Avoiding impending power sector collapse

The current state of the Nigerian economy demands drastic, urgent and unconventional actions. But to achieve this, the critical and foundational problem of lack of electrical power must be solved first; for no power means no economy, and to get power you must address the problem of gas production as 80 percent of current and future power generation is based on gas fired power plants.

The Gas-to-Power  value chain itself is terminally sick infested with a number of crippling diseases chief amongst of which are the primary diseases of vandalisation of oil and gas facilities, sector illiquidity, price and securitization challenges as the immediate major infections and lurking behind these monsters are the secondary diseases of inadequate and dilapidated  power transmission and gas distribution infrastructure, low  economic returns for gas projects and  lack of access to gas reserves by those willing to develop them if the terms and conditions are right.

The most critical of the four primary problems is vandalisation of oil and gas facilities and infrastructure. Vandalisation is a short-term hyper priority problem because if you have zero production, you cannot talk about illiquidity, price or securitisation.

Less than two years ago, vandalisation was not a critical issue. Today, vandalisation of oil and gas facilities and pipelinesis topical and has brought the Nigerian oil and gas industry and the power sector to its knees. The country’s current oil production has dropped to about 1.4millon barrels a day from about 2.2 million barrels a day in 2015causing the nation to suffer significant losses in oil revenue with the knock-on effect on the national budget and economy and lack of foreign exchange to meet the needs of our import dependent economy.

The government has only achieved 51.3 percent of its half year budget target in 2016. In addition,the grid power generation capability of the nation has dropped drastically from a peak in excess of 5,000 megawatts, achieved sometime in the first quarter of this year, to about 2,000 megawatts presently. This is because there has been vandalisation of not only oil facilities, but also of gas facilities and pipelines.

In the past six weeks, the third party owned gas evacuation system through which our company – Frontier Oil Limited – transports gas has been sabotaged twice resulting in the loss of about 450 megawatts of power from the nation’s power generation capacity therebyworsening an already dire situation. We need quick wininitiatives that will put a stop to vandalisation of oil and gas assets to ensure that oil and gas production ramps back up to circa2.2mmillion barrels of oil production per day and 5,000 megawatts of power generation, which is what we are capable of generating and transmitting successfully at this point due to an antiquated “dumb” grid that is the weakest link in the Gas-to-Power value chain.  This will yield the immediate short term benefit of increasing the country’s foreign exchange earnings and providing power for the nation, the factories that are closing down daily, the offices and homes that are wasting hard earned income on expensive diesel or petrol for self-power generation.

For avoidance of doubt the only long term and sustainable cure to the vandalisation problem and the sporadic civil unrests we are seeing is good governance. To achieve sustained good governance will take time and a major paradigm shift across all segmentsof the Nigerian society.  The issue of regional struggles for equitable distribution of resources is neither new nor peculiar to Nigeria.

After vandalisation, illiquidity is the biggest problem in the Gas-to-Power value chain today. The Nigerian Gas-to-Power value chain starts with gas producersexploring,developing, producing and treating gas from the oil and gas fields, most of which are located in the Niger-Delta. The treated gas is then transportedthrough pipelines, some of which are hundreds ofkilometreslongand owned by gas transportation companies, to the power generation companies (GENCOs) who use the gas as fuel in their power stations to generate electricity. The electricity is transported through power transmission grids,still owned by the government, to the eleven distributioncompanies or DISCOs who in turn sell the electricity to the various consumers in their concession areas and collect revenue from the consumers which is then used by the DISCOs to pay NBET who in turn pays the various market participants who provided services up the value chain.

In Nigeria another entity called the Nigeria Bulk Electricity Trader (NBET),with capitalisation in excess of $800millionwas introduced into the value chain in 2010 as a middle man to helpstabilise and enhance the Power Reform transition programme with the objective of purchasing power from the GENCOs and selling the power to the DISCOs. The DISCOs would then pay NBET who in turn would pay the GENCOs so that the GENCOscould pay the gas transporters and producers.

The problems we have today is that the DISCOs do not get enough electricity to sell to consumers, as only 25 percent or 3,125MW (peak 5,000 MW early 2016) of the installed generating power of 12,500MW is actually distributed amongst the eleven DISCOs due to a combination of poor planning and maintenance of power plants, transmission losses which occurs when electricity is transmitted over long distances and technical losses which occurs when the TRANSCO wheels the power to the various DISCOs.

To compound the problem the DISCOs only collecta fraction or 56 percentof the revenue duefrom the little electricity they distribute to the end consumers as the rest (some 37 percent) is lost due to poor, inefficient and ineffective collection practices and commercial losses (7 percent) by the DISCOs. The reality is that virtually most of the eleven Discos, with one or two exceptions, are insolvent and are not remitting enough money to the NBET for distribution to the various other members of the Gas-to-Power value chain.

