‘Gbite Adeniji, Managing Partner at ENR Advisory, is a specialist with expertise in policy, regulatory and commercial issues in the energy, natural resources and infrastructure sectors. He was, between 2015 and 2018, the Senior Technical Adviser (Upstream and Gas Policy and Regulation) to the Nigerian Minister of State for Petroleum Resources, in which role he advised and provided direct support to the Minister on policy development, governance, regulation and reform of the petroleum sector. He led the preparation of the National Gas Policy and the National Petroleum Policy among other reform deliverables. In a wide ranging interview with the Africa Oil+Gas Report, he fielded questions on the entire spectrum of the energy industry, the highlights of which include: opportunities in the midstream infrastructure, challenges of low domestic offtake of natural gas; the heavy subsidy of gasoline (PMS) importation, mitigating the poor finances of the Bulk Electricity Trader, conundrum of price fixing in the natural gas market and all through the conversation, he kept repeating the warning: “there are 13 years left for Nigeria to make the most of its fossil fuel resources, achieve domestic industrialization on the back of those resources, ensure power sector growth and start making foreign currency reserve gains…
AOGR: How Challenging, or exciting, do you find the Nigerian energy sector?
ADENIJI: The first point is that Nigeria is expending 1.2Trillion Naira per annum on gasoline (PMS) subsidy. But you have to question whether that is the correct policy choice. We have an economy waiting to accelerate, if you just direct money to proper places. Left to me, I’d take the money from PMS subsidy and move it to the power sector where we are more likely to have wider economic impact. This is where the focus should be, not on PMS. As it is, many of us have more than two cars. We are the people that are being subsidised.
So, We Might as Well Subsidise the Power Sector?
Not quite. Let me explain.
70% of the demand for gas is from the power sector where most of the power plants are owned by government. There’s a bulk electricity trader (NBET) that buys most of the power that is produced. It has no balance sheet of note. Therefore, it is not an effective purchaser of power, which also means it is not an effective purchaser of gas. As you know, gas is an input for power production.
The Bulk Trader takes power that is produced with gas, but is always delaying payment. You certainly cannot run a utility business that way. So, the NBET’s weak balance sheet affects the natural gas sector. If you were a gas asset owner, and you are presented with a power sector offtaker and you know that most of that power is not paid for, what position would your directors take on such a transaction? What do you think your lenders will be saying? You simply cannot sell gas to an impecunious offtaker. It’s just not a bankable project if your offtaker is not bankable.
So why doesn’t the Government put some of this subsidy money behind NBET? As you start producing more power, the economy starts growing. The purchasing power of these poor people that you say you’re helping will gradually start increasing as you produce more power. That’s how you build a market for natural gas.
You mentioned a balance sheet?
Yes, you need to put that money right behind NBET to give it a strong balance sheet. You just cannot attract the right investments into the sector if you still present a bulk purchaser that doesn’t have a meaningful balance sheet. So, I would rather take the money that is going to PMS, and put it at NBET. You must of course understand the argument about putting money in development as opposed to consumption.
But that’s what they’re doing and NBET has been the one that they’ve been giving the money to, over two trillion naira.
It’s not enough. A policy choice was made to put NBET in the centre as a bulk purchaser. When you take that decision, you cannot now not back it up, because it’s central to the bankability of the chain.
That’s true. And it’s in the law, which you helped draft.
I didn’t draft the power sector reform, I just contributed to part of the debate.
My point is, where is all that money?
Let me contextualize it. NBET is the centre as the main purchaser of the power, which it sells to the DISCOs. Again, the decision was taken to privatise the DISCOs. The privatization was badly done clearly, because the DISCOs are not strong enough and the purchasers of the DISCOs also bought with a commitment to roll out meters within eighteen months. It’s been several years now and that hasn’t happened, which is why all this other damage is happening. Many things have happened wrong in the handling of the entire power sector reform. But what I’m just trying to illustrate is that proper funding of NBET is very important for the time being. You can then put more attention around the DISCOs because revenue collection through the metering programme is very, very, important. The more revenue you collect, the more fluid the power sector becomes and it becomes easier to pay those who have made the investment in gas and in power generation. So, the two areas of focus should be distribution and bulk purchase of power. Another area is transmission, which the Government also decided to retain ownership of but doesn’t seem to be able to fund adequately. However, I think that with consistent support from multilateral finance institutions, this issue will be resolved in the long run.
