November 1, 2016

Power sector reels under gas shortage, Niger Delta militancy

nuclear power plant

Nuclear power Plant

By Sebastine OBASI, Michael EBOH, Ediri EJOH and Prince OKAFOR

Nigeria’s electricity sector is still under the pressures of weak gas supply which has also affected other sectors of the economy, especially some large scale industrial sectors such as cement manufacturing.

Nuclear power Plant

Nuclear power Plant

Power generation has considerably been limited by gas constraints, a  development that has also driven down electricity supply to households and businesses within the country.

In a recent report covering third week in October 2016, the Nigeria Electricity Regulatory Commission, NERC, stated that gas constraint to power generation, averaged 2, 661mw.

The NERC data indicated that October 19th, had the highest gas constraint which averaged 2, 932mw, while October 12 had the least constraint at 2,479mw.

The situation has been long pervading the sector. In particular, the Nigerian National Petroleum Corporation, NNPC, disclosed that between February to July 2016, 88.39 billion Standard Cubic Feet (SCF) of gas was supplied to gas-fired power plants across the country, indicating a huge 35.95 per cent drop from 138 billion SCF supplied to the power plants between August 2015 and January 2016.

These negative developments are against Nigeria’s position as one of the countries with the largest gas reserves in the world.

The challenges and root causes

Industry experts have identified absence of critical gas infrastructure as the key factor responsible for the poor gas supply, as the country had over the years, failed to expand on its existing facilities and infrastructure.

An update of the challenges in this regard was given last week by the Minister of State for Petroleum Resources, Dr. Ibe Kachukwu, while launching the Short and Medium Term Priorities to Grow Nigeria’s Oil and Gas Industry (2015 – 2019), tagged the ‘7BigWins’, a new initiative by the Ministry of Petroleum Resources.

Kachikwu, referring to the slow pace of action as it concerns Nigerian Liquefied Natural Gas, lamented: “The present nostalgic feelings are that 10 years ago we should have been in Train 12. The fact that we wasted this much time when the prices were really very lucrative and supportive is a shame.  But we are going to continue to keep working on the process; we are committed to doing that. We are driving that process; we are going to keep doing that.”

Another major factor, which is currently giving the authorities cause for concern is the resurgence of violence in the Niger Delta region. The attacks on gas pipelines in the Niger Delta had made it impossible to evacuate gas from the production fields to the various power plants across the country, especially in the first half of this year.

The shortage in gas supply, according to stakeholders in the sector, had negatively impacted the growth of the country’s power sector and is gradually plunging the sector further into a state of total collapse.

Industry experts have also highlighted the issue of escalating costs in the operations of the power companies which came with the rising inflation as well as the militant attacks and poor infrastructure.

There is also the issue of poor funding of the sector amidst liquidity crunch and huge debt owed the operators by mostly government establishments.

Commenting on the volatility in the Niger Delta and its impact on electricity generation and supply, Mr. Eze Onyekpere, Executive Director, Centre for Social Justice, CSJ, said the crisis in the region has negatively impacted gas supply and growth of the power sector.

”Niger Delta crisis has adversely and negatively impacted on the growth of the Nigerian power sector. The cost of repairing blown up pipelines and facilities also adds up to costs in the sector. Thus, the Niger Delta crisis contributes to the stunted growth of the power sector,” he stated.

Also speaking to Sweetcrude on the problem, Mr. Adeola Adenikinju, a Professor of Economics and Director, Centre for Petroleum, Energy Economics and Law, University of Ibadan, Nigeria, lamented that the Niger Delta crisis had dealt a very significant blow on the Nigeria energy sector in particular and the economy in general.

According to him, the crisis had brought about volatility in gas supply, which has reduced the capacity utilization of the electricity generating companies (GENCOs) and, therefore, the amount of power that could have been generated from the installed electricity capacity present in the country.

He said, “The Niger Delta crisis has dealt a very significant blow on the Nigeria energy sector in particular and the economy in general. Apart from increasing the risk premium for petroleum companies working in the region, because of kidnapping incidence and the constant threat from the militants, the actual attacks on the petroleum infrastructure in the region have led to significant reduction in petroleum production and exports with major impact on government revenue and capacity to operate the budget.

“More importantly is that the flow of gas to the power stations had been badly hit. Over 80 per cent of our power plants are based on thermal. Hence, regular gas supply is important for their continuous operations.

“However, the volatility in gas supply has reduced the capacity utilization of the GENCOs and therefore the amount of power that could have been generated from the installed electricity capacity present in the country.

“It also impact on the unit cost of electricity produced and consumed. The uncertainty of electricity supply to businesses and homes will raise marginal costs of operations for those firms, leading to higher production costs and products prices.”

Kola Adesina, Chairman, Egbin Power Plc, believes that one of the constraints of the generation companies is the debt owed them by the government. “What seems to be the challenge so far is the log of debt owed us by the Federal Government. This huge debt is hindering operations and limiting possible development to increase our network,” he stated.

The company raised alarm over the indebtedness of government to the tune of N86 billion.

Confronting the challenges

Onyekpere called for a political resolution of the Niger Delta crisis, through effective dialogue and beneficial compromise.

He said, “The human being is the coordinator that puts all forces and factors of production into a momentum that culminates in goods and services. When the human element malfunctions, the other components are bound to fail or not to start the process at all.