Today, it is claimed that NBET is only paying 26 percent of due invoices compared to 65 percent payment achieved in 2015. These are invoices due to GENCOs, the Transmission Company of Nigeria (TRANSCO) and the gas transporters and producers. The puzzling thing is that NBET is sitting on about $800 million in the bank and the sector is collapsing. Why is NBET not using this fund to plug the payment shortfalls? Though the fund is not enough to solve the total indebtedness in the sector, which is in excess of N1 trillion, it can be used to prevent a total system collapse and a potential domino effect as many Nigerian banks have large exposures to the power and oil and gas sector.

Arguably the DISCOs are primarily responsible for the illiquidity in the Gas-to-Power sector. They are not metering properly and are therefore not collectingtheir revenues efficiently as demonstrated earlier. They have continued the odious practice of estimated billing and they are not doing the things they contracted to do when they took over the franchises they bought. They argue that they are not getting enough electricity to sell, that the electricity tariff is not cost reflective and consumers are stealing power and as such are not making enough money to pay their loans let alone fund additional capital investments. The blame game and list is endless. The fact is that the DISCOs are not the only ones to blame. The government and consumers (who steal electricity without paying for it) also have to shoulder part of the blame.The DISCOs claim the government has failed to keep its own side of the agreements and is constantly changing the goal posts including the application of a non-cost reflective tariff. The DISCOs also claim government Ministries, Departments and Agencies (MDAs) owe them N93 billion. This means government is the biggest debtor to the DISCOs and is also partly responsible for the illiquidity in the Gas-to-Power sector.

As long as the DISCOs are insolvent or not making enough money, they cannot invest in meters and the upgrade of distribution infrastructure. The money they are making is barely enough to service their loansand the banks are no longer willing to lend money to the Power sector especially the DISCOs. We have a complex but undeniable problemand Government needs to and must do something about it urgently.

We can learn from the Indian model. The Indian government supported their power sector for 10 years bysubsidising it. They allowed power generation to grow to the point that power supplybecame stable. The consumers got used to stable power and then the government introduced price increases.

In Nigeria, the DISCOs  are facing consumer resistance because the consumers are not getting stable power and in many cases no power at all and are being asked to pay more and more for less and less, thanks to vandalisation!

I humbly suggest that government should use the =N=1 trillion savings realized from stopping petroleum products subsidy to stimulate and support the power sector. Ample precedence exists for this. AMCON was created to rescue the banking sector from systemic collapse in the recent past and it worked, albeit AMCON’s portfolio and the Nation’s ultimate liability is still a work in process.

I believe the imminent collapse of the Power sector is as critical if not more critical than the banking crisis of the recent past because if the Gas-to-Power sector fails, the banking sector will also likely fail. More fundamental is the fact that gas equals power, and power equals economic diversification and growth. Therefore no gas, no power, the economy is dead.The government’sintention and objective of diversifying the economy will amount to nothing unless the Gas-to-Power sector is rescued from imminent and catastrophic systemic collapse.

Government has to do something drastic. Shouldgovernment allow NBET to sit on $800million and let the sector collapsebefore our very eyes? Should government not consider the idea of a Bond for the Power sector as many experts are advocating? What role can the pension funds, with the right and effective safeguards and stringent due diligence to protect peoples pensions and future play in meeting the huge funding requirements of the Gas-to-Power sector? These are the sort of out of the box thinking and solutions that is required to address the pressing problems of the power sector.

This brings me to the matter of securitization and the lack of sanctity of contracts. Many gas producers are producing and selling gas to GENCOs but haven’t been paid for periods ranging from a few months to years despite having Take-or-Pay and Supply-or-Pay and Securitization clauses in the gas contractsbetweengas supplier and consumer.

Our group is among gas producing and transportation companies that are owed substantial amounts of money by government owned GENCOs while privately owned companies are paying for gas consumed by them.However, it has proved verydifficult or actually impossible to invoke the securitization provisions, generally in the form of Letters of Credit, in the gas sales and purchaseagreements either because the means or will to enforce the securitization provisions are not adequate or effective or the government owned GENCOs strongly resist all attempt to enforce the measures.

Our small indigenous company isborrowing money to pay our overhead costs and salarieswhile government companies continue to owe us substantial amounts of money. Yet government agencies continuously harass us to pay them royalties, multiple levies and taxes as at when due and pretend not to understand that sister government departments or parastatals are owing us huge sums of money.

