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Nigeria: making gas work

A recent IPP deal suggests Abuja may have a way to come good on promises to provide power to the people

NIGERIA has a massive power shortage and ambitious plans to remedy it, provid­ing major opportunities for the gas sector. But a chaotic privatisation of electricity distribution, militant attacks on gas pipe­lines and a difficult investment climate means too many people depend on back-up diesel generators to see them through blackouts. It remains a difficult place for would-be gas-fired power producers.

Things may be changing. President Muhammadu Buhari has prioritised pow­er sector development, and, unlike some of his predecessors, has taken some practical steps. The most important has been to au­thorise a rise in electricity prices to better fund infrastructure development by power generators and distributors.

The government is also trying to coax investment from private power producers. One project that could provide a blueprint for more rapid generation expansion got off the ground not long after Buhari took office last year.

The Azura-Edo independent power project (IPP), a $0.87bn, 459-megawatt open-cycle gas-turbine facility achieved financial close in January 2016, backed by a mixture of private equity, investment banks, state support and multilateral ­backed loans and guarantees. The IPP, now under construction and due on line in 2018, should be the first phase of a 2-giga­watt IPP complex on a site near Benin City in Edo State. It is one of country's largest gas-fired IPPs to date.

Sharing stakes

Equity holders include Amaya Capital, a Mauritius-based compa­ny set up to invest in West African energy projects, American Capital Energy & In­frastructure, and Aldwych International, a London-based African power-project de­veloper. Debt finance totalling more than $0.6bn is coming from a number of public and private lenders, including the World Bank's International Finance Corporation (IFC), Nigeria's state-owned Bank for In­dustry and Standard Chartered. Siemens is among the major suppliers to the project.

Key to getting the deal done were guar­antees from the World Bank, covering acts of terror or default on electricity-sales payments from state organization Nige­rian Bulk Electricity Trading (NBET). A creative insurance arrangement with the Ministry of Finance also means the gov­ernment could be forced to buy the plant from the owners if either gas supply is dis­rupted or NBET doesn't pay for contracted electricity sales.

No one doubts the pent-up demand or, given its abundance in the country, that the gas can be cheap enough to compete with renewables or coal

Now the Azura-Edo project must be built on time and operate as planned. But the successful financing is an early vote of investor confidence in Buhari's efforts to push ahead with gasification of the power sector and to tackle the bureaucracy and rampant graft that has held back similar projects in the past.

Progress also reflects the growing role of independent gas producers in the Ni­gerian economy. Azura-Edo will take gas from fields operated by Lagos-based Se­plat, with which a 15-year supply deal was signed in 2014.

The more creative approach to man­aging risk evident in the Azura deal could also spur a new wave of power investments, though developers will remain cautious while economic reforms are being imple­mented and unrest persists in the delta. No one doubts, though, the pent-up demand or, given its abundance in the country, that the gas can be cheap enough to compete with renewables or coal.

Successive governments have produced ambitious targets to expand power gener­ation, but have failed to deliver on them. The latest target is to boost capacity to 20GW by 2020 from today's 5-6GW - of which little more than half is generally available, due to the run-down state of power infrastructure and inefficient distri­bution. At least half of the 20GW could be met by Nigeria's domestic gas reserves, and probably a lot more if exploration targeting gas for the domestic market - rather than oil for export - was given more priority.

It will be a tough goal to achieve, given the decrepit state of Nigeria's power infra­structure, but the Buhari government may at least get the sector heading in the right direction. If gas pipelines from the Niger delta - through which much of the gas passes - can be protected from militants and electricity distribution issues can be sorted out, the role of gas in the energy mix seems assured.

This article is part of an in-depth series on West Africa. Next article: Ghana's prospects brighten.

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