Focus on the Nigerian gas and power– what to expect in 2018

by | January 25, 2018 1:38 am



Nigeria’s dependence on the proceeds of hydrocarbon exports, coupled with the current regime of low prices, which is expected to subsist in the foreseeable future, have given rise to an urgent need to emplace strategic policy initiatives which utilize hydrocarbons as a vehicle for national economic growth in the Nigerian electric supply industry (“NESI”), and not simply as a source of income.

Noteworthy policy choices taken by the Federal Government of Nigeria (“FGN”) in the year 2017, which have reportedly impacted NESI include the N701Billion payment assurance to electricity generation companies, the development of the Power Sector Recovery Program (PSRP), the declaration of eligibility, the issuance of, amongst others, mini-grid regulations and substantial number of transmission related projects which ensure that the national grid can now reportedly wheel 7,000 megawatts (“MW”) of electric power.

Although, the reported growth within the power sector is yet to be categorically confirmed, emerging trends already indicate a productive, busy and industrious year for the sector. Thus, it is anticipated that the year 2018 will present a fresh set of challenges as some of these policies enter gestation period. Many industry experts anticipate that the  progressive policies and sustaining reforms already commenced will likely attract new investments especially in off-grid power generation.

These trends are considered very valuable factors which will contribute to efficiency and reliability in the sector and range from FGN policies, investment decisions and increased private participation especially in power generation due to new regulations such as embedded power regulations amongst others.

GAS

The Nigerian oil and gas sector accounts for a major part of the Nation’s GDP. Notably, exploration and production of oil stand at the top of Nigeria’s GDP, with end products contributing either directly or indirectly to the development of other industries in the country. The challenges in the oil and gas sector have however been overwhelming. The struggle to accommodate the fluctuating global oil prices, keep vandalism of oil and gas assets to the barest minimum, develop cost effective oil refining processes, reduce crude and petroleum theft, provide the much-needed support to keep the power sector functioning optimally, and ultimately reduce gas flaring, continue to be major concerns within the oil and gas industry.

Interestingly, the response from the Federal Ministry of Petroleum Resources is more tilted towards developing infrastructure to increase domestic availability of gas for the power sector, and other industrial users . The rationale for this is no rocket science. Both upstream and the downstream oil sector have suffered strong setbacks. Unfortunately, the indices for the control of oil prices and sometimes, stability of supply, lie generally on external factors hence the shift from oil to gas.

CURRENT GAS RELATED PROJECTSLate into year 2017, the Nigerian National Petroleum Corporation (the “Corporation”) announced the commencement of the Ajaokuta-Kaduna-Kano (“AKK”) gas pipeline construction. According to the Corporation, the contract for the construction of the pipeline, estimated at about US$2.8 Billion has been approved by the Federal Executive Council (“FEC”), and construction of the 683KM pipeline would commence in 2018.

Similarly, the NNPC has announced plans to finance more pipeline construction projects in 2018 through transportation tariffs. Noting the need to increase gas supply to meet consumption needs, the Corporation has committed to developing more infrastructure. According to the Group Managing Director, Dr. Maikanti Baru, the Corporation will deploy efforts for the “completion of the 127km East-West OB3 gas pipeline which would join Oben to Obiafu-Obrikom by the fourth quarter of 2018, and the 363km looping expansion of Escravos-Lagos Gas Pipeline System expected for delivery by the first quarter of 2018”.

It is also important to mention the plausible effect of the marginal field bid rounds, which is highly speculated to take place, in 2018. It would be recalled that the third Marginal Field bid round has been severally delayed/postponed. However, following presentation of the 2018 Federal Budget, and with the announcement that signature bonuses derived from the marginal field bid rounds will part-fund the budget, it is quite likely that the bid rounds will take place in 2018.

POWER SECTOR

2017 recorded significant activities for the power sector and going by factual indications, NESI is projected to witness a lot more activities in 2018 especially because the current administration will likely want to make a positive impact ahead of the general elections in the year 2019. We believe that off-grid engagements and transactions will primarily drive private sector activities in the generation segment of the industry, especially as relating to providing solutions to homes and small scale businesses.

In a bid to boost and reform the power sector performance in 2018, the current administration has allocated significant funds to run the sector. Among the key capital spending allocations in the 2018 Budget Estimates, the Ministry of Power, Works and Housing was allocated N555.88 Billon as against the N529 Billion it received in 2017. From this budget allocation estimate, FGN is set to implement key power projects including N9.8 Billion for the Mambilla hydro power project, and the N12 billion counterpart funding for earmarked transmission lines and substations. It is interesting to note that FGN has given assurances that it is rounding up 2017 projects and it is expected that the power sector will not be left out.

In order to keep pace with the power generation increase expectations in the country, there are current plans being set up by FGN, to electrify rural areas and involve more private operators to run the power sector. It appears that off-grid renewable energy will be the way to go for rural areas. The Transmission Company of Nigeria (“TCN”) announced plans to commission 1,400MW capacity transformers by the end of January 2018, across the different geopolitical zones of the country.

Very recently, the FEC approved a memo targeted at providing a framework of investment in expanding the national distribution network, to deliver an extra 2000 megawatts of electricity to Nigerians. The Minister of Power, Works and Housing,  Babatunde Fashola (SAN) had disclosed at the FEC meeting that the framework for investment to improve distribution capacity will involve competitive tendering and procurement, with the FGN contributing 40% of the needed investment while the Distribution Companies (Discos) will contribute 60%.  The practical workings of this arrangement are still not completely clear.

