Transitioning: Steps are being taken to manage reform and secure domestic supplies

Policymakers in Nigeria would like to create a fully market-driven natural gas system. However, ever since – indeed, before – the Gas Master Plan was drawn up in 2008, it has been understood that this objective will not be realised in the short term, and that carefully planned transitional mechanisms are necessary to ensure both that progress and the economy’s growing needs are catered for in the meantime.

MUCH OBLIGED: One such mechanism is the Domestic Gas Supply Obligation (DSO), which requires all producers to reserve part of their output for the local market. With exports such as liquefied natural gas (LNG) likely to offer attractive prices for some time to come, additional incentives are needed to secure supply for the less lucrative domestic market.

The DSO stipulates a percentage for each firm, taking into account the company’s current resources and production capacity and level of gas flaring, which is seen as both an undesirable practice to be discouraged, and a sign that gas is available should the necessary infrastructure to capture it be in place.

CONTRIBUTION: Individual DSOs are divvied up from an overall target based on the determined need at any given time to meet the demands of consumers – mainly power plants, but also gas-based industries and even commercial users of the country’s few local gas distribution systems. The total DSO is subject to a maximum of 5bn standard cubic feet per day (scfd), and producers can disperse production beyond their contribution requirement as they choose. The limit is somewhat academic, however, as current domestic consumption runs at around 1.2bn scfd, so there is still room before the maximum limit is reached.

Failure to abide by the DSO can lead to increased liability, hefty fines or even a suspension of exports. The public draft of the Petroleum Industry Bill (PIB) that is currently going through parliament gives the newly created Petroleum Inspectorate power to refuse gas export licences if it believes export is not in the national interest given a domestic market shortage. This power, however, does not extend to exports contracted under existing licences.

Still, not all gas consumption is covered by DSOs. Some firms produce specifically for local needs, known as “independents”. While price has so far disposed the “indies” to go more for oil than for gas, this is not universally true. Affiliates of the Nigerian-owned firm Seven Energy, for instance, are producing gas in their Uquo Field, and doing so exclusively for local consumption – specifically for two power stations, Ibom Power and the Calabar Power Plant.

PRICING IT RIGHT: Domestic gas prices have at times been extremely low. This is because local power producers simply cannot afford to pay gas prices that fully reflect international demand, as the household price of power is a chronically sensitive issue. In fact, in May 2012 the national Power Holding Company of Nigeria (PHCN) had around N10bn ($64m) in unpaid gas bills to the state-owned Nigerian Gas Company, and around N78.8bn ($504.3m) in “gas bills at one remove”. The latter is for electricity received from gasfired plants in the National Integrated Power Project (N6.6bn, $42.2m) and from the two international oil companies, which use their own gas to fire the large and effective power plants that they own (Agip, N60bn, $384m, and Shell, N12.14bn, $77.7m).

To avoid price shocks while also providing more incentives for producers, the government has opted for sector-specific schedules for gas price rises over the years. Having stood at an incredibly low $0.10 per million British thermal units (MMB tu) in 2006, the price in the power sector was set at $0.60 in 2010 and $1 in 2011, rising to $1.50 for 2012 and 2013, and $2 (all MMB tu) in 2014-15, with indexation according to OECD prices from 2016 onwards. Eventually there will be price parity between gas sold domestically and exported. Meanwhile, transitional pricing is subject to “domestic parity”: the fixed domestic price of gas can never be higher than that of a selected basket of global market gas prices, so a downward lurch on foreign markets would not leave domestic gas more expensive than that exported.

Industry sources say that, generally, things are not as bad as they might be, and that a price of $2 per MMB tu begins to look attractive. But there are two provisos: the first is that much depends on the still uncertain outcome of the PIB. The serious tax hikes on gas that some drafts have suggested would significantly alter corporate calculations. Second, a schedule too closely geared to smoothness and immediate cost might be unrealistic. Though these might be borne by the state and government debt, infrastructural requirements might also need to be factored into gas prices, and such development will not be cheap, especially if the suggested pipeline running north to Kano is put into practice.

THE AGGREGATOR: At the centre of the transition is the Gas Aggregation Company of Nigeria (GACN) – also known as the National Strategic Aggregator (NSA). State-owned GACN was officially incorporated in 2010, and as of 2012 is seriously in business. Kunle Allen, GACN’s CEO, like his boss the petroleum minister, Diezani Alison Madueke, formerly worked with Nigeria’s Shell operation, which has proved a useful recruiting ground for senior sector officials.

Though corporate in form, GACN does not buy or sell products, acting more as an intermediary, a coordinator and a repository of sector-wide knowledge and advice. Alongside keeping the minister advised on demand growth trends, GACN performs a host of “nitty gritty” functions. It is the first point of contact for potential gas buyers, and its due diligence process is a precondition for accepting them into the “demand pool”. Liaising with the regulatory authority, the Department of Petroleum Resources, on DSO levels, GACN matches individual buyers with suppliers, at times quite authoritatively, to avoid cherry picking. This strategy helps parties negotiate Gas Purchase and Supply Agreement contracts, a sensitive matter to judge from the sighs of official relief that greeted the deals with Chevron and Shell in August 2012. These two processes were lengthily drawn out, and yielded a template applicable to other power plant contracts, Minister Allison Madueke commented.

OVERSIGHT: Once a contract has been concluded, GACN manages the escrow account set up under it, receiving and verifying payments from buyers, paying suppliers, and managing the resolution process in cases of dispute. Given the seriousness of non-payment problems in the past, this is a crucial responsibility – and one that has been significantly helped by World Bank partial risk guarantees and government indemnities that have been called upon to ease problems in the gas-to-power sphere.

GACN also fulfils the day-to-day function as a network administrator. It manages the metering of gas flows for invoicing and dispute resolution purposes. Keeping in constant touch with buyers, suppliers and the NGC as the gas transporter, it has real-time knowledge of where supply capacity is available in the system. This allows it to coordinate swaps or deployment of swing capacity, and can tell NGC where it can source temporary supplies if there is a shortfall. And, if the shortfall is severe, it can manage the rationing of demand – albeit according to predetermined rules.

TAKING THE REINS: Desperate times, moreover, mean new roles. With mayhem in the power system in March 2012 and the declaration of a 12-month Gas Emergency in April that year, the GACN received a further boost, under direction from Allison Madueke. She gave Allen and GACN responsibility for “identifying gas sources/supplies, and designing incentives for accelerated domestic gas delivery”. GACN’s mandate will include driving the implementation of findings from the recently constituted Emergency Gas Committee, which is scheduled to make recommendation on short- and medium-term gas supply on an ongoing basis. Finally, GACN has also been tasked with “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 DSO”.

Such processes might have had an ambitious midlevel Soviet apparatchik dreaming of Politiburo membership. In the less ordered, less pliable environment of 2012 Nigeria, with Barth Nnaji out of office as power minister and GACN mentioned (so far favourably) in leaked political documents that may have contributed to Nnaji’s downfall, reactions can only be confined to wishes of good luck – and at all cost abstain from references to “poisoned chalices”.

PLAYING THE LONG GAME: Nevertheless, emergencies have a way of lasting much longer than expected, which begs the question of whether there has been sufficient development in recent years to ensure gas fields are able to supply the growing amounts Nigeria will need in three, four, or even five years. That, for reasons to do with pricing and legislative uncertainty, maybe the real question, rather than the availability of emergency administrators.