But what happened to the Gas Flare Commercialization Programme that you championed when you were in Government?
Our regulatory system sat on it after I left.
The President made a very correct call when he went to Glasgow for COP 26 when he said that Nigeria cannot commit to Net Zero by 2050. But he had a low hanging fruit that would have made him look like a like a giant among all the global leaders at the summit, because he had signed the Natural Gas Flare (Prevention of Waste and Pollution) Regulations into law in 2017 to address the enormous waste of approximately 320Billion cubic feet of (Bcf) gas that is flared every year. This was a programme that Nigeria had presented to the world’s largest gas flaring nations at various fora in Paris, Baku, in Azerbaijan and in Cairo in Egypt, and was acknowledged as the most advanced solution to gas flaring globally. Everyone was looking for Nigeria to lead on gas flare – out and were ready to follow.
In the Niger Delta onshore and shallow water, we identified 197 flare sites because every company was compelled to submit their data. Now let us assume that only 97 of the 197 sites are doable because some sites are so remote and therefore might not have immediate solutions. If there are 97 sites within the Niger Delta where people are investing millions of dollars in communities, you will first of all be able to address some environmental issues, but then also the social and economic activity or value from that that activity may change the Niger Delta story entirely.
But what do you have instead? You hear that we have a shortage of LPG in the country whereas most of that gas that is being flared and wasted contains a lot of valuable Natural Gas Liquids. A lot of that gas would have been captured and put into the domestic market to meet LPG and related gas shortages. Supply meeting demand keeps prices down, not so?
This was a scale thinking behind the gas flare commercialisation programme. It was not only an environmental programme, but it was also a multiple developmental impact programme.
Unfortunately, our regulatory system sat on it. They preferred to go out and licence marginal fields instead. Basically, this country took the wrong policy choice again. How does that make us look?
You have to wonder why Nigeria keeps taking the wrong decisions even when opportunity is staring it in the face?
That Conclusion Should Take Us to Discussion on Energy Transition and Industrialisation
Now, there is roughly 13 years left for the country to make the most of its fossil fuel resources, if we go by the energy transition plans of most industrialised nations which will impact demand, especially for crude oil. In those 13 years the country has to have achieved domestic industrialization on the back of those resources, ensured power sector growth and started making foreign currency reserve gains with gas-based products. The hard truth is that a lot of Nigeria’s future rests in the hands of the CEOs of the petroleum sector regulatory agencies. Basically, they have to understand how these things fit together and rise up to the challenge and drive everybody to achieve the most profitable outcome for the country. They don’t have to wait for any minister to steer the industry towards these economic imperatives. As regulators, they are already empowered by the law. The Petroleum Industry Act is powerful. I have dissected the law from several angles. The regulatory powers are clear and enforcement powers tighter than they have ever been. These guys literally have to assume the toga of war, unlike previous regulators.
What’s your take on Nigeria’s pricing scheme for gas to power and gas to other products”
It’s interesting that you raised it. If you look at the PIA, it says there will be a transitional phase and a fully competitive market-led pricing phase. During the transitional phase, prices will be fixed. In fact, the exact wording is price control. So, the price for power will be derived from what we call a Base Price. So what’s the base price? No one actually knows because the law requires the regulator to go through a consultative process with stakeholders for that price to emerge. Whenever that price emerges it will be a fixed price. Then you add a topping on it every year to take account of inflation.
We’re not there yet at a particular price?
The legacy price will have to continue the consultative and determination process is completed. Now, when that price emerges, the gas aggregation process will kick in. So how that works is that every year the Nigerian Midstream and Downstream Petroleum Regulatory Authority will ascertain what the domestic gas demand requirement is from three strategic sectors: the power sector, the commercial sector, and the gas-based industries. It will then advise the Nigerian Upstream regulatory Commission to impose a domestic gas delivery obligation on all Lessees (holders of Oil Mining Licences) in respect of that ascertained demand.
The Commission will then take that demand requirement and spread the obligation around everybody. What the obligation really means is that you will deliver the gas to a location that the gas aggregator will determine. The concept that everyone should contribute towards gas supply into domestic economy is very good and important.
