As the President of the Nigeria Gas Association and chief executive officer of Frontier Oil, one of the top five suppliers of gas to Nigeria’s domestic market, Dada Thomas has a broad insight into the nation’s energy crisis. In this exclusive interview, he outlines how the crisis has taken shape and what needs to be done to resolve it.
The government’s recently approved national gas policy says Nigeria is experiencing a “full-blown energy crisis” in spite of its abundant gas resources. Why?
This is a cumulative problem dating back many years. Traditionally the pricing of gas in Nigeria has been regulated by the government. The international oil companies (IOCs), who hold the bulk of gas reserves, found the price far too low and so were not interested in producing for the domestic market.
The same IOCs were able to develop the successful Nigerian LNG (NLNG) project because the Nigerian LNG Fiscal Incentives, Guarantees & Assurance Decree of 1990 and Associated Gas Framework Agreement (AGFA) of 1991/92 provided sufficient fiscal incentives. And they were selling their product into the world market and getting paid for their product in US dollars.
For the domestic market it's not been the same. Traditionally, the largest consumer of gas domestically had been the government-owned National Electric Power Authority (NEPA). The NEPA would take gas and not pay for it. Over decades a huge backlog of debt was built up by the NEPA, which was only recently cleared by the government.
Lately, however, indigenous operators such as us – Frontier Oil with our joint venture partner – have stepped into the fray, making investments in supplying domestic gas. But there are severe issues. Today is bleak. But there is a bright future, provided the gas policy is backed up by a fiscal policy that creates a win-win environment for everybody.
There is also a clamour by the gas suppliers for government to step out of commercial price regulation and stick to technical regulation. We urgently need a “willing buyer-willing seller” market now.
Illiquid power sector
Going down the gas-to-power chain, the power sector is illiquid. The key reason is that the power privatisation undertaken [in 2013] under the previous [Goodluck Jonathan] regime hasn't succeeded because there isn’t enough value in the pricing of power to provide for all the members of the gas-to-power value chain.
Something drastic needs to be done about the pricing of power, and something drastic needs to happen about the efficiency of bill collection by the distribution companies (Discos) because collection efficiency is as low as 28%. That's ludicrous.
Something bold needs to be done to break this self-destructive cycle
On top of that, I understand that when the privatisation was being done the Discos did their economics on the basis of receiving about 5 GW of power. If you do your economics on receiving and selling 5 GW of power, and you're actually only receiving and selling half of that, there is simply not enough money. The Discos don't have enough capital to do all the things they promised, such as installing meters and upgrading the 33kv distribution infrastructure. They are practising estimated billing. Customer dissatisfaction has increased, customer resistance has increased, and so at any mention of increasing tariffs everybody goes crazy.
It's a self-perpetuating downward spiral. Something very bold needs to be done to break this self-destructive cycle.
What can be done in the short term to address the immediate crisis? And who should do it?
The government should increase the power tariff to make it market- and not cost-reflective. Market-reflective will promote efficiency while cost-reflective promotes inefficiency. This is the top priority because if the sector is not economically viable, anything you do is just putting Band-Aid across a huge gash.
The government must also ensure that Nigerian Bulk Electricity Trading (NBET) – which bridges the gap between the money remitted by the distribution companies and the money paid to the transmission, generation and gas suppliers – is sufficiently capitalised and funded and able to fulfil its role.
The government has instituted a NGN 701 billion (USD 1.95 billion) power sector intervention fund to pay for gas supplied and power generated from January 2017 for the next two years. That money has not yet been made available to NBET by the Central Bank of Nigeria. There is also the problem of the debt that accrued before January 2017, which is not being addressed at all. To restore confidence in the market, that intervention fund should be released to NBET and the government should repay the backlog of the debt.
To improve the ability to get power to the consumer, the Discos need to invest in their 33 kV local distribution infrastructure, in new transformers, and in metering. But they're reluctant to do so.
Does that mean there needs to be a recapitalisation of those discos? I think so. Does it mean that the existing shareholders should be diluted? Yes, they have to be, because they are insufficiently capitalised to undertake infrastructure upgrades. Other creative collaborative solutions between Discos and third-party investors by which new investments could be brought in should and must be explored.
