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22 Apr 2012

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Mrs. Diezani Alison-Madueke

By Ijeoma Nwogwugwu

News Analysis

In recognition that the wholesale reform of the power sector cannot be achieved without the cooperation and input of the oil and gas sector, the petroleum ministry last week declared a 12-month gas supply emergency plan aimed at increasing gas supply to thermal power stations in the country, especially the new National Integrated Power projects expected to come on stream in the months ahead.

Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, in a statement, said during the period, her ministry alongside the Nigerian National Petroleum Corporation and gas producing companies would deploy extraordinary measures to accelerate opportunities for quick wins in order to ameliorate the potential gap between gas demand and supply.

A decision, she said, has been taken to strengthen the capacity, as well as the roles of the Gas Aggregation Company of Nigeria Limited (GACN), which is a DPR-regulated company of her ministry with responsibility for gas sourcing and allocation, as well as operator of the commercial framework of the Gas Master Plan.

Accordingly, in addition to its traditional gas demand management role which includes processing requests from gas buyers, managing gas supply/demand allocation, as well as facilitating Gas Supply Aggregation Agreement (GSAA) negotiations, the GACN will henceforth be accountable for identifying gas sources/suppliers and designing incentives for accelerated domestic gas delivery.

It will also be responsible for driving the implementation of the findings of the recently constituted Emergency Gas Committee with emphasis on short and medium term gas supply; on a sustained basis, ensuring integration as well as alignment between gas demand and supply to ensure robustness of longer term gas supply to power; and providing implicit data to enable the DPR to be more proactive in compelling suppliers to meet domestic gas supply obligations.

In furtherance of the emergency gas supply plan, Mr. Kunle Allen was appointed the substantive chief executive officer for the Gas Aggregation Company of Nigeria. He will, within the emergency period, report directly to Alison-Madueke and will be accountable for the delivery of the roles stated above.

The minister’s effort to facilitate the delivery of adequate gas to meet the nation’s power needs is noteworthy. But beyond the declaration, an appropriate fiscal framework would still have to be put in place and implemented to incentivise oil and gas companies to invest in gas exploration and production projects to meet the nation’s local gas needs. This is sine qua non in a country, in which over 75 per cent of electricity output comes from thermal power sources. The balance is generated by hydro power sources.

To be fair, past administrations have failed to put policies in place to encourage investment in gas production. Indeed, Nigeria, the seventh largest producer of gas in the world, has paid more attention to producing gas for liquefied natural gas exports and on accidental gas (gas produced in association with crude oil), than in gas development projects targeted at the domestic market.

The same can be said of failure by successive governments to expand and upgrade the transmission infrastructure in the electricity sector, to the extent that the current grid lacks the capacity to transmit the incremental increase in electricity generation from the new power projects coming on stream. The result is that electricity supply in the country has been at best erratic, or in several sections of the country, non-existent.

As it stands, Alison-Madueke insists that there is excess gas stranded, particularly in the south-east, but that the thermal power stations lack the facilities and capacity to absorb the extra gas. In order to address the misalignment in the energy sector, plans are in place to speedily construct hundreds of kilometres of pipelines and gas metering stations to make gas available to the existing and new power stations.

Under the emergency plan, special focus will be paid on completing all outstanding gas pipeline projects such as the Obiobi (in Oyigbo, Rivers State), the pipeline to Olorunsogo, and another pipeline to Ajaokuta. In addition, extra gas will be pumped through the Escravos-Lagos pipeline to increase supply to the Egbin power plant and others in the south-west zone.

With respect to the fiscal regime, the World Bank will provide partial risk guarantees to gas producers to encourage investment in the sub-sector in the immediate term. But in the medium to long-term, the minister intends to introduce a cost-reflective tariff structure that will enable producers to sell gas at $1 per million standard cubic feet (mscf), in the first instance, to power companies, as opposed to the 4 cents per mscf, which the Power Holding Company of Nigeria is currently unable to pay.

But to ensure that the power companies are able to pay cost-reflective tariffs for gas, the Ministries of Petroleum Resources and Power would have to work in concert to liberalise and privatise the electricity sector so that power producers are empowered to pay for the gas at a market determined price.

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