“What is required for the Niger Delta is a political resolution of the crisis where the stakeholders including the federal government, state and communities will engage in a give and take relationship. All cards should be laid on the table and a long lasting resolution will be designed. This will help the generating companies to increase their generation of power; restore investors’ confidence and bring increased development to the Delta.”

He lamented the delay in commencement of negotiations with the aggrieved parties after over two months since a ceasefire was announced.

“Many Nigerians are surprised that the Federal Government has failed to take steps to commence the negotiations for the resolution of the crisis since the Avengers and other groups announced a ceasefire over two months ago.

“There has been a lull and from time to time, the militants still carry out attacks of oil and gas facilities. Nigerians have not been briefed on the state of the negotiations if any is ongoing. It did not take the Umaru Yar’adaua government this long to establish a truce and calm down the Delta,” he stated.

On ways to address the many factors hindering the growth of the power sector, Onyekpere said, “The Federal Government knows exactly what to do, which starts with the negotiations with the militants and resolving the security scare. This will pave the way for the restoration of the gas supplies, especially with some repairs of damaged facilities.

“There is no reason for there to be a liquidity crisis in the sector if all stakeholders play by the rules. If the Distribution Companies (Discos) do not have the resources to provide appropriate metering infrastructure or to collect their debts, then they should open up to new investors or to the Nigerian public. The dog in the manger attitude of those who bought public companies is no longer acceptable.

“The story about indebtedness is funny. Every Discos should be able to disconnect debtors; sue in court for recovery of money owed and for services rendered and ensure that they pay before service metres are installed in every home, office or company.

“I think most of the ownership and management of the Discos are jokers; they do not understand what it takes to be in business. They want to collect tariffs without supplying electricity and or investing money to improve the system”, he concluded.

Solutions, way forward

Adenikinju advised that in the short, medium and long term, the Federal Government should consider negotiating with the militants; boost gas storage infrastructure to reduce the impact of pipeline vandalism and diversify the country’s energy generation supply source respectively.

He said, “I believe that we need to take several steps. In the short term, we should negotiate with the militants and the aggrieved stakeholders in the Niger Delta with the hope of achieving confidence building and reducing the incidence of vandalism.

“We can also explore the possibility of using technology to monitor the prospects of attacks before they actually occur.

“The pipeline communities should also be treated as stakeholders to ensure they protect the pipelines passing through their areas.

“In the medium term, we need to explore gas storage technology and infrastructure to ensure that we delay the impact of pipeline vandalism on the generation company.

“We should also encourage dual fired generation plants, virtual pipelines technology and in the long term diversify our energy generation supply source in order to boost our energy security. “The dependence on gas up to 80 per cent for electricity generation is not healthy. Other sources of electricity generation including renewable should be incentivized and encouraged.”

On ways to address the many factors hindering the growth of the power sector, Adenikinju said, “There must be a study of the system by experts so that government reform or rescue package is based on evidence. There should also be implementation of numerous reports by the Energy Commission of Nigeria, the Civil Society Organisations (CSOs) working in the energy sector, and the various technical reports sponsored by our technical partners.

“In other words, we need evidence-based approach to fundamentally address the issues in the Niger Delta and the impacts on the power companies. Most of these power companies are indebted to the banking sector, thereby exposing the financial system to high risks.

“A restructuring programme that could include a well-structured bail-out plan for the Discos should also not be ruled out. Technical and economic losses remain unacceptably high. Many debtor government agencies and powerful individuals and organisations are also indebted to the power companies.

“The genuine concerns of the power companies must be addressed. However, they must also be held to high standard of probity and compliance with the terms of restructuring plan, including mergers if necessary.

“The NERC should use more robustly stakeholders’ approach to ensure that decisions and pronouncements of the regulatory agency are mutually beneficial to all the stakeholders.

“Finally, I hold strongly the view that the extant enabling legislation in the industry the Electric Power Sector Reform Act of 2015 should be reviewed.”

For Mr Dada Thomas, founder and Chief Executive Officer of Frontier Oil Limited, the only long term and sustainable cure to the vandalisation problem and the sporadic civil unrests we are seeing is good governance.

He explained that to achieve sustained good governance will take time and a major paradigm shift across all segments of the Nigerian society.

He stated: “The issue of regional struggles for equitable distribution of resources (known as Resource Control in Nigeria) is neither new nor peculiar to Nigeria. Let’s learn from others who have also confronted and dealt with this problem. The Netherlands (Holland) and the United Kingdom are good case studies.

“The bulk of the gas in The Netherlands is produced from the north of the country; in and around the Groningen, Drenthe and Friesland regions but many of the natives of these regions believe that most of the money generated by the exploitation of the natural gas resources has been used to develop the western parts of the country;

The Hague, Rotterdam, Amsterdam etc. Similarly most of the United Kingdom’s oil comes from the North Sea much of which lie off the North East coast of Scotland. Many Scots argue that the bulk of the wealth generated from North Sea oil is spent in England thereby fueling much of the agitation for an independent Scotland.

“These nations have been able to peacefully deal with the issue of resource control simply because they have good governance and strong stable institutions and are able to debate the issues instead of resorting to violence and destruction of national and private assets. Let us as a nation also work to achieve good governance at all levels but especially at the local government level”.

As if in response to the suggestions put forward by stakeholders, NNPC said that it is liaising with key security agencies and other relevant stakeholders and has called for deeper collaboration to safeguard pipelines, gas stations, mega stations, refineries and other critical oil installations and facilities across the country.

But Kachikwu said last week that oil companies would be responsible for