West Africa Energy & Utilities: Nigerian Reforms Leads The Way
The largest oil and gas producers in Africa are located in West Africa. Nigeria, Angola, and most recently Ghana are major exporters of oil and gas, but their domestic energy sector still remains in a derelict state. Low electrification rates are symptomatic of chronic underinvestment in infrastructure and misallocation of resources, and capex plans currently in place are a fraction of what is needed. However, we note that substantial reforms currently underway in Nigeria's energy sector are essential to ensure an adequate supply of natural gas in the region, and thus the necessary increases in power generation.
To put things into perspective, a comparison between Nigeria and South Africa highlights the striking deficiencies in the electricity provision. South Africa's nameplate electricity capacity was 40GW in 2010, ten times larger than Nigeria's, while its population is three times smaller. Nigeria's electricity deficit is a major development problem for the country and a source of deep popular resentment. Successive governments have pledged investment, but to date few projects have gone through into construction and even fewer into operation. Independent Power Plants gained some traction in recent years, especially when they were in cooperation with large industrial players. According to BMI's Key Projects Database projects planned and in the pipeline in Nigeria's power generation sector have a total value of nearly US$20.5bn and due to increase capacity by nearly 13GW, the largest one in the region.
|Nigeria Leads, But Long Journey Ahead Power Sector Projects Planned, Value & Capacity|
A cornerstone initiative for Nigeria and certainly the most comprehensive in the region is the National Integrated Power Project (NIPP). It forms a core part of the electricity sector recovery plan to generate 9,000MW of electricity from various large-scale power sites to be built around the country. In 2007 when US$10.4bn had already been spent with a gain in capacity of 3,000MW. President Goodluck Jonathan has made the energy sector reform a pillar of his economic strategy and we reiterate that early successes with the implementation of the plan will certainly encourage a bullish outlook for Nigeria's energy infrastructure prospects.
The broader picture in the region is similar to Nigeria. IPPs could be the way forward for several of the countries in the region, though the deficiencies in the investment climates are certainly the greatest obstacle. The Dibamba oil-fired power plant IPP in Cameroon is one of the few that have progressed following development financing approved in May 2011.
|Power Deficits Electrification Rates In 2008 (%)|
Financing and feed stock are two crucial aspects of power sector. Development financing has been crucial in driving projects and remains a key determinant in whether or not the private sector will become involved. China is the other main source of financing. West Africa especially has been a major area of focus of Chinese ventures to gain access to resources. According to a study conducted by the World Bank on China's activities in sub-Saharan Africa, (much based on anecdotal evidence given the opaqueness of operations), nearly 60% of total Chinese commitments to financing transport and power projects in SSA went to Nigeria (37%) and Angola (22%) between 2001 and 2007, unsurprisingly the two largest oil exporters in Africa.
However, anti-Chinese protests have indeed occurred across the continent, and the 'hearts and minds' problem that China faces in Africa is a very real one. China is criticised for poor quality, scattered and expensive infrastructure builds. As a result, we are now seeing a growing tension between locals and Chinese companies that could hamper China's efforts - and as a result infrastructure financing - on the continent.
Feed stock is the other major obstacle. Again going back to Nigeria as a case study, even though the country has some of the largest gas reserves in the continent, gas flaring at the various oil fields is radically diminishing natural gas captured and made available for power generation. The latter however is also as much due to a lack of the necessary infrastructure to capture the gas. Nigeria is largely geared towards oil production, and as a result little attention has been given to gas infrastructure. This is yet another aspect of Nigeria's energy programme, specifically part of the Petroleum Industry Bill (PIB). Due to recent cabinet approval of the long-awaited final draft of the PIB, it looks like it could finally be passed by the end of 2012. We believe this will remove one of the main obstacles - namely regulatory uncertainty - towards unlocking billions of dollars in investments in the country's oil and gas industry. In Ghana, where a more defined legislature is currently in place we see more straight forward investment as a result of minimized policy uncertainty. Contracts with foreign companies stipulate a more clear 'cut' where oil is geared towards export whilst gas is kept for domestic consumption.
However, Nigeria's troubled gas sector took what was potentially a major step forward in late-May 2011, when the country's leading international oil companies (IOCs) signed gas-supply deals with state-run companies Nