Tackling the Hydra-headed Problem of Gas Supply Shortages
Ejiofor Alike posits that dealing with the problem of inadequate gas supply to the power plants nationwide is necessary for Nigeria to reap the full economic benefits of the power sector privatisation
Inadequate gas supply to the power generating plants in the country is perhaps the biggest challenge hampering uninterrupted power supply to households and businesses.
There are lots of economic benefits to derive from the power sector post privatisation but these economic benefits are currently trapped due to inadequate gas supply to fire the various power plants in Nigeria.
Indeed, the inability of gas producers to meet their supply obligations to the power stations is impacting negatively on revenues from power generation and the capacity of the private investors to embark on expansion projects.
With the persistent shortage of gas, power generation has been at very low ebb and the new investors do not have enough electricity to sell to consumers.
Though a Transitional Electricity Market (TEM) was declared in February 2015 to ensure the implementation of all the actionable agreements signed by the various market participants in the country’s privatised electricity market, the issue of inadequate gas had led to the non-activation of these agreements.
With last February’s declaration of TEM, the power sector is no longer supposed to be operated on best endeavour basis but in line with contractual agreements such as the Transmission Use of Service Agreements (TUOS); Grid Connection Agreements; Ancillary Services Agreement; Power Purchase Agreements (PPAs); Gas Supply Aggregation Agreements (GSAAs) and Gas Transportation Agreement (GTAs), among others.
Under TEM, the Nigerian Gas Company (NGC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC) is obligated to deliver the agreed minimum amount and quality of gas to the generation companies, in line with the Gas Supply Agreement (GSA) signed in 2013.
And if the NGC is not ready to supply the gas when the generation company is ready to take the gas, the PPAs stipulate that the NGC should pay for the power the generation company was supposed to have generated with the gas that NGC fails to supply.
However, when agreed minimum amount and quality of gas is delivered to the power station and the machines are not ready to take the gas to generate power or when NGC is ready to deliver the gas but the generation company is not ready to take the gas, TEM also requires that the generating company should pay for the gas it refuses to take from NGC.
But even though TEM has been declared to bring all these actionable agreements into force, the Nigerian Bulk Electricity Trading Plc (NBET), otherwise called the Bulk Trader is yet to provide security cover for payments in the form of Letters of Credit (LCs) to the generation companies in the event of NGC’s inability to supply gas in line with the terms of the GSAs.
With the shortage of gas supply to the generation companies, these companies are finding it increasingly difficult to honour their power supply obligations to achieve the desired targets in the expansion of the existing capacity.
For instance, the current volume of gas supply to the power generating companies can only meet about 60 per cent of their immediate demand, thus increasing the risk of embarking on new power expansion projects by the private investors.
Gas pricing One of the issues that hamper adequate supply of domestic gas to power stations in the country is the issue of pricing.
The deep-pocket international oil companies (IOCs) and the Nigerian independents are not keen in investing in domestic gas because they said that the price is not economic to justify the investment.
So, with all the gas producers focusing on the export market, there is inadequate supply to the domestic market, despite the Domestic Supply Obligations (DSOs) imposed on the producers by the late President Musa Yar’Adua’s administration.
Between 2010 and 2014, the immediate past Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke reviewed the domestic price of gas first from $0.5 per standard cubic feet to $1.5 per standard cubic feet and then, to $2.8 per standard cubic feet.
But the IOCs and other gas producers are clamouring for a domestic gas price of between $5 and $7 per standard cubic feet to bring it at parity with export price.
So, with the low price of domestic gas, the IOCs prefer to supply gas to the export market in the form of Liquefied Natural Gas (LNG), which has very high returns on investment.
Immediate past Managing Director and Chief Executive Officer of Total Upstream Companies in Nigeria, Mrs. Elisabeth Proust had told THISDAY that her company invested $900 million in a 24- inch wide 50-kilometre long pipeline onshore starting from Oil Mining Lease (OML) 58 through Imo River to supply 100 million standard cubic feet of gas per day to Alaoji Power Plant in Abia State.
According to her, by 2017, her company should evacuate 300 million cubic feet of gas through the pipeline, adding that “to stimulate the development of gas facilities, we calculated that the average price of the gas will be between $5 and $7 per million per British Thermal Unit.”
The Chief Executive Officer of Frontier Oil Limited, Mr. Dada Thomas, whose company also pipes gas to many power stations, had also told THISDAY that the current domestic price of $2.5 is still well below world market price.
“We need to get gas pricing domestically as attractive as may be, Henry Hub in the United States. I am not saying as in Korea because in Korea, that is the highest gas price paid in the entire world. Henry Hub is about $5, $6 or $7 right now in the United States and that is in spite of Shale gas. We need to get gas pricing moving in that region in Nigeria for you to have absolutely no reason to beg anybody to invest in gas. They will invest so much in gas; you will have so much gas that we won’t know what to do with it. This current price of $2.5 per thousand standard cubic feet is nice but is not going to have people screaming to invest in gas,” he had said.
