Tackling Gas-to-Power Shortage With Fresh Measures

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With hundreds of billions of Naira poured into the power sector, especially in construction of new power plants and the rehabilitation of old plants, not much has changed in terms of electricity output from the sector.

As at last week, power generation was still a meagre 4,010megawatt for a country with estimated population of about 165billion people. For over a year now, the challenge mainly has been in getting gas to power the plants.

Why most blames have been on vandalism of the pipelines, there was also the baffling challenge of building gas powered power plants without corresponding plan of getting gas to the plants. So you find brand new power plants waiting endlessly for gas to be powered on.

The culmination of all these and of course the very far below market value for gas to power meant that there was hardly enough gas for the plants.

But last, government very slow machinery finally cranked into action and several new measures were rolled out to tackle the problem and in the process supply addition 370million metric cubic feet of gas per day (mmcf/d). The far-reaching measures also included the hiking of gas to power price by over 100 percent from $1.5/mcf to $2.50/mcf with another $0.80 as cost of transportation.

There was also the issue of power sector indebtedness to gas producers which has ran into billions of Naira and has understandable made the gas companies very reluctant to make more gas available to the power plants.

Addressing the challenges took a form of inter-agencies collaboration involving the Ministries of Petroleum Resources and Power, the Central Bank of Nigeria (CBN) and the Nigeria Electricity Regulatory Commission (NERC).

Speaking on the new measures adopted by government, Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, who was flanked by Minister of Power, Chinedu Nebo, CBN Governor, Godwin Emefiele, and NERC, Chairman, Dr. Sam Amadi, said government expect power supply to stabilise by October and hit additional 5000mw by the end of the year.

She said government through a CBN initiative would pay off about N25billion legacy debt owed to gas suppliers by the power generation companies.

Alison-Madueke explained that following government intervention plans, “NERC has approved a new benchmark price of $2.50/mcf for gas supply, and $0.80/mcf as transportation costs for new capacity, from 2014. This benchmark will rise with US inflation annually.

“In addition to new price, NERC will require firm commitments from gas suppliers, that they will supply the agreed quantities of gas to generation companies as long as payment terms are met”.

She noted that in the medium to long term, “it is anticipated that this new price regime should trigger additional investment in the infrastructure for gas to power”.

The minister disclosed that “NERC is presently concluding the review of Aggregate Technical Commercial and Collection (ATC &C) losses studies submitted by the distribution companies. This will be followed by a review of the revenue requirement for the power sector that is to be covered by a revised MYTO path. While the detail of the tariff is being worked out, NERC reaffirms its commitment to ensure cost recovery for all prudent and efficient operators”.

Alison-Madueke stressed that with the new pricing regime and government efforts in revamping and expanding gas production and processing facilities, government expects to achieve at least 370million metric cubic feet of gas to power before the end of the year.

“The projects include the Utorogu field expansion comprising accelerated work over of some wells and completion of the new gas plant. Expected impact is 60mmcf/d. Expansion of the Oben gas plant and drilling of new wells will add 100mmcf/d.

“Re-entry of the Odidi field and revamping of the processing plant and the flow lines will deliver 40mmcf/d. collectively, these projects will add 240mmcf/d. all these are in advanced stages of delivery and progressive impact should be felt steadily from October till year end.

“On the Eastern axis, NGC is building a 6km bypass line to enable alternative supply of 60mmcf/d to Alaoji. This line mitigates slippage in NOPL (Northern Option Pipeline) line originally planned to supply Alaoji. With stabilisation supply of 40mmcf/d expected from Shell, all Alaoji’s requirement for gas is expected to be met by year end.

“In the East, Seven Energy will be delivering 30mmcf/d in the first instance to Calabar NIPP. It is expected that the Gbaran and Omoku power plants will be able to be completed by the end of Q1 2015. When this happens, it will make available a future 130mmcf/d of gas to be utilised.

“These projects should unlock an additional 370mmcf/d assuring us of a total 5000mw (hydro inclusive) within the four to five months to the year end. In order to minimize disruption to supply, NNPC has also concluded a harmonisation plan of the maintenance schedule of all gas plants from various suppliers”.

The minister, who stressed that between August and September, all planned maintenance activities would be carried out, pointed out that while this would create temporary disruption in supply to power, it would ensure that from October, disruptions due to planned maintenance activities would be minimal, enabling steady supply of power to Nigerians.

She noted that in order to confidence to stakeholders in the gas sector, regarding the willingness of the power sector to settle its outstanding debts for gas, the CBN would support initiatives to clear up the most recent gas related debts of the power sector.

“Specifically, the CBN is looking at banking sector led measures to pay off N25billion of debts owed to gas suppliers. This will be subject to reconciliation efforts and adequate provision for this support in a revised MYTO that ensures repayment within five years. The CBN will also play key role in financial arrangements that guarantee payment for gas supply by the power sector”, she explained.

