JOE-EZIGBO: APPROPRIATE FISCAL FRAMEWORK WILL PROPEL INVESTMENT IN GAS SECTOR
the few that have stand-alone gas operations, their operations have practically come to a halt, particularly where their gas is lean and they are unable to leverage on revenues from condensates or other bi-products of stripping the gas. It is an irrational expectation for any business that has such extensive receivables for two years and counting to still stand, and we are talking of millions of billions of naira that were largely originally contracted in dollars when the dollar was a fraction of what it is today whereas the loans are to be paid back in dollars at the current rate of exchange. Many players are facing bankruptcy arising from inability to service their loans, and a severe liquidity crunch that impacts their day to day operations. It is a very dire situation indeed.
Speaking to the currency mismatch between investments and returns, there is the fact that the Government had recently mandated that Gas producers should be paid in naira, whereas Gas is dollar-denominated commodity, and loans for gas development and infrastructure projects are contracted in dollars and expected to be repaid in dollars. Effectively therefore, we have been operating a situation whereby the Gas producers source investment funding in dollars, are paid in Naira at the Central Bank rate. These same companies have however had to obtain dollars to service their loans from the parallel market as they are not able to obtain funds from CBN at the official rate. There was a point at the peak of the dollar crises when parallel market rates peaked at an all-time high of over N500, that those who had dollar-contracted loans were losing almost N230 for each dollar. The situation has improved significantly this year resulting from the various interventions by the CBN. What still obtains however, is that for every N305million payment received for gas supplied, a producer/supplier remits the equivalent of N365million to its lenders. Now imagine, as is the case today, that even at this clear gross loss position, they also contend with upwards of twelve to eighteen months of unpaid invoices. This is clearly unsustainable, and no one can reasonably be expected to continue or survive under such a harsh operating environment.
What is the impact of the N701b payment guarantee to Gas producers on your operations? Is it improving liquidity constraints at all?
This N701 billion intervention fund was set up by the CBN to provide a payment assurance guarantee to address the liquidity constraints along the gas-to-power value chain. Let me first say that the funds are no more than a drop in the ocean as the debt value is currently in the trillions of naira in debt. The intervention also does not address legacy debt so there remains the question of how to resolve the backlog. Moreover, this announcement was made in March and to date not a single naira has been disbursed, meaning another seven or eight months’ worth of unpaid invoices have further accrued.
It is very troubling for us as a business because one way or the other, we are all feeding from the same gas supply pool and when certain factors have potential to upturn supply security, we must pay attention. Granted, the immediate impact is not at the distribution end of the gas industry value chain, but it is a significant factor nonetheless because we can only distribute what is supplied and if supply is threatened, distribution is inadvertently then also threatened. Falcon is a company that keeps her eye on mid and long-term prospects, opportunities, and key risks to our business, so it is of concern because the gas aspects of our operations cannot continue to run smoothly or at optimal capacity outside of our assurance of sustained supply at the volume, pressures and flows which we require.
What is the idea behind the recent Falcon Corporation’s Stakeholders’ forum on Underground Infrastructure Safety?
We operate the Ikorodu Franchise for the Nigerian Gas Marketing Company and have several kilometers of Natural Gas Pipelines traversing the Ikorodu area. We found that it was imperative to engage the various stakeholders (TELCOS, GENCOS, DISCOS, LASIMRA and other relevant agencies of government at various levels, etc.) to work collaboratively and in unison to ensure safety remains the highest priority for continuous sustainable growth and development. We have observed companies building infrastructure, carrying out excavations and installations, etc without taking into cognizance the risk implications that can possibly cause colossal loss of lives and properties to our host communities and understand that this challenge is enabled largely by two factors: the existing multiplicity of government agencies (State and Federal) which means that in many cases, permits are given for such works to be done without companies being informed of our existing Gas infrastructure within the area; and secondly, the lack of composite data and mapping of the existing underground infrastructure within the area.
We had a successful outing and achieved our objective of engaging various stakeholders operating within Ikorodu in order to keep them abreast of the importance of the safety and security of our host communities, human lives, assets and investments.
Do you see virtual pipelines as panacea to infrastructural challenges?
Virtual pipelines are but one of the available solutions to resolving infrastructural challenges, particularly the absence of pipelines and the ability to get gas to remotely located industries or plants. Virtual pipeline technology is however expensive, from the point of view of the equipment itself and then also the added costs of compression and/or regasification as in the case of mini-LNG, security, logistics and so on. It is thus better suited to bulk offtakers such as power plants and heavy industrial consumers, or in cases where there are industrial clusters that can absorb shared portions of the fixed costs. In many instances there are limitations as to where and how efficiently you can deploy this technology and remain cost effective, particularly considering the state of our current road network and building patterns, and other challenges we face in the environment. It is an alternative yes, and it is commendable to see those investors who are making the first moves to deploy virtual technology to address the industry gaps.