4 February 2007

Nigeria's Energy Crisis


Lagos — Just as the ink on my article last week about this administration's mismanagement of the power sector since 1999 was starting to dry up, the country was dealt another knock out punch by the Power Holding Company of Nigeria (PHCN). PHCN through its Public Affairs unit informed the country that power generation dropped again by almost 60 per cent from over 3,000MW to below 1,500MW.

The blame was placed squarely on Shell Petroleum Development Company (SPDC), which had shut down its gas gathering and compression facilities for routine maintenance as well as Agip's new Independent Power Plant (IPP) at Okpai. Agip we were told had also shut down some of its generating units for maintenance. Given our penchant for not making provisions for any form of back up, PHCN went on to mention that the situation was further exacerbated by the low reservoir levels at the hydro power stations as a result of the dry season.

Upon reading the report I was deeply disappointed for a number of reasons. First, when I wrote my article last week, my assessment was completely inadequate of what I personally knew is a wider problem that spans the socio-economic unrest in the Niger Delta to the lack of an integrated energy policy framework encompassing the electricity, and oil and gas sectors.

Secondly, by trying not to offend the sensibilities of the majority of readers and in particular the labour unions who over the years have taken umbrage with my well known stance on the role price distortions in the energy sector have played in entrenching market inefficiencies and supply disruptions, I merely skirted around the issues of the root cause of a crisis that has set us back by at least a decade.

Furthermore, PHCN's disclosure that generation had dropped to less than 1,500MW was a throw back to the pre-democratic years of the 1990s. It was as though no progress had been made whatsoever in the eight years since this administration assumed office. This country was back to ground zero.

Some critics may perceive my assessment of the current situation as being too pessimistic. The government, they could posit, has promised to deliver 10,000MW of electricity by the end of the year. It has also pledged to offset petroleum product subsidies monthly to forestall a boycott of product importation by oil marketers who import fuel at international prices, but resell it locally at the government controlled price of N65.00 a litre. My response to those eternal optimists is that they should not hold their breath.

Nigeria today is possibly facing the worst energy crisis ever to befall this nation. But before delving into how we got here in the first place, a brief rundown of the current situation in the energy sector is necessary:

-The country by the government's admission imports every drop of refined fuel needed for domestic consumption;

- None of its four refineries works mainly due to the vandalisation of the crude oil pipelines by militants in the Niger Delta;

- Despite the award of licenses to several private firms to build refineries, absolutely no investor has committed a farthing to their construction;

- The subsidy element in the downstream segment of the oil industry makes it attractive for speculators and the existence of a black market to thrive, and by extension the destruction of fuel pipelines by villagers who expose themselves to certain death;

- Work at several of the power stations under construction in the Niger Delta has fallen behind schedule as a result of activities by the militants in the area;

- Gas distribution to the thermal power stations remains epileptic either due to unscheduled maintenance work by the oil majors, disagreements between PHCN and the Nigerian Gas Company (NGC) over the price of gas, or once again the militia has managed to destroy the pipelines;

- Policy inconsistencies and regulatory overload brought on by competing regulatory agencies (there is DPR, PPPRA, NERC and a new Gas Regulator will soon be thrown into the mix) have made it impossible to implement an integrated energy framework that caters to needs of operators in the energy sector. Need I go on?

Readers by now must be wondering what the oil and gas industry has to do with electricity supply. The answer is everything. Nigeria gets its electricity supply from two major sources comprising hydro and thermal energy sources. But the fact is thermal plants out number hydro generating units by at least three to one in this country. And the ratio is expected to widen with the construction of 11 new power stations of which only one at the Mambila Plateau will be powered by water.

This means that more power stations in Nigeria will either require gas as a major energy input or fuel oil - a distillate from the refining process - as back up in the event of gas supply disruptions. By extension, if oil multinationals and NGC decide to withhold the supply of gas due to pricing disagreements with the power stations, or militants cut off gas supply, or even the refineries are incapable of distilling fuel oil (as is applicable presently), electricity generation will be hampered.

