17 August 2014

Nigeria: Nerc - New Price Regime Removes Justification for Gas Flaring

- Wants minister to read the riot act to erring firms

The Nigerian Electricity Regulatory Commission (NERC) has said it will ask the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, to place an instant and precise end to gas flaring in Nigeria's oil and gas sector.

NERC explained that the order had become necessary to improve gas supply to power plants now that it has upgraded the commercial price of gas-to-power from $1.50 to $2.50 per million cubic feet per day (mcf/d).

The commission also said gas producers who hitherto had excuses to default in their Domestic Gas Supply Obligation (DSO) following the existence of the "best endeavour" regime in gas supply transactions will no longer have such latitude with the new price as it will insist on strict respect to supply contracts.

Chairman of NERC, Dr. Sam Amadi, who spoke to THISDAY exclusively in Abuja on this, said the new commercial price framework and a N25 billion intervention fund proposed for gas-to-power by the Central Bank of Nigeria (CBN) are part of new measures to incentivise and put to rest age long issues of poor gas supply to power plants in the country.

Amadi explained that relevant stakeholders in the sector are abreast with the new initiative and that it came from sustained discussions across board.

"They are not happenstance; they didn't just happen because they are parts of a long discussion and work by NERC with stakeholders. We have been worried about the problem of gas to power especially since it has thrown the Multi Year Tariff Order out of order.

We met with NNPC and decided to put up a working group involving owners of power plants and gas suppliers and we are working hard," he said. Amadi further noted: "Parts of the outcome of those initiatives and hard works are the collaboration between NERC, ministry of power and petroleum as well as CBN.

"Based on that, NERC finally approved $2.50 and $0.80 as gas price and transportation cost but let us make it very clear here; we do know that the only reason why gas has not been supplied sufficiently to power plants is not only because of pricing but there are issues of policy, weakness in project management and all that but we believe that price is the strategic point to start with."

Following from the measures, Amadi said: "With pricing now, NERC is firmly demanding change; we do not want price to be another sweetener, we want it to totally change the taste of the whole meal and so with this commercial price, we are going to put pressure on the ministry of petroleum to end gas flare.

"So, that crisis means that with this cost-reflective tariff on gas, there is no justification for flaring gas. We will be moving swiftly to persuade the ministry of petroleum to issue a direct order to actors in the industry to end gas flare. Gas been flared daily could generate up to 2,000 megawatts without too much of work.

There is no longer commercial reason why flare should continue, we are going to demand that this price is contingent on improved commitment from the gas players. We had met with some of the gas players and the CBN and this was made clear," he added.

Speaking further on NERC expectations and choice of approach to address the gas-to-power challenges, Amadi said: "We expect improvement; the last domestic supply obligation showed that these gas suppliers failed woefully.

The oil majors failed woefully to live up to their commitments and so they treated the domestic supply obligation cavalierly and without any sense of commitment." He also stated that discussions with gas producers have so far remained fruitful and that NERC is not interested in creating bailout options for the sector but a coherent market that can withstand challenges.

He said: "The gas operators are totally comfortable with the NERC; they see for the first time that we are not addressing their concerns with rhetoric but we are addressing them with real concerns.

"We want an intervention that secures confidence in the sector and translates responsibility, we want the responsibilities to remain where they are and we don't want a windfall, we are looking at a stage where we want to begin to create a culture of the market taking responsibility to pay their debts and respect commitments.

"Government should not be dragged into bailouts because it becomes a moral hazard and people underperform because they have an expectation that they will be bailed out. There is no bailout in this sector but an intervention by the CBN to restore confidence in the sector and that will be owned by the debtors themselves," Amadi added.


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