But where it breaks down is around the pricing. The price is fixed in the contract but you actually do not get that price. The law creates what we call an Escrow account which will be held with the aggregator where all payments due to a supplier will be paid by the purchaser of the gas. All the payments due for gas supplied under this scheme from the three strategic sectors go into these extra accounts and are blended to arrive at an aggregate price, so you’ll actually get paid an aggregate price. So, imagine that you are in the boardroom and your managing director requires the board to make an investment decision to produce gas to supply to let’s say the power sector. If the economics based on the base price show, say a price $2.50 per MillionBtu (roughly $2.5 per thousand standard cubic feet), but the directors become aware that the price in reality will be a different yet unascertained price, the board will likely not approve the project because they’ve got shareholders that they must account to. So they need to know the basis upon which they are making decisions and they also need to know what they are going to earn from the investment. In case the board falls asleep and says yes, you’re still going to end up with your lenders who are likely to be more alert and likely going to say sorry, they cannot lend you money based on an unknown or unquantifiable outcome.
So, gas supply based on the aggregate price concept is not bankable. Again, please put your mind to that 13 years that I mentioned earlier because the time is very short. Anything that gets in the way of a quick turnaround or a quick investment in the power sector growth, quick investment in domestic gas industrialization and quick development of the gas market opportunities, should go out of the law. In fairness to the law, it says that if you find someone who is ready to buy the gas on a willing buyer- willing seller basis, go ahead. So maybe some would take that window. If you find someone who can take the exact volume then you can be exempted from the domestic gas delivery obligation and you’ll be deemed to have complied basically. But if you don’t, then you will have to go through that process. So basically, they need to just clean that bit out of the law quickly.
You’ve been talking about power, the energy deficiency and the fact that people aren’t empowered to build an economy that will demand for power at the end of the day. A large complaint has been that the power tariffs haven’t been robust enough for investment. If you’re sitting across the table from power producers and talking with them, what would be your take?
Remember the big error, just before the 2015 elections, when the tariffs were due for review and the government intervened with NERC and they could not proceed with the tariff review. That was an awful decision, because it sent a warning signal to the investment community. And it took a while for us to come to the point where tariffs were now reviewed. So, tariffs have been reviewed now to a point where recently, they are headed in the right direction and NERC is becoming more alive to its statutory obligations. Because the law is very clear. The law says when there is a major macroeconomic event, let’s say inflation goes beyond minimal level or there’s an FX devaluation, you must review the tariffs, because you must give those who have invested, the cost reflexivity. You can’t invest one way and then they just find that what they’ve been getting has been eroded by these macroeconomic events. So you’re supposed to adjust the tariffs to make them whole. That’s the law. So, what’s going to happen is that the tariffs have now been adjusted in continuance with these macroeconomic events. We’re not quite there yet but it’s going in that direction. And these are the things that will basically help bring more investment into the sector. It’s also important to ensure that there’s pressure put on DISCOs to roll out meters because you have to be able to collect the money. You’re actually collecting on behalf of the entire chain anyway, which is all the way to the gas sector really. So revenue collection is central to this equation. And that’s where the regulations on the petroleum side must have a good handshake with NERC because it’s an energy chain so they need to be able to work well together.
The Renewable Energy market has taken off from a low base and it is growing, though no in grid scale, in Nigeria. Are you concerned that it will eclipse the gas to power part of the electricity supply industry?
Well, the truth of the matter is that you need a mix.
So you’re not worried about possibly diminishing investments in gas to power? When everybody in Ikoyi, V.I, and some of the most economically viable places in Kaduna, Kano, Awka and Onitsha, is looking to install renewables?
Firstly, the country has many energy-fuel sources, so we’ve got huge solar intensity in Northern Nigeria, which we need to tap, because it’s going to take a long time to get a gas pipeline carrying base load volumes into Northern Nigeria. And you may see that even when that happens, solar would still be cheaper than gas going through the pipeline to the north. Again, back to fuel-to-fuel competition. We also have two great rivers, Benue and Niger, of which there is a dam in one, Kanji, producing power, cheaper than even the gas for thermal plants.
So there’s a good mix?