The question that arises from the foregoing is why are the refineries in this country not functioning? A variation of this will be to ask why the private sector is not investing in the construction of refineries alongside those belonging to the Nigerian National Petroleum Corporation (NNPC).

Yet another question that could be asked is why the oil multinationals are not doing enough to cut down on gas flaring in the Niger Delta through the introduction of Associated Gas Gathering (AGG) projects and gas re-injection schemes in most of their crude oil reservoirs? Or better still, why do they keep shifting the flare-down dates that would make gas flaring in the region a thing of the past?

The answer is to all this is that we lack the political will to deregulate the price of products in the downstream and gas sub-sectors, and by perpetuating market inefficiencies, have made it unattractive for investment by the private sector. In the same breath, the privatization of the refineries (that is if NNPC, whose officials feed fat from the inefficiencies in the system, does not scuttle the process again) will just not sail through.

As I write this, I can imagine that the labour unions and Adams Oshiomhole with whom I have had a running battle on this issue for years must be bristling with indignation at my advocacy for the removal of subsidies on fuel and gas. They will accuse me of advocating IMF and World Bank policies that are not people friendly. They will wonder if I am unaware of the inflationary impact the removal of subsidies will have on the economy.

I will even be reminded that the availability of efficient transportation infrastructure in advanced economies helps to cushion the effect of market determined fuel prices in those environments. The raison d'etre will be the argument that if advanced countries can subsidise their farms and agriculture sector, then why can't Nigeria subsidise fuel products?

As populist as this line of reasoning may seem, it is not at all people oriented. It is the agricultural sector and not the oil and gas or electricity sectors that account for a huge chunk of Nigeria's gross domestic product (GDP). According to the Central Bank's Annual Report in 2005, agriculture alone accounted for 42 per cent of GDP while the oil and gas, and electricity sectors combined accounted for less than 15 per cent of GDP. Unlike the agriculture sector, industries in the energy sector import 90 per cent of their input and raw materials requirements from oversees. As such their contribution to the nation's GDP is low.

Agriculture, on the other hand, remains the largest employer of labour in Nigeria (well over 60 per cent of the working population). In the light of this and given the preponderance of farming in Nigeria's economic activities, shouldn't we be subsidising agriculture? It stands to reason that if subsidies are transferred from energy to agriculture through the introduction of price guarantees, government buy-back schemes in times of excess capacity, construction of silos for the storage of grains as well as other incentive schemes meant to encourage production, prices of agricultural produce both for domestic consumption and export will remain low.

By adopting this as a plan of action, the government will not have to resort to palliative measures which only give a temporary reprieve, but fail to deal with the underlying cause of the problem. Besides, concerns over inflationary pressure arising from the transfer of subsidies will not arise. While additional savings made from the removal of energy subsidies can be diverted to the provision of public transportation in partnership with the private sector. That is the trick western nations have always employed over the years. So why can't it be replicated here?

The energy crisis in which we find ourselves is largely self-inflicted. We have refused to do right the thing due to lack of foresight and the political will to stay the course. Even as this is being written, the National Assembly is preparing to pass a new law on downstream gas development and utilisation. Since the public hearings on the Bill started, legislators have concerned themselves more with curtailing the powers vested in the Minister of Energy over the proposed Gas Regulatory Commission. Of greater concern should be the potential for conflict and confusion that may arise from the establishment of yet another regulator in the energy sector.

The good thing is that the government has finally taken the first step in the right direction by merging the power and petroleum government departments under one Ministry. Having done this, it should take the next step of merging all the regulatory agencies into one commission with the powers to regulate, licence and monitor a truly liberalised energy sector as a whole.

Nigeria, a major oil and gas producer, has shamefully wasted too much time seemingly taking one step forward and several paces to the back. We should not wait for more Michelins to withdraw from Nigeria or for factories to shut down before we take the necessary action. Neither should we wait for fuel queues to become a permanent fixture on our streets. The removal of subsidies in the energy sector will undoubtedly be a biter pill to swallow. But if that is what is required to cure this patient once and for all, Nigerians should brace themselves and swallow it.

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