JOHN BALSDON, Partner, Project Development & Finance, Latham & Watkins LLP; TOMINIYI OWOLABI, Partner, Oil & Gas Practice, Olaniwun Ajayi LP; CHUKWUEMEKA OSUJI, Senior Associate, Power & Infrastructure, Olaniwun Ajayi LP & JONATHAN ALUJU, Senior Associate, Power & Infrastructure, Olaniwun Ajayi LP in an exclusive roundtable discussion with FRANK UZUEGBUNAM, Editor, West Africa Energy Intelligence talks about infrastructure investment in gas-to-power sector, financing structure, Nigeria’s energy mix amongst other issues. Excerpts:
What is you take on investment in gas-to-power infrastructure in Nigeria?
John Balsdon:
Infrastructure clearly is not there to aggregate the gas in a manner that takes advantage of huge natural resources of Nigeria and there seem to be no appetite to bring it all together to generate gas-to-power. Nigeria Gas-to-power sector can attract foreign direct investment to its infrastructure but it has to be investment-by-investment basis. I suspect it will primarily involve captive industrial clients in the first instance with investment focused on them with excess power going to the grid.
Gas as the hydrocarbon choice for power will only grow and given Nigeria’s place, it should be at the fore front of that growth. The question is; what gas for Nigeria? Will it be the LNG in the first instance before Nigeria can resolve its infrastructure problem or can Nigeria use its enormous gas reserves?
Tominiyi Owolabi:
The investment interest in Nigeria has consistently been high. It is not a matter of interest. People are keen to do Nigerian deals, we get enquires regularly but the issue is there are quite a number of things that need to be put in place that would allow investors come in droves to the country. There is capital looking for where to invest in Nigeria but the issue is that as Nigerians, government and regulatory bodies, there are a number of things that have to be dealt with to allow the investment crystalize.
We are where we are as a result of several years of failure to do the right thing. Yes, we took some strategic decisions a few years ago to unbundle the power sector, privatize it and we have a structure which we believe should work but that structure which we believe should work has been mired by a number of regulatory bottlenecks and government inactivity and failure to see power in the way it ought to be seen in a commercial level.
The fact that we have gas in abundance will not translate itself to power. We need to do what we need to do. Take for instance, if we do not understand that people need to pay for power at the right rate, no investor will come; if you do not create a regime and environment for investors to make money, they will not bring their funds here. It is an irony but it is an irony that we understand because we failed to do small pieces of changes that will bring about what we need to do.
Jonathan Aluju:
The government needs to be courageous to take the right steps – there is a lot of emphasis on tariff. We have to go back to the end tariff, if that is not cost reflective, no investor will put down money to build infrastructure because you must be reasonably assured that when you put down money for that infrastructure, you can make returns and until the tariff is right, nobody will do anything and we have had this circle over and over again. The point is; to deliver on good governance, you need power and until you take that courageous steps to fix the right tariff, nothing will happen.
What kind of financing option would you recommend for Nigeria’s gas-to-power projects?
John Balsdon:
It depends on the project. If it is going to be a dedicated captive power plant to supply select industrial users that is quite easy to manage under integrated project because the capital expenditure will not be so high and an oil and gas company, some local investors and someone who is interested in electricity can make that investment because they can control everything. If it is a bigger project, people will take certain elements piece by piece, thus, it will be non-integrated.
Tominiyi Owolabi:
It is more of a transactional basis. If you are looking at captive, it is easier to do the integrated and non-integrated is clearly for bigger deals. There are other points you have to note for non-integrated: you can share it with other people and get other people to deal with the other parts of the chain; a non-integrated may make it more appealing.
What should be the best approach to solve the power puzzle in Nigeria?
John Balsdon:
Power is such a huge problem to tackle in one bite which is why I think that smaller projects that shows that things can work in parts of the country over certain users and create individual arrangements that actually functions because trying to tackle it all at once is very expensive and extremely difficult. For me, it is smaller steps that will be more likely to deliver results.
Tominiyi Owolabi:
As I mentioned before, we have not dealt with the fundamental issues, government, regulatory, commercial, until we solve all those issues, we won’t get a go on power. Nigeria problem is so big, complex that trying to tackle it headlong you will fail because of the complexity and its size. Part of what people have said is lets have embedded power, solar, let’s begin to solve the problem in bits but that’s not the solution we need. We need to tackle the big elephant in the room. How do you deal with it? Do you deal with it with one stroke of a pen? We need to deal with it on a gradual basis. For instance, let’s look at the privatization we did, the guys who are running the show; are they able to handle the obligations, we need to take a second look at the whole process, determine where we are and find a way of refining the future. We really need to ask ourselves what is the way for the future.
Chukwuemeka Osuji:
We also need to learn to be more dynamic in terms of chosen options. For example, the West African Gas Pipepline was a solution to harness Nigerian gas and use it to power Rep. of Benin, Togo, Ghana but when they saw the challenges we had with delivering gas to them, it did not take them time to quickly take a decision to begin thinking of other smaller solutions even with the way they configure their power plants. I think that is something that we need to start considering.
Do you see renewables helping to solve the power puzzle?
Jonathan Aluju:
In terms of renewables, there are 14 power purchase agreements (PPAs) with power developers totaling 1,100MW. One thermal power plant can do 500MW or 1,000MW. In terms of base loads, renewables cannot deliver on the power needs of a country but can only add to the energy mix. They can contribute their quota but we need much more that renewables.
John Balsdon:
There are downsides to renewables. Sometimes the sun does not shine or maybe the wind does not blow. You got to have base loads and base loads can only come from thermal.
Tominiyi Owolabi:
From where we are, we need a lot more that renewables can deliver. Considering our gas potential, we need a proper clear path to getting our thermal going. There are a lot of countries importing gas to fire their plants and we have so much gas – what are we doing with it?
Significant infrastructure investment for some captive markets like Lagos state can provide interim solution. The thinking is since we cannot solve our gas problem immediately, why don’t we adapt captive market solutions to some of the key hotspots and use that to reduce the pressure on our national grid and demand? Even if it is coming with a slightly more expensive price, those major electricity demand centres can afford those tariffs.
