• Monday, May 20, 2024
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Hopes rise in Nigeria’s battle to beat power deficit

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One has underpinned Nigeria’s economy for decades, providing about 80 percent of the government’s revenues. The other has held the country back, deterring investors while keeping millions of people in the dark and the rest sleeping to a soundtrack of noisy generators. Now, in 2013, it seems the petroleum and power sectors – the two main planks of the country’s energy industry – may be swapping trajectories.

After years of false starts and billions of dollars wasted on halfhearted attempts to solve Nigeria’s massive power deficit, privatisation of electricity is well under way. Late last year, in a process that attracted interest from more than 400 domestic and foreign companies, the government approved $2.3bn worth of bids for 15 of the 17 state-owned generation and distribution groups.

The winning consortiums have paid 25 percent of the sale or concession costs and will take ownership later this year on payment of the balance. Meanwhile, Manitoba Hydro of Canada is managing the state transmission company.

While there are bound to be hiccups, few doubt that power supply is headed in the right direction. Under the state-owned Power Holding Company of Nigeria, the country’s peak power production is still barely more than 4,000MW. That compares poorly with South Africa, Nigeria’s rival for the title of Africa’s biggest economy, which produces 10 times more power for a population that is three times smaller.

Atedo Peterside, who heads the technical committee of the government’s National Council of Privatisation, believes the “tipping point” towards solving the country’s power woes has passed and that the impact of the reforms will be “huge”. If all goes well, not only will generation, transmission and distribution be better run, but also

new independent power plants will come on stream to meet the huge demand for electricity.

“If you have GDP that’s been growing at 7 percent already, imagine what it would be if you had reliable power,” he says.

Increased tariffs have been put in place to ensure that investors can make a return. In April, the World Bank provided a payment guarantee to Chevron for the provision of gas to

the country’s largest power plant and the government signed a separate deal for gas supply with ExxonMobil. At the signing ceremony, President Goodluck Jonathan said of power reform: “There is no turning back and … no relenting.”

Other problems remain outstanding. In order to keep to the strict deadlines for privatisation, some winning bidders for the state power plants and distribution companies signed the purchase agreements without all the fine details being resolved. Some consortiums still need to raise debt financing to fund their purchases and to rehabilitate and expand the assets they are taking over.

Arun Velusami, a partner at London lawyers Norton Rose and who worked on two of the successful bids, says the scale and complexity of the process was unprecedented in sub-Saharan Africa. “There’s still a lot of work to be done,” he says. “But it’s not insurmountable,” Velusami adds. “The impetus to finish it is there.”

The excitement about power is matched by the gloom in the oil and gas sector. In 2000, there were hopes that Nigeria could produce 4m b/d by 2010.

Militancy in the Niger Delta – fuelled by grievances over environmental damage by oil companies and poor governance, as well as criminality – put paid to that. The unrest is largely over but industrial-scale oil theft of up to 150,000 b/d has sprung up in its place.

The government has promised repeatedly to tackle the problem, which is believed to involve well-connected Nigerians, security forces and foreign traders and buyers. Yet little has been done. More damaging has been the slow progress of legislation meant drastically to reform oil and gas. The petroleum industry bill, or PIB, was designed to break up the opaque and poorly run Nigeria National Petroleum Corporation and replace it with commercially viable successor companies. Transparency, accountability and environmental protection, all noticeably absent

for decades, would be improved, and fiscal terms would be recalculated.

After five years and innumerable drafts, the bill is still with legislators. The resulting uncertainty, particularly related to the fiscal terms, has caused the oil majors that dominate Nigeria’s industry, including Shell, Chevron, ExxonMobil, Total and Eni, to put tens of billions of dollars of potential new investments on hold.

The result is that production is stuck at 2.4m b/d. Meanwhile, other countries in West Africa and elsewhere on the continent have discovered oil and gas deposits, providing alternatives to Nigeria’s production. The US, the biggest purchaser of Nigeria’s oil, is becoming more self-sufficient as it develops its shale reserves.

Competition aside, the government in Abuja has an added incentive to pass the PIB since, without it, the government is unlikely to be able to hold any new licensing rounds, which would yield billions of dollars. Despite all the pressures, there is no certainty that the PIB will get through this year. With the 2015 election approaching, the political atmosphere is heating up and the bill has become entangled in a struggle between lawmakers and governors from different parts of the country. In addition, the oil companies are still lobbying hard to have proposed fiscal rates revised downwards.

So far, there appears little to contradict the consultancy Wood Mackenzie’s forecast in January that 2013 “will mirror 2012: a series of non events” and that “negative sentiment [will] further test the patience of some established players”.

This could have a detrimental effect on reforms. Nigeria relies on a mix of hydro and thermal – mostly gas – sources for power. New electricity plants that are in the works will mostly be gas-fired, too.

For all the progress on privatisation, until the signing ceremonies in April there had been little momentum in ensuring that the upstream gas supplies would be sufficient for the expansion in the country’s generation capacity.