated as the largest on the African continent, and ninth largest globally, have been assessed at three times the value of her crude oil reserves. Given the role that oil has played in the economy thus far, it is clear that the gas reserves, if harnessed properly, can play a vital role in the economy.

In recognition of this, the Nigerian Gas Master Plan was developed to position Nigeria competitively in high value export markets, guarantee the long-term energy security of the country, move gas from its dormant status in 2006 to a sustainable market-based system with willing buyers and willing sellers, and realise the full potential of the sector for the benefit of Nigerians.

The strategic effort led to the categorisation of three broad areas for intervention: Strategic Domestic (initially gas to power for national grid supply), Strategic Industrial and Commercial Sectors. The power sector is the largest area of demand for domestic gas and the success or failure of the domestic gas industry is tied to the fortunes of the power sector.

With electric power generation at its ground state, crippling rate of unemployment, emergent global climate change caused by greenhouse emissions from flare-out, it has become imperative to further find ways to exploit and utilise the nation’s natural gas reserves and translate it to the improvement of the nation’s economy.

Managed pricing and challenges across electricity value-chain
For instance, there have been concerns between local manufacturers and gas franchisers on the pricing of gas and dollarisation of the commodity, considering challenges encountered by the local producers in accessing foreign exchange. Similarly, a review of the power sector regulatory performance showed that managed pricing remains a bane across the value-chain, with consumers unwilling to pay more for inefficient power supply, while operators’ indebtedness to each other remains on the rise.

From having near constant supply of power in the 1980s, from the state-owned electricity company, the Nigerian electricity industry moved to almost complete dependence on self-generation by the 1990s. In the early 2000s, the government communicated its interest in the improvement of the power sector and published a new power sector policy.

Since then, there has been a series of events that has propelled the power sector discussions to the fore of societal discussions. The Electric Power Sector Reform Act (EPSRA), was passed in 2005 and then implementation began with the creation of a strong and supposedly independent regulator; Nigerian Electricity Regulatory Commission (NERC).

NERC subsequently went through a detailed sector review, which considered all the economic elements of power production and supply to create a model that prescribes a sustainable power pricing schedule. The subsequent privatisation of PHCN brought in private sector groups that committed to efficiency improvements as well as additional investments to improve the sector.

Since the privatisation however, the sector has continued to run at a deficit; a big part of the deficit being due to non-payment of cost-reflective electricity prices. NERC published the Multi-Year Tariff Order 2 (MYTO 2) in 2015, to communicate the regulated prices to be paid to electricity distribution companies (Discos).

Although Section 6 of MYTO 2 authorises NERC to conduct bi-annual minor reviews of the tariff so as to update the total cost of electricity, NERC has failed till-date to effect any changes to the total pricing of electricity despite significant material changes to the basis of assumptions in the sector pricing framework i.e. Nigerian inflation rate, US dollar foreign exchange rate, cost of fuel (gas price), and actual available generation capacity.

This failure to effect changes to pricing has resulted in participants in the sector being unable to repay their loans and the sector is struggling to raise the much-needed investments identified in the privatisation exercise. This has led to significant value erosion to investors across the power value chain from gas suppliers to generation companies (Gencos) and even NBET, whose investments were predicated on a market-driven electricity sector.

Specifically, about N701 billion invoices submitted by the electricity generation companies (GenCos) between the last quarter of 2016 and third quarter of 2018 is yet to be settled by the Nigerian Bulk Electricity Trading (NBET).Statistics published by the organisation revealed that while invoices submitted by the GenCos stood at N499.78 billion in the first eight months of 2018, NBET only paid about N130 billion, leaving a debt of about N369.78 billion.

In 2017, while the GenCos sold electricity worth N530.26 billion to NBET, only N338.775 billion was paid, leaving a debt of N191.4 billion. Available records for 2016 showed that electricity worth N221.03 billion was sold to the government agency, but only N80.55 billion was remitted to power firms, leaving a deficit of N140.48 billion, which brought the total to 701.66 billion in the period under review.

The statistics, which showed the financial burden in the sector that was privatised in 2013, revealed that poor remittance by the DisCos remained a major barrier, as the firms recorded only an average of 25 per cent remittance. Erratic power supply continues to be the bane of Nigeria’s economic and industrial development as several manufacturers have had to either shutdown their operations or relocate to neighbouring West African countries in order to remain competitive in the market.

Opportunities in gas uptake
Power is the main destination for domestic gas with up to 70% offtake. NERC’s Q1 2018 quarterly report of activities in the sector, attributed 74% of the operational constraints causing stranded capacity within the electricity market to inadequate gas supply to the Gencos.

A key component of the MYTO 2 model was the pricing of gas to the power sector under the Domestic Supply Obligation (DSO) regime, which is capped at $2.50/mscf. Gas Aggregation Company of Nigeria (GACN) acting as the “Strategic aggregator” for the domestic gas market mandates every gas producer to allocate a portion of their gas production to strategic sectors of the domestic market (majorly the power sector) before allocation to other commercial obligations.

However, the yearly performance of actual gas supplied compared to DSO ranges from a low 20% to 35%, as gas producers are unable to meet the DSO demands. The short-fall of gas supply to the domestic market can be linked to a number of issues and one such issue is the preference of producers for a deregulated market (i.e. export) where they can ensure return on their investments.
Given the global push away from oil to cleaner fuels, such as gas, the Nigerian economy is going to become ever more dependent on gas and less dependent on crude oil.With rising demand, users in the private sector, especially local manufacturers continue to advocate fair pricing to aid competitiveness.

The need for a common ground in pricing and regulation
To avoid a downward trend in the gas industry, it is crucial that a system that encourages private sector investment, including foreign investment, is put in place. To achieve this, all the participants in the gas value chain (gas producers, gas processors, pipeline developers) must be confident of return on their investment.

The immediate past President, Nigerian Gas Association (NGA), Dada Thomas, had told The Guardian that investors, especially those, who would primarily invest in gas fields and infrastructure have been hindered by a 2015 policy by the CBN, which stipulated that all transactions in Nigeria must be settled in naira and at the apex bank’s rate, not minding that most gas transactions are in dollars.
Besides, the inability of the government to pass the Petroleum Industry Bill (PIB) to address the challenges affecting the sector would also continue to delay the development of the sector, the NGA President said.

According to operators, the current DSO procedure that allocates seemingly arbitrary pricing on gas supplied by the upstream gas producers without considering the viability of such pricing does not work and is a disincentive to gas producers investing in the gas infrastructure required to utilise Nigeria’s vast gas reserves.

Likewise, imposing arbitrary end customer gas prices on downstream gas distribution companies without considering investment made to develop the gas distribution infrastructure and the cost of operating and maintaining the infrastructure will have a similarly damaging effect.

To gas operators, the key lesson for the gas industry from the challenges facing the power sector must be the importance of investors being assured of return on their investment either through an agreed return or through market-led pricing. If this lesson is ignored and the gas industry is not incentivised to work, the aspiration to achieve the optimum contribution of gas to the economy will remain a mirage.

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