THE PETROLEUM INDUSTRY ACT 2021: IMPLICATIONS FOR THE POWER SECTOR

Introduction

Until recently, gas was not considered as a commercial commodity and currently only accounts for about 6% of the nation’s total primary energy supply. Gas as a fuel source has not been adequately commercialized in Nigeria due to infrastructure challenges, inability to meet domestic gas demand, gas flaring practices, etc.

The Petroleum Industry Act (PIA), 2021 has introduced specific provisions for the natural gas sector. It acknowledges and creates a stand-alone natural gas sector with its market participants and operational value chain. In the light of this, it captures specific provisions for the strategic sectors which include power, gas-based industries, and the commercial sector. This new development creates an enabling environment for direct entry and investment into the value chain, thereby encouraging Nigerian businesses and overall sectoral growth.

Gas-to-Power (G2P) Objectives

According to the Center for Strategic and International Studies: ‘Electricity is the largest gas consumer in the world’.

In Nigeria, Gas is the primary source of power generation. Nigeria has stranded generation capacity of at least 7,000 MW. However, issues with gas supply amongst others exist as ongoing limitations. Nevertheless, the Federal Government is keen on strengthening the gas-to-power nexus in the country via various policy initiatives including - Nigerian Gas Master Plan (2008), National Domestic Gas Supply and Pricing Policy (2008), Nigerian National Gas Policy (2017), National Gas Expansion Programme (NGEP) Committee set up in 2020, etc. The use of gas for power remains an important policy goal in Nigeria, especially considering that power is an enabler in stimulating and promoting other industrial developments in the country.

The Challenges

The totality of the challenges impacts the commercial viability of gas utilisation projects, and these include:

• Production fluctuations given the nature of associated gas production.
• Gas Availability (Demand growth v Feed Gas Supply) stemming from inadequate capital investments
• Gas Deliverability (Inadequate gas transportation and processing infrastructure across the value chain)
• Legal and Regulatory Impediments (misaligned legal, regulatory and policy framework across the gas-to-power value chain)
• Security, Affordability, Reliability, Commerciality and Pricing of Gas Supply for Power Generation (Regulated gas pricing, Value chain issues)
• Gas Flaring, etc.

Domestic Gas Obligations Prior to the PIA

By legislation, the Federal Government is permitted to approve the price at which gas is sold domestically which has been viewed as being contrary to international best practice, given the high degree of what has been termed as ‘state controlled’ pricing.

Gas producers in the past did not comply their Domestic Gas Supply Obligations (DGSOs) in flagrant disregard of the National Domestic Gas Supply and Pricing Policy 2008 and the National Domestic Supply and Pricing Regulations 2008 and instead opted for the exportation of natural gas.

Participation in the international gas market was a juicy sell to domestic gas producers, due to the investment-friendly prices, preferable contract terms and appropriate levels of regulatory certainties alongside guaranteed reasonable return on investments. The effect was unrealistically low prices for the domestic market with a huge shortage created in relation to gas supply for domestic demand.

Domestic Gas Obligations in the PIA

The PIA stipulates the terms for what is now termed as ‘Domestic Gas Delivery Obligations’ (DGDO) based on the ‘Domestic Gas Demand Requirements’ (DGDR).

Section 110 (1) of the PIA empowers the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) to prescribe and allocate on a yearly basis the DGDO based on the DGDR as determined by the Midstream and Downstream Petroleum Regulatory Authority (MDPRA) on a yearly basis. The DGDR is the total amount of marketable natural gas required for all wholesale customers of strategic sectors.

The Act empowers wholesale customers of strategic sectors to negotiate direct supply contracts with lessees or suppliers. The PIA allows the holder of a lease to contract directly with wholesale customers of the strategic sectors or wholesale gas suppliers supplying the strategic sectors for delivery of marketable natural gas on a free market basis.

Lessees who comply with their DGDOs or who intend supplying customers outside the strategic sectors can deliver marketable natural gas to the domestic market on a willing-buyer-willing-seller basis. The Commission is empowered to direct a lessee to increase production volumes and dedicate specific volumes of natural gas to the domestic market.

The penalty for non-compliance with the DGDO is US $3.50 per MMBtu not delivered except where the lessee has a signed Gas Sale and Purchase Agreement with a wholesale supplier of the strategic sector, in which case the penalty for failure to deliver will be as stated in the Agreement.

The lessee may also be barred from, supplying any new midstream gas export operations. Other exceptions include - force majeure, inability of purchaser to accept allocated gas volumes, transportation challenges, failure to pay on the purchaser’s part.