There’re many rivers in the country and many dams we could have, producing power discreetly to certain areas that are stranded. Again, there’s the opportunity, with the virtual pipelines, the CNGs and the mini-LNGs to get gas into stranded areas and help respond to and further build up demand in those areas until when there could be a hard pipeline going there. So there are many possibilities here. So, different parts of the country are positioned for different types of energy solutions, so gas should not necessarily trump all. However, what’s great about gas is that it’s useful for industrial projects and also large power plants, particularly in the south. But there’s no reason why you shouldn’t have many solar projects up in northern Nigeria, large ones for that matter because of the solar intensity up there.
Can you respond to this challenge we hear from people all the time? Nigeria has abundant gas resources, but very few offtake transactions are happening at scale in country. Most of the announcements that Savannah Energy has made are about trickles: 10MMsf/d; 1MMscf/d, 5MMsf/d…. There’s a methanol plant that is penciled down for Bayelsa State. It’s planned gas requirement is about 350Million scf/d, the largest single domestic offtaker. But the FID is not yet in clear sight. What exactly is going on that outside the dysfunctional power sector, there is hardly a >100MMscf/d offtaker, with the exception of Dangote and Eleme?
You really put your finger on some very concerning issues. The truth of the matter is that gas projects are incredibly difficult to implement. When you put the gas projects together, it’s like you’re putting together a jigsaw puzzle. There is such a mutual dependency of so many things in that chain, and they must work together in sync. If one aspect of these dependencies is off kilter, you don’t have a project. So let me put it this way. Fortunately, we don’t have resource issues in Nigeria as everything starts with the resource being available. But the other end of the equation in gas is the off-take. I illustrated to you that 70 percent of the demand for gas in Nigeria comes from one sector: the power sector, which must be a priority sector for any economy. So if you don’t sort out whatever the problems are in that major off-take sector, then you’ve got a problem and your gas resources may end up being stranded within that 13 year period. So that’s one. I also know that within the 13 year period, funds can gradually start drying up, so time is of the essence. But then also, major industrial plants can take large volumes in gas. So you mentioned the methanol project, yes that’s the second or third largest project being done since the Nigerian LNG project. So it’s a very important for the country.
Another is the Indorama (Eleme) fertilizer project which took off on the back of the initial petrochemical plant at Eleme. So when they went looking for money to do their fertilizer project, it was oversubscribed with 90 percent of the funding for that plant provided by lenders. That’s never been done in Nigeria before but it is because the borrower has a hugely successful petrochemicals business. That shows that sponsor capacity is very important because that’s important to lenders. Alas, most sponsors in Nigeria are weak and that’s why many gas projects just go into the graveyard. I have the experience of many of them. People wanting to do a lot of big interesting projects, but cannot even fund the development of that project. You should be open to bringing in other investors into your project as it makes it more likely to happen.
Again, we have a syndrome in Nigeria where investors like to hug everything. An example emerging today are upstream asset owners who want to control the midstream and downstream projects. You don’t necessarily have to do it that way. Someone else can more conveniently build the process plant so the CAPEX spend can be avoided by the upstream. You pay OPEX instead to process your gas and you can still retain the compounds that will come out of the processed gas. But there are hardly any tolling projects in Nigeria today because upstream investors aren’t as focused around capital efficiency in spite of the creation of a distinct midstream sector in the policy reform which allows third parties to invest purely in infrastructure. My point is that upstream people should be happy about putting their money into looking for oil or gas, finding it, producing it, and letting the midstream provide the service.
I have just one last question.
It’s in two parts. The first basically addresses your final line in your magical presentation in late 2021 at the Petroleum Club. You just mentioned midstream, with midstream gas and all that, and that has probably been the centerpiece of your legal career. But then you have a problem with two regulators, and the fact that even though you say now that policy reform in your time in government advocated for a separation in terms of projects, but you still consider it too expensive or cumbersome to have a regulator working in midstream and downstream, and another overseeing upstream. I would like you to respond to that. The second question is; what’s your solution to the gas pricing conundrum?
In the sector policy reforms that was accepted by the government, we advised that a single regulator be established for the petroleum sector because it is a petroleum chain. You produce resources, you either refine crude oil or you process gas, then you store, transport, and then utilise the resource. So, if you’re a regulator, it’s important that you have a full view of your regulatory field so that you don’t have what I call asymmetry of information. If you’re not seeing things fully then you take decisions based on only what you are aware of. Whereas if you are in full view of the chain, then you have what we call structural efficiency in regulation. But when you bifurcate it as they have wrongly done in the PIA, with a regulator with focus on the upstream, and another one focused on the midstream and downstream, then your focus will be limited to areas within your regulatory remit. That is another example of a policy choice taken by the Government notwithstanding its position in published policy.