What's your view of the final national gas policy as approved by the Federal Executive Council (Nigeria’s Cabinet) in June. Are the targets the right ones?
The NGA and Frontier Oil engaged with the ministry team when they were formulating those documents. It was a good process.
The final document doesn't please everybody. There are members of our industry, especially those with substantial integrated oil and gas production operations, who are not happy about the segregation of the upstream, midstream and downstream because the gas policy has removed the AGFA fiscal incentive. AGFA meant that if you were doing a gas project you could write off all your gas costs against oil projects. The intention of the government is clear: to decouple the upstream, midstream and the downstream segments and to remove AGFA to create a level playing field and encourage new investors and players into the gas business.
We have to ensure that gas business is economic on a stand-alone basis. What we said to the ministry team was, “Please make sure that the fiscal policies are such that a dry, stand-alone stranded gas project, with no liquids, with no condensates or oil, is profitable and bankable in and by itself.”
To assuage the fears of the IOCs and indigenous operators with substantial integrated oil and gas investments and operations, you have to grandfather existing agreements. You cannot cancel AGFA for investments that have already been made on the basis of AGFA.
The fiscal policy will be submitted to the Federal Executive Council by mid-September. We look forward to the approval of the policy by the Federal Executive Council (FEC). In encounters with the minister and his team, we have been assured that the fiscal policies will try to ensure that dry stand-alone gas projects are profitable. The minister has also said, “Look, we realise that a one-size-fits-all approach may not work. We are therefore ready to be flexible to look at projects on a stand-alone basis to ensure that they clear the economic screening hurdle.” That is encouraging.
When do you hope the FEC will approve the fiscal policy?
By the end of this year. They approved the oil and the gas policies pretty quickly, so I would assume they would treat the fiscal policy just as quickly.
Nigeria approved the implementation of a gas master plan in 2008. The gas policy document says, "the plan has not delivered on all its targets". What went wrong?
The project was very ambitious, it was not well funded, and project execution was not as effective as it could have been.
Let me tell you my fundamental belief: government has no business running businesses. Government has no business running projects. They lack the requisite skills and the staff get paid whether they’re productive or not. Whereas in the private sector you get paid for productivity, efficiency and performance. Today that plan is being re-modelled, with the objective of ensuring that the private sector takes the lead. This is the new thrust of the approved gas policy.
Why is Nigeria’s installed electricity generating capacity so tiny, given that you have a population of 180 million? And what can be done to speed things up?
We have 12.5 GW of installed grid utility generation, of which only 7-8 GW is technically available. And of that only about 5 GW is functional because of inadequate gas supply and technical problems such as wheeling capacity, grid system collapse etc. Why have people not been investing in generation capacity? For years there was simply no investment by the government and the NEPA in generating power or upgrading the backbone transmission and retail distribution infrastructure.
Government has no business running projects. They lack the requisite skills and the staff get paid whether they’re productive or not.
There was an attempt under the regime of President Olusegun Obasanjo – which was between 1999 and 2007 – to roll out around 19 new power plants but those plants were simply procured and placed in often the wrong places. There was no thought given to how would they get gas supply and how their power would be evacuated.
Putting generation aside, there is a bottleneck in the transmission system. Up to about last year the transmission capacity of Nigeria was a maximum of 5.5 GW. Above that the system was always collapsing because it could not handle the load. There's been a very good attempt by this current government to expand transmission capacity so we're just about between 6.5 GW and 7 GW of capacity now.
The reason why there is light in Nigeria today is because we are self generating power. We must be self-generating at least 20 GW of power.
Assuming that the Disco situation is resolved, transmission bottlenecks are resolved, and new generation gets built, there will remain the problem upstream with gas supply. A major issue with that is the long-running security situation in the Niger Delta. Can the dissatisfactions in the region be effectively addressed?
The only long-term sustainable solution to general insecurity is good governance, at the local, state and federal government levels. But that's a long-term project. So let's look at the short term.
This government, under the leadership of the vice president and the minister of petroleum, has been heavily engaging with the Niger Delta. That has yielded the relative peace we have today, compared with 18 months ago.
