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Gas producers, power firms disagree over supply terms

By on January 14, 2015

Private investors who took over the electricity generation companies unbundled from the Power Holding Company of Nigeria are in disagreement with gas producers over supply terms.

The gas producers, it was learnt, had asked the power firms to produce Letter of Credit, which covered 12 months of gas supply, in a bid to protect themselves against the possible risk of default by the firms.

Some of the major gas producers in the country are Chevron, Shell, Exxon Mobil, Seven Energy and Seplat.

The gas producers were said to have insisted on this condition in order to forestall what happened before the privatisation of the power sector, when the government-owned PHCN failed to pay for gas supplied to it.

The Federal Government had through the Nigerian Electricity Regulatory Commission recently approved a new gas-to-power pricing benchmark of $2.50 per thousand cubic feet from $1.5 per mcf, effective January 1, 2015.

Our correspondent gathered that the disagreement was responsible for the delay in the commencement of the Transitional Electricity Market, which was expected to come on stream on January 1, 2015.

The Minister of Power, Prof.Chinedu Nebo, had on December 22, 2014 announced that the TEM would be declared on January 1, 2015, the effective date for the commencement of all contractual obligations in the Nigerian electricity supply industry.

A top official of one of the Gencos, who pleaded anonymity, told our correspondent, “We don’t agree that the best solution is a 12-month letter of credit. I don’t think that is the way to go. However, all parties involved have come to the table to discuss and figure out amicable solutions. Based on that, we are trying to ensure that we have a reduced LC period. But the bottom line is that we have not come to a final agreement yet.

“We are all trying to make sure that we finalise it and come to some agreements, hopefully by Thursday or Friday. We are still in negotiation with the gas producers. We are going to meet with them to review the issue, and we are also meeting with NERC on Wednesday on the same issue. The NPDC is working with us to come to some middle ground, whether it is a three-month or four-month LC.”

An energy specialist at Ecobank Capital, Mr. Dolapo Oni, said the TEM was currently being held by the lack of effective gas supply and purchase agreements between the gas producers and power generation firms.

He said, “When the gas price was less than a dollar, the power plants were owing the gas producers. Now that the price has increased, the risk of default exists to a large extent, especially since the gas price used for tariffs was about $1.80 and tariffs will not be raised till June. Thus the cash flow of the power producers could be constrained as they have to pay a higher gas price despite no change in tariff.

“While the gas producers are right to demand LCs to protect themselves; the 12-month duration is too long. Perhaps six months would have been ideal, especially since tariffs will be adjusted in June.”

The TEM is expected to signal a fully contracted and rules-governed electricity market wherein the sanctity of contracts will be upheld to protect market liquidity and incentivise increased investment.

It was scheduled for March 1, 2014 but had to be put on hold as many of the condition precedents could not been achieved. It was also scheduled to be declared in November last year, but it was not to be.

 

[Punch]