With most of the private investors focusing on the export market, the Nigerian Petroleum Development Company (NPDC), a subsidiary of the NNPC became the core supplier of gas to the thermal generating plants.
But even though domestic gas producers are not contended with the $2.5 price, the generation companies are insisting that gas suppliers, particularly the NPDC, should retain the old price of $1.5 so as not to create additional financial burden to the power producers, given the fact that electricity tariffs have not been reviewed upwards in line with the provisions
of the Multi-Year Tariff Order (MYTO 2).
Shortage of supply to power plants The shortage of gas supply to both the old power stations and the new stations became so acute that it frustrated federal government’s plans to privatise the remaining power stations built under the National Integrated Power Project (NIPP).
Several units of most of the 10 medium-sized gas-fired NIPP power stations built nationwide to add 4,774 megawatts of electricity to the national grid have been completed and ready for test-firing, but inadequate gas supply has continued to hamper the operations of these plants.
For instance, a source close to the contractors handling the 507.6 megawatt-capacity Ihovbor Power Station in Edo State, which has Marubeni Engineering West Africa Limited as the Engineering Procurement and Construction (EPC) contractor, told THISDAY that only one of the four units is generating power to the national grid due to the shortage of gas to fire the other three units.
There is also limited gas to fire the 507.6 megawatt-capacity Sapele Power Plant built by Marubeni Engineering West Africa Limited as the EPC contractor.
The 634.5megawatt-capacity Calabar Power Plant, also built by Marubeni Engineering West Africa Limited is also experiencing gas supply challenges.
Total is also yet to complete the gas project to feed the six-unit capacity Alaoji Power Plant in Abia State, which is the biggest plant under the NIPP, with a nameplate capacity of 1,131.4mw.
However, the 225megawatt-capacity Gbarain Ubie Power Plant in Bayelsa State is the only NIPP power station that will not experience shortage of gas due to the nearby Gbarain Ubie Integrated Oil and Gas project by Shell Petroleum Development Company (SPDC) joint venture.
However, there has been an improved gas supply to the Egbin Power Station in Lagos
The gas supplied to most power plants remains epileptic, and meets only about 60% of demand. This acts as a disincentive to those operators who might otherwise be thinking about expansion projects
The Ondo State government has signed an Engineering, Procurement and Construction (EPC) contract with South Korean firm, POSCO E&C, for construction work to begin at the first phase of the state’s proposed 1,050 megawatts (MW) Independent Power Project (IPP) early next year.
The state government is currently partnering another South Korean firm, Kingline Development Company, through its Nigerian subsidiary, Kingline Development Nigerian Ltd, for the development of the 1,050MW IPP. Head of Kingline Development in Nigeria, Akinnola Fola said in a statement in Abuja that the first phase of the project involves the construction of a gas-fired power plant that would generate 550MW of power into the national grid while, the second phase which is expected to add another 500MW would be followed up subsequently.
Fola explained that POSCO will see to the design, EPC, commissioning and testing of the first phase 550MW open cycle gas turbine power plant, adding that actual construction is expected to begin in first quarter of 2016.
According to him, the construction will last for about 26 months from commencement and date of issuing of the Notice to Proceed (NTP).
He said the project would be undertaken by a special purpose vehicle called Kingline Ondo IPP Ltd which has been registered to implement the power generation project.
“The Engineering, Procurement and Construction (EPC) Contract between international engineering and construction company, POSCO E&C of South Korea and Kingline Ondo IPP Ltd is considered a crucial milestone. The contract covers the turnkey delivery of the power plant,” Fola said.
He further stated that funding for the project has been secured and that the EPC contract was signed recently at the Inchon Seoul, South Korea headquarters of POSCO E&C.
Among other progress reports, Fola noted that a Certificate of Occupancy (C of O) was issued to the SPV by the State government in October. The Environmental Impact Assessment (EIA) panel review scheduled for the end of November with public display, he added, has already been done.
Fola equally stressed that gas supply and transportation arrangement with a major gas supplier and transporter is to be concluded this month, while a Power Purchase Agree (PPA) with the finalization with the Nigeria Bulk Electricity Trading Company (NBET) would also be concluded within a very short time.
He explained further that the approval for power evacuation by the Transmission Company of Nigeria (TCN) had already been secured as well.
The statement equally quoted the Governor of Ondo State, Segun Mimiko to have described the contract with the Korean firm as a major step in the actualisation of the project.
Mimiko was represented at the signing ceremony by his Senior Special Assistant on Energy and Power, Prof. Ige Bolodeoku, who described the project as a major milestone for the state towards alternative revenue generation, especially during this time of dwindling oil revenue.
While assuring the EPC contractor of the State’s support, especially in the area of community relations, Bolodeoku also stated that the government would provide information in all areas of skills the company would need for the project.
He thus asked the firm to maintain an open communication with the government to ensure that its requests are promptly attended to.
Equally, the statement quoted the Senior Vice President (Energy Division) at POSCO E&C, Mr. Woo Dea-Young as saying that the POSCO team is excited about this project and the prospect of entering Nigeria, a new market for them in their power generation business expansion.