She noted that the sector has been impacted adversely by rapid reservoir decline, continuous pipeline vandalism, community disruption of project schedules, and funding.

She however insisted that these “are all being continuously and progressively mitigated through various schemes, such as a more aggressive drilling campaign to bridge decline, alternative funding schemes and a holistic government approach to pipeline security.

“Notwithstanding the above challenges, it is expected that the aggressive combined effort of the Ministries of Petroleum and Power, the CBN, and the NERC, will ensure that from October, following the critical maintenance activities, stability in supply will be restored and steady growth towards a minimum of 5000mw by year end will be achieved.

“Finally by 2015, a more significant boost in supply is expected as a number of projects reach maturity”.

On his part, Minister of Power, Chinedu Nebo, expressed satisfaction at the new measures taken to address the gas supply challenges.

The minister, who had often bemoaned the reluctance of gas suppliers to sell gas to power plants, noted that with the new price, suppliers would be more willingness to make their product available to the power sector.

“I am satisfied that the current arrangements will deliver the needed gas to the NIPP. It is very clear that this is unprecedented power packed cross sectoral synergy between the main players in the power sector, Ministries of Power and Petroleum Resources, CBN, NERC and NNPC getting together to solve age-long problems.

“If this kind of synergy had existed in the past several years, we will not be worrying about the gas situation today. Thankfully this is a result of President Goodluck Jonathan’s transformation agenda because this agenda has one of its core software insist on minimisation of waste and losses and maximisation of resources.

“We have the capacity to solve the problems of this country and we have synergized in a very robust manner to do this. So the answer to whether we will now have a enough gas for the power sector is a solid yes”, he added.

Elaborating on gas debt pay off, Godwin Emefiele said CBN will establish a special purpose vehicle to settle the debts.

“We felt that we should look at the issues that are militating against the production power in the country and we began a process of engagement in collaboration with the ministries of power and petroleum resource as well as with NERC.

“The bankers committee had some engagements and that engagement led to the CBN governor being asked to continue engagement with the ministries of petroleum resources as well as power and that is why we are here today.

“The process of the engagement revealed that there is an outstanding legacy debt of about N25b and we thought that as financial catalyst in the process, what we should do is to give support by ensuring that the existing gas suppliers are given some confidence by ensuring that the existing debts are paid off.

“The CBN as well as the deposit money banks will be seeking ways to set up an SPV where this N25b will be paid to existing gas suppliers, give them confidence to continue to produce gas which is badly needed to continue to power our generation plants.

He expressed that the hope that with the adjustments in the gas pricing it will make it more competitive and as a result both existing gas suppliers and potential investors in the gas sub-sector can also begin to come in and the banks can play the role of financial catalyst by lending money and with the CBN also sowing some seed to provide intervention funds to support the provision of power to our people.

However, NERC Chairman, Sam Amadi, warned that the N25billion intervention by the CBN to pay off debts owed to gas suppliers by the power companies is not a windfall for the sector.

Amadi explained that the money will be absorbed into the new Multi-Year Tariff Order (MYTO) which is currently under review and will be paid by the distribution companies.

According to him, “The money supplied by the CBN is not a windfall. Those gas cost are stranded cost that even for the new owners all the cost did not happen under their watch.

“Secondly the interim rule which we are running has provided for shortfalls in revenue and part of the provision is that those will be re-cycled back in the new tariff.

“It means that this N25billion or whatever that is agreed at eventually will still be repaid by the distribution companies through the tariff process. It is like an intervention to secure for us confidence in the gas market and the ultimate responsibilities is on the Discos”.

The NERC boss also pointed out that both new price for gas and the CBN intervention would be factored into the new MYTO.

“Both the new price and the Central Bank of Nigeria interventions are contingents that will by captured in the Multi-Year Tariff Order. The MYTO is a five year tariff plan which is based on capturing the real cost of power production.

“Right now part of the agreement with the owners is that when they come and take over the assets, they would conduct their losses studies and NERC will verify to ensure that our loss projection is same as their own.

“And therefore what follows from that study is a review of the multi-year tariff order. That process is ongoing and both the new price of gas and the support that the CBN is going to make are part of the cost in the industry that the new of existing MYTO model will address.

“Essentially, it is part of the plan to review the losses and always get to a more cost reflective tariff”, Amadi added.

On the new $2.50 for gas, he said, “as always the cost we benchmark is the real cost of production, whether of coal, gas or other renewable feed stock, and then compared with the market. So $2.50 is deemed to be a reasonable price if you compare both the cost of gas processing and what other industries pay for gas.

“So, it was arrived at through a process of consultation with both the gas people and the generators and the power sector is prepared are to pay a cost that will ensure much more supply of gas”.

SOURCE

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