We have the option to cut off gas supply to the government owned GENCOs for a failure in contract performance, but as patriotic Nigerians we have held back from doing so because if we do we would be adding to the woes of the nation as some 450MW of power would be lost and the nation’s economy would suffer. But how long can wecontinue to suffer the lack of payment for gas supplied and lack of respect for sanctity of contractsespecially by government owned power plants.

Gas contracts include Take-or-Pay and Supply-or-Pay obligations which when strictly enforced require the defaulting Party to adequately compensate the non-defaulting Party for any failure to supply or take gas. Gas producers are suffering huge financial losses as a result of government owned GENCOs not paying for gas supplied because the GENCOS themselves are not being paid by NBET. We must move to a point where there is sanctity of contract and full and timely payment for the provision of goods and services in the Gas-to-Power sector. The current system is simply unsustainable and can only lead to the total collapse of the sector and scare away the much needed externalinvestment we need to build a viable long term Gas-to-Power sector in Nigeria.

The last of the four primary problems is that of price. The price of electricity continues to generate heated controversy in Nigeria. Electricitytariffis set by the Nigerian Electricity RegulatoryCommission or NERC and is governed by the Multi Year Tariff Order or MYTO system which is subject to periodic reviews based on certain triggers amongst of which is the Naira-US$ exchange rate. The recent flotation of the Naira, reflected in a significant weakening of the Naira from =N=197.5/$ in June 2016 to =N=310/$ in the last week of August 2016 had a significant impact on the MYTO tariff but any change in the tariff results in huge public outcry, legislative summons and interference and even in court judgements that further confuse and compound the problems of the sector and the evolution of a viable and sustainable long term power sector in Nigeria. The price of electricity sold to the end consumers has a significant impact on the price of gas sold to the GENCOs, based on affordability by the GENCOs, and because the Powersector is the largest domestic consumer of gas in Nigeria.

The base price of gas sold for power generation has risen over the years from a price of 10$cents per thousand standard cubic feet many years ago to about $2.50 per thousand cubic feet plus 80 cents per thousand cubic feet for transportation now. This is the direction the price of gas should be going because gas projects and gas developments are extremely expensive, much more expensive than oil developments (given the limited scale of processing and transportation infrastructure existent in the country), while the revenue and profit margins are far lower.

Earnings from gas development and production span a longer period of time but accrue at a far lower rate than oil production projects. If the financial projections are not attractive and the project not bankable then gas projects will not be attractive to investors and as a country we will continue to struggle to develop the potential of the vast gas resources we have been blessed with estimated to be about 187trillon cubic feet of gas, the largest in Africa and the ninth largest in the world.

Generally, investors look at Nigeria as a high risk environment and therefore expect a higher rate of return. There is a lot of capital out there, but capital prefers to go to places where there are good returns, peace, stability and some degree of certainty. Nigeria ranked 169 out of 189countries in the World Bank’s Ease of Doing Business 2016 report. Government must enact appropriate legislation to make our business environment more investorfriendly to attract the billions of dollars ininvestment required to get the Gas-to-Power value chain growing properly.

Coming back to the terminally sick Gas-to-Power patient in the emergency ward. There is still hope but only if the medical team acts fast, collaboratively and effectively. The associations of GENCOs and DISCOs have been placing full page adverts in the newspapers claiming that the gas-to-power value chain is sick, and if government does not do something drastic, very soon, the country will be plunged into darkness. I think we should all take that cry very seriously. The generation and distribution of power is not a social service. It is a business and it has to be allowed to run as a business but with fair and proper regulation to protect the interest of both the consumers and providers. However, government must create the enabling environment through clear,consistent,well-articulated and properly implemented policies and regulation. The Power Reform Agenda was an excellent initiative which is suffering from teething problems. These problems must be attended to urgently and surgically so that the Gas-to-Power sector does not collapse taking the banking sector and entire economy with it.

While I acknowledge that government is considering seekingemergency powers to address the issue of the economy the results and benefits of this will be in the medium term. Nigeria is faced with the possibility of the immediate and systemic collapse of the Power sector which will have far reaching and catastrophic effect on the entire economy.  I therefore urge the Federal Government to declare a national emergency on power fast and ensure it takes the courageous, far reaching and well thought out decisions to save the sector before it is too late.I am encouraged by the fact that my interaction with the current government leads me to believe that this is a listening government that truly wants to do something about the Power sector. A stitch in time, they say, saves nine.

Engr Dada Thomas is the founder and Chief Executive Officer of Frontier Oil Limited. He has over 38 years of experience in the oil and gas industry with a proven track record in Facilities Engineering, Project Management and new business conception and development.

 

DADA THOMAS