Why did Nigeria waste $137m on unutilized gas?

Two weeks ago, the federal government apologised for the worsening power supply in the country, blaming the breakdown of most of the generating plants and lack of gas supply for the current electricity challenges.

To relieve the pain, President Muhammadu Buhari says the government is ramping up the underutilised capacity at the Niger Delta Power Holding Company (NDPHC), with a $50 million Gas Supply agreement which is being finalized to secure the sustainability of up to 800MW of underutilized NIPP assets.

But this is not a new thing in the sector.

From 2018-2019, Nigeria paid $137 million in two years for gas and electricity that were never used under a Gas Sale and Aggregation Agreement (GSAA).

“The gas supply agreement is based on 80percent gas take-or-pay; meaning that whether or not gas is utilised, payment of 80percent of contracted gas quantity will have to be made. As a result, NBET had paid a total of $105 million and $32 million in 2018 and 2019 for unused electricity and gas respectively,” Nigeria’s ministry of finance to President Muhammadu Buhari in a letter dated November 19, 2021.

Issues with gas supply agreements

Over time, gas producers have been cautious of investing in gas infrastructure in the country as a result of low gas prices and a lack of assurance or guarantee of payment from GenCos. Hence, the processes for gas supply agreements have been fraught with challenges.

A Gas Sale and Aggregation Agreement (GSAA), which is typically between the GenCo, gas supplier and the gas aggregation company, stipulates contractual framework, rights, obligations and risk allocation for gas supply to the GenCo.

The most prominent case was the sloppy gas supply deal between Calabar GenCo and Accugas Ltd, forcing the federal government to keep paying over $10 million monthly with or without gas supply to the plant.

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The perennial liquidity challenge

One of the major -possibly the biggest — challenges bedevilling the Nigerian Electricity Supply Industry (NESI) is the liquidity challenge; hence the sector is not financially viable.

The electricity distribution companies (DisCos) are finding it hard to collect significant revenue for energy distributed to customers. This also affects the Discos’ remittance to the Nigerian Bulk Electricity Trading Company (NBET) and market operators. Most of the DisCos do not offset up to 50 percent of the market invoice for energy received.

NBET is the body that buys power from the GenCos through power purchase agreements (PPAs) and sells to the DisCos through vesting contracts.

As a result of low remittances by the DisCos, NBET too has been unable to meet its obligations to GenCos. The ripple effect means GenCos too will be unable to pay gas suppliers.

Two weeks ago, the Association of Power Generation Companies (APGC), an association of electricity generation companies, issued their own release, refusing to accept responsibility.

“Illiquidity, caused by the huge sums owed GenCos by the Nigerian Bulk Electricity Trading Plc (NBET), has more than ever before continued to frustrate the GenCos and kept them incapable of meeting their obligations which are extremely necessary to keep their power plants running and make capacities available,” said Joy Ogaji, executive secretary of APGC.

The GenCos said the cash crunch had disrupted such obligations including operations and maintenance as and when due, procurement of critical capital, spare parts and accessories, payment, and servicing of existing loans from lenders and financiers, and employee obligations.

GenCos added that issues including the inability to source foreign exchange, issues of gas volume, gas quality, gas pressure and gas transportation had consistently curtailed capacity utilisation by GenCos, thereby affecting generation.

“While the owners of the GenCos invested committedly and increased generation capacity up to 13,000MW across the country, no corresponding investment and improvement were made at the transmission and distribution ends. The result was the significant stranded capacity of GenCos, which ironically, Nigerians are in dire need of but cannot get,” Ogaji said.

Against the backdrop of the blame game, the Nigerian consumers who saw their electricity tariff rise over 35 percent in 2020 upon the introduction of the service-based tariff plan, are complaining of being short-changed.

Way forward

The federal ministry of finance says it has come up with an unprecedented proposal to market the makeup gas (MUG) to potential off-takers such as the Nigeria Liquefied Natural Gas (NLNG) for off-take by Vitol, an international trader, through a swap agreement to generate revenue in dollars.

“Just like crude, this will constitute a major (additional) source of income that will be more stable considering its stability and predictability,” the ministry of finance says.

“The proceeds from volumes accrued from the gas supply agreements is approximately 5113mmsef (25.7 mmBTU) and a potential market value estimated at USD84.5 million (as of March 2021) from one source alone. The proceeds from the sale of the MUG will be redeployed to address the financial challenge of the Power Purchase Agreements and override the Partial Risk Guarantee of Azura, service the Genco legacy debt, the PPI projects and other FGN liabilities,” it added.

To accelerate the above development, the Federal Ministry of Finance recommended a direct involvement of VITOL, a reputable gas company that already has a long term LNG off-take contract with Nigeria LNG Limited (NLNG) and provides financing to Savannah Energy, while Ahmed Zakari and co, an indigenous accounting and audit firm, will engage as transaction advisor.

The finance minister added that the implementation of the programme will shore up the gas supply capacity of NLNG and eliminate its feed gas challenges.

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