Last year a 16-point agenda was agreed between the stakeholders and leadership of the Niger Delta and the federal government. Secondly, there are ongoing engagements to make sure that there’s increased participation in the upstream oil and gas industry by Niger Delta communities. And you even have the fact that they've broken up the Petroleum Industry Bill (PIB) and there is now a whole bill entitled the Petroleum Host Community Bill. These are all good signs.
In our own [Frontier Oil] operations we form a symbiotic relationship in which we try to ensure we create and spread wealth within our operating area – that “if it's good for me, it's good for you”. We’re in it together. They have to have a stake in the business and therefore care for the well-being of the business such that they will not attack your facilities or blow up your pipelines.
This government is doing a much better job. It was rough at the start. The militancy brought oil production down to as low as about 1.5 million barrels/day from 2.2 million barrels b/d and it also affected gas supply to the nation because when you blow up oil pipelines a lot of the oil facilities use up all in-situ storage capacity and therefore have to shut down. Once you shut down oil production, you have to then shut down gas production because you no longer have storage space to store the condensate produced form the gas operations.
In 2015 less than 15% of the gas produced in Nigeria was sold in the domestic market, and more than 38% was exported as LNG. Should more gas be diverted from exports to the domestic market?
We're going to have to do both. We’ve seen wild fluctuations in oil prices, we’ve seen the double impact of low oil price and pipeline and facilities vandalisation. We need to diversify the source of foreign exchange. We already have commitments on LNG, and have to honour these agreements. Nigeria needs foreign exchange to industrialise, because we have to import capital equipment.
In our own operations we form a symbiotic relationship in which we try to ensure we create and spread wealth within our operating area – that “if it's good for me, it's good for you”. We’re in it together. They have to have a stake in the business and therefore care for the well-being of the business such that they will not attack your facilities or blow up your pipelines.
This means that we need to truly start the exploration, categorisation and classification of gas resources. The 182 Tcf of reserves we have is the result of exploring for oil not gas. There has been no active exploration for gas in Nigeria.
To meet our thirst for foreign exchange we have to move away from an oil-based economy to a gas-based industrialised economy. This is the thrust of the new Petroleum Reform Programme and the newly approved gas policy. But that means that you need foreign exchange to buy your capital equipment, to start creating value locally to employ the tens of millions of young people that we have in this country.
So we need exports and more importantly we need to increase the local value addition of gas by using it for fertiliser, for methanol, for all kinds of gas-based industries, the way Trinidad has done, the way Qatar is doing.
How much of a help or a hindrance to the necessary reforms is the current political situation?
The problem in Nigeria has not been that we don't have good policies it's always been poor implementation, and continuity of implementation and of policy direction.
We have been saying to government that we have to stop what we call policy somersaults in Nigeria. There must be commitment to ensuring that policies and laws are consistently and transparently implemented. The indication that I get in all my interactions with this minister of petroleum and his team is that they want to ensure the success of these policies.
They understand that we can no longer depend on oil as a nation, we can no longer continue to export raw materials as a nation, there is a great appreciation that there needs to be local value addition, wealth creation, and therefore creation of employment opportunities for the huge number of Nigerian youths pouring out of our schools.
Now, this government has an election coming up in 2019. Will it win or will it not? I do not know. I'm praying that there will be policy implementation continuity, whoever takes over in 2019. The best thing really is to accelerate the pace of implementation of approved policies and pass the long-awaited Petroleum Industry Bill, which has now been split into four different bills, so that the train has already left the station.
Once you have a law then at least you have a framework for addressing any issue that comes along, whether it's a new government or not.
How optimistic are you that Nigeria will be able to resolve its energy crisis? Or will things will get worse before they get better?
They’re going to get worse before they get better because the government has been slow in taking hard, fundamental decisions. They’re reluctant to effectively implement the multi-year tariff order, which is the pricing mechanism for power in Nigeria and the politicisation of that has caused us great harm. If they don't take this hard decision before the end of 2017, it will be difficult to take it in 2018 because electioneering will start.
The government itself needs to respect sanctity of agreements, and set an example by paying its debt to the sector, and thereby saying to everybody: “It's a new day, it's a new age, we will honour our agreements, everybody pay your bills. If I the government am paying my bills why are you the consumers stealing electricity? Everybody pay your bills