On the investment side, report shows that Nigeria is also planning to amend investment rules to channel more of the country’s US$26Billion of pension funds into corporate bonds, to ensure long-term funding of power and infrastructure projects. In 2017, Viathan Group, a private company, issued a $32 million infrastructure bond to fund power assets. This was the first transaction of its kind in Nigeria.

In line with its plan to revamp the sector, the FGN has also embarked on series of projects, targeting Moribund power projects such as repairs of Afam Power Station which added 110MW in 2017 and is set to add another 240MW this year through a Public Private Partnership. Also worthy of note is Katsina Power Project now being tested and producing 10MW of power from wind for the first time in Nigeria. It is expected to be fully operational this year.

The Nigerian Government has also disclosed that the transmission and other requirements to operate the 30MW Gurara Phase 1 Hydroelectric Plant, the 40MW Kashimbilla Hydroelectric Plant and the 215 MW Kaduna Gas/LPG/Diesel Power Plant would be completed this year.

The policy makers and stakeholders are also set to do more work in the sector this year. Recently, the Niger Delta Power Holding Company (NDPHC), has set to work in collaboration with other stakeholders in the power sector to ensure that NESI has a distribution system capable of taking all the over 7, 000 MW of electricity capable of being wheeled by the transmission network, in 2018.  The Nigerian National Petroleum Corporation (“NNPC”) is also set to  build 4,600MW Power Plants in FCT, Kaduna, and Kano via the recently approved contract for the construction of Ajaokuta-Abuja-Kaduna-Kano Gas Pipeline project. These ground-breaking projects are no doubt going to benefit Nigerians and also setting a remarkable pace for upcoming investors/operators in the power sector.

The Federal Ministry of Power, Works, and Housing has listed eight power plant projects which it intends to embark upon, in 2018. These are Azura (450 MW), Katsina Wind Farm (10 MW), Gbarain (115 MW), Kashimbilla (40 MW), Afam III (240 MW), Gurara (30 MW), Dadin Kowa (29 MW), and Kaduna (215 MW). It is projected that when some of these power generation projects are completed by 2018, they could generate additional 1,129MW to boost the current 7,000 MW in the country.  The remaining four power stations being built under the National Integrated Power Project (“NIPP”) will be completed by the end of 2018.

Other notable projects that will certainly impact on the power sector include the Dangote and the Phanes Group proposed projects. The President, Dangote Industries, Aliko Dangote, has said his company should generate about 12,000 MW of electricity for the country by 2018 whilst Phanes Group, an international solar energy developer, investment and asset manager based in Dubai, is to develop three 100 MW grid-connected solar plants in Nigeria, this year.

SOME PLAUSIBLE CHALLENGES

With the 450MW Azura Edo-IPP coming online, and power generation possibly reaching a peak of 6,000MW within months, come with the problem of ability of the sector to pay. With the Azura IPP being backed by the World Bank’s Partial Risk Guarantee, a default in payment by the Nigerian Bulk Electricity Trader (“NBET”), could raise the nation’s sovereign debt portfolio and hurt Nigeria’s sovereign credit ratings.

With the tariffs not considered cost-reflective and more generation plants coming especially with the Azura IPP entitled to extra-ordinary tariffs (higher than current MYTO), the issues around illiquidity in the electric power sector may get worse especially as there are still loses coupled with inadequate tariff rates. FGN may either have to increase tariffs or continue to bridge the gap; either option will at the moment likely lead to crisis. Elections are not that far off, and the political backlash associated with increased tariffs make this option highly unlikely, at least until after the general elections.

The N701Billion payment assurance guarantee for gas suppliers referred to above, will soon run out especially if electricity distribution companies continue to pay less than or just around 30 per cent (30%) of the market invoice and do not improve collections by cutting Aggregate Technical, Commercial & Collection losses.

Electricity theft still remains a challenge despite provisions made in the Miscellaneous Offences Act in connection with certain actions which amount to electricity theft. There is need for more efforts to be made (beyond legislation and regulations) to substantially reduce same. Market participants, especially Discos, need to invest in technology to also help reduce same.

Failure to address the foregoing issues could leave the sector in crises and illiquidity may lead to near collapse of the NESI. 

CONCLUSION

2018 would be a busy year for NESI, in the light of the above observations. Notwithstanding FGN’s optimism and good intentions, it is important to stress that the 2019 general elections may have an overall impact on project execution, especially in the area of policy implementation. Whilst it is expected that FGN would push the regulators and other stakeholders to implement proposed projects, in a bid to cajole and secure support ahead of the elections, we suspect that campaign distractions may lead to liquidity crisis and ultimately affect completion of some of these projects. Nonetheless, we are persuaded that 2018 would usher in more innovative ideas and opportunity for investors to thrive within NESI.

Ayodele Oni

Ayodele Oni, (ayodele.oni@bloomfield-law.com), a commercial lawyer and Partner in a leading Nigerian law Firm, specializes in international energy investment law & policy advising a number of electric power developers. He holds a mini-MBA in Power & Electricity and has been advising some ministries, departments, and agencies of the federal government of Nigeria on the post-privatization restructuring of the electric power sector. He has also been involved in most of the big ticket transactions in the power sector in Nigeria.

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