Now, when you make such a choice, you have to be ready to address the inherent problems in such a structure, especially the regulatory gaps you will have between the upstream and the downstream or the potential clash of power in terms of environmental regulation, competition regulation and even in terms of agencies cooperating together. So you have to have a way of moderating the relationship between the two agencies. If the leaders of the agencies appreciate this problem well and they take up the challenge to work together, they would have served Nigeria well. This is because, the onset of any regulatory system is an inherently risky phase because the system is needs to settle. So typically, investors would ratehr wait and see how things work before they make big investments. So, the early signaling, because of the structural design issues which requires co-operation by the leadership of these two agencies is very important. They have to find a way of working together very quickly, and also calming their respective teams down so that they present a very unified image to existing stakeholders and even prospective ones.
As for the pricing of gas, it’s very important for the PIA to be amended. There are many areas of the PIA that need amendment due to the quality of the drafting and the resulting interpretation problems. But , to the substantive issue of pricing, it would really help the country given its need to take advantage of the direction of global energy policy. This escrow account and aggregate price hard wired into the law, are potentially poison pills to investment and need to be removed, so that those who are going to invest in the upstream have more clarity regarding price. The next area is that requires clarity is the question of when the transitional pricing phase would end. As you just cannot have an indeterminable period of fixed pricing. You can’t stimulate investment and demand that way. We’ve seen that the market has been calling for competitive pricing, and a lot of people are ready to do willing buyer- willing seller gas supply. So you basically need to steer people in that direction with clarity around the sunset of the fixed pricing framework. We had that clarity in the National Gas Policy but the PIA has detracted from that position to something rather fuzzy.
NNPC seems to, even though it’s no longer the be-all and end-all of the Nigerian petroleum system, have a huge monopoly of the infrastructure. What do you have to say about that?
It still is.
Can people actually use the law to pry away from NNPC this power?
Yes and no. The first thing to understand is that the PIA has protected NNPC such that nothing invasive has been done to the national oil company. In fact, the new one created out of the old one shed out its liabilities to create a liability-free entity with huge assets vested onto it. In terms of its power in the upstream, nothing is done there and it has a potential to be a very strong upstream entity because of the size of the assets vested onto it, but its governance is the big issue that must be addressed so that it can deliver on its promise. And that has implications for the 13 years. It’s the issue of how it will use those assets and how to drive crude oil or gas development, keeping an eye on the 2035 period, so that’s one. Then go to its infrastructure. Most of the infrastructure for gas assets in the sector belong to NNPC directly or indirectly. Indirectly because it’s a 60 or 55% interest owner in the JVs. So it has big control there. Also, it has its midstream subsidiary, NGC which controls most of the transmission system. In competition law that is a monopoly. Now, I’m trained in competition law, so I hasten to say that there’s nothing wrong with the monopoly per se; what is important is how you use your monopoly power. So, what the PIA has done is to open the space for other people to come and invest in infrastructure, but then you cannot duplicate infrastructure as that would offend against the waste doctrine. But there are other opportunities, for instance Ibadan is waiting to happen, so is the entire eastern Nigeria.
But Ibadan is under the franchise of NNPC?
The PIA doesn’t recognise franchise. Rather, the PIA vests sole power for determining entry into the midstream along with competition regulatory powers onto the Midstream and Downstream Petroleum Regulatory Authority, and not NNPC. There are eight midstream licenses, including transmission and transportation of gas and network operations. That’s all within the power of the regulator. So, NNPC may not determine who builds and operates gas pipelines to Ibadan, Enugu, or Nnewi. This position is very clear in the law.
What about the former Oando Gaslink, which is Axxela now? Was that not a franchise? What happens to it?
It was. If they want to transport gas, they should go and apply for a license. The law says you must make an economic case and show potential demand if you want a pipeline license. Once you make that case with the regulator, and meet up with the other conditions, you will get the license. So you don’t have to go to NGC to enter the midstream otherwise that would be anti-competitive.