In 1879 the invention of the incandescent light bulb kick-started the race to commercialise electricity; it catalysed competition in prices, markets and technologies.
Newly introduced electricity technologies – alternating current (AC) and direct current (DC) – had to contend with gas companies, the incumbent suppliers of lighting and heat to most homes in the US.
Thomas Edison, inventor of the incandescent bulb, who had the first mover advantage with his DC technology had to contend with the economically and politically influential gas companies as well George Westinghouse who was promoting the AC technology. Westinghouse won the race because he combined the advantages of gas and DC technology at an attractive price to wider market.
The adoption of electricity – to light homes, trams, and street lights, and to power manufacturing plants – by affluent city dwellers and industrial companies in rural areas resulted in a gas price war. In New York, due to competition between the gas companies and Edison Electric Lighting Company, the price of gas dropped to $1.50 per thousand cubic feet in 1890 from $3 in 1878 (six gas companies came together in 1884 to form the Consolidated gas Company of New York).
Fast-forward 124 years to Nigeria where there is no commercial market for selling gas to the power sector. Despite a huge suppressed demand for electricity, where technology isn’t a significant issue, where lack of electricity has spurned a generation solely reliant on generators but willing and able to pay for a cheaper source of power.
The absence of a market for this abundantly available commodity and the fuel for generating most of our electricity, is the single biggest obstacle to making gas available to the power sector, because the federal government of Nigeria insists on controlling the domestic supply and price of gas to the power sector.
Because we have put the cart before the horse, commercialising gas-to-power is moving at an astonishingly slow pace. The government largely controls the gas sector through the Nigeria Gas Company (NGC), a subsidiary of the Nigerian National Petroleum Corporation NNPC, which currently owns the largest network of gas transport pipelines in the country, and the Minister of Petroleum, who controls gas prices by regulation.
A poorly sequenced reform of the electricity industry has unbound the electricity industry, putting the generation and distribution of electricity into private hands overseen by the Nigeria Electricity Regulatory Commission (Nerc) without similar changes in the commercialisation of gas – 70 percent of Nigeria’s total power output is supplied by gas-fired plants.
Most of the existing gas infrastructure is owned by government and related agencies who are focused on using public procurement to build emergency gas-to-power infrastructure, rather than commercial-based solutions. NNPC is engaged in a number of gas-to-power projects e.g. the $400mn OB-OB3 pipeline project which is due in 2016. The project will deliver 700mmscfd from to Western Nigeria were demand and the number of thermal generation companies (Gencos) are highest from Eastern Niger Delta.
To be fair, the domestic supply obligation (DSO) that regulates the price at which gas is sold to the power sector was, arguably, a good policy, when government owned the power sector. The price control regime for gas-to-power which was set up in 2009 and will end in 2015 has not incentivised the development of new gas supply and processing facilities. The reality today is different and the price of gas has to reflect this change. A new reality dawned on November 1 2013: a privately-owned, market-driven and commercially-oriented electricity industry took off.
The regulated gas price for power purchasers is a disincentive to private investors to build the infrastructure. Most of the gas reserves are owned by the major international oil companies (IOCs) for whom gas supply is not a core business; at the current price. Add to that the limited availability of partial risk guarantees by the World Bank to gas sellers, which are required for any serious investment in gas-to-power infrastructure.
In other words, the regulated domestic gas price is too low to spur real investment in gas gathering and transportation. Such investments are large and require a robust market with credible buyers on one side. Gas transportation requires major investments to acquire rights of way over long distances, install pipes, and build processing plants. It can take years and only the truly hardy e.g. Seven Energy, Oando etc will take such risks. More will come if the roll-out process is easier and gas price higher.
In a few years, thanks to privatization, there will be several credible large independent power plants (IPPs) that will catalyze a robust market and spur investments in supply further upstream; but we are not there yet. Blackouts are the norm in Nigeria’s nascent electricity supply industry; good days, of uninterrupted power supply, are few and far between.
A keen observer of Nigeria’s power sector defines a “good day” in the industry as a “a day on which no gas pipeline has been vandalised, there is no maintenance outage by NGC or by any of the gas suppliers and every molecule of gas that available power plants can burn has been delivered. The last time Nigeria saw such a day was 23rd December 2012 when all available power plants delivered 4517MW to the grid, including about 700MW of hydropower. This means about 1.1 billion standard cubic feet of gas (1.3bcf) was delivered to power plants that day.”
Tayo Fagbule