It is anticipated that once it is determined by the Authority that the natural gas market has attained full market status, the Commission will discontinue the imposition of domestic gas delivery obligations. Prior to the anticipated gas market outlook, the domestic gas aggregator still has a role to play in managing the relationship between producer-customers and customer-clients for the supply of marketable natural gas (where applicable).

Impact of Pricing Framework of the PIA on the Power Sector

It was expected that the PIA will provide for the deregulation of the downstream sector through the promotion of a market-based pricing regime which would boost investments in the gas to power value chain. However, this has not been sufficiently achieved within the PIA as the pricing framework is still regulated in the PIA. The base price per year for the power sector and other strategic sectors is to be determined by the Authority and conditions for transition to free market are not based on the guiding principles of the National Gas Policy.

Under Section 167(5) of PIA, floor price for the power sector is not stated. It states that: “The price of marketable natural gas applicable to the power sector shall be the domestic base price at the marketable natural gas delivery point.”

The domestic base price is to be as determined by the Authority annually. The pricing methodology review will be subject to extensive stakeholder engagement. Hence, stakeholders in the gas and power sectors are advised to take advantage of the process to shape the gas pricing methodology.

With price control/regulation, incomplete payment of invoices by GenCos, legacy debts to the gas suppliers and uncertainty around the price of gas- ‘what’s in it for the investors?’ In addition, low electricity prices reduce incentives for the creation of new markets in less economical areas such as renewable energy, smart grid development, etc. These are key within the energy transition conversation.

Key Drivers for Investments in G2P

• Viable Business Models
• Clear policy, legal and regulatory framework
• Scaling up incentives
• Appropriate value chain pricing
• De-risking financing elements, etc.

Ultimately, to attract investments in power projects for increased energy access, the government will need to provide the necessary legal and regulatory framework in the gas and electricity sector(s) to underpin the Power Purchase Agreements which typically has a duration of 20 or more years alongside other attendant agreements.

Outlook for the Future

It appears that the PIA has not changed the pricing framework for the gas to power nexus. Long term expectations for price liberalisation and viable investments in the gas to power sector, would be hinged on a simultaneous declaration of competitive natural gas and power sectors by the Authority and the Nigerian Electricity Regulatory Commission (NERC), in so far as the preliminary structures are put in place beforehand. This will require dedicated coordination across both sectors.

However, the IPP option might prove to be a viable investment vehicle given the right project, economics, and an efficient willing-buyer-willing-seller arrangement.

Recommendations

• Infrastructure: adequate investment in infrastructure is paramount and to the credit of the PIA, provision is made for infrastructure investments.
• Security: issues relating to pipeline vandalism and other security concerns that can impede the progress of the gas-to-power objectives must be addressed as a matter of priority.
• Legal and Regulatory: a unified approach is needed for the regulation of domestic supply of gas for power especially regarding pricing for gas which is cost-based and power which is incentive-based.
• Sound market-based pricing regime and coherent export regime is essential as subsidized prices will likely create artificial competition. Reducing energy subsidies will lead to higher wholesale and end-user prices for gas. Gas pricing adjustment for power should align with the Multi-Year Tariff Order with adequate pass-through mechanisms in tariffs
• Governance: coordination and alignment of institutional behaviour across the gas-to-power value chain is essential, to reduce transaction and administrative costs via the avoidance of duplication of functions and regulatory overlaps.
• Ongoing policy implementation tracking is key: In Korea, the government through the Ministry of Trade, Industry and Energy (MOTIE) develops a ‘Long-term natural gas supply and demand plan’ every 2 years over a 15 years trajectorial forward plan for the primary energy balance, the electricity balance, and the gas balance. Energy and electricity balance are presented to National Assembly without the need for formal approval while the gas balance only requires Ministerial approval. A similar implementation tracking structure can be considered and adopted in Nigeria.
• Mitigation of risk factors in the power sector is paramount for the success of the attainment of the gas-to-power objectives.

Conclusion

It is important that the gas pricing framework in the PIA is mirrored in power sector regulation and reflected in the MYTO to ensure uniformity of application. Any pass through costs and risks enshrined in documentation across the value chain must conform and align with the regulatory provisions governing each segment of the value chain to avoid any form of dichotomy that will send a negative signal in the market and deter the much needed FDI in the sector.

The Governance framework in the gas sector should complement and not contradict the framework governing other related sectors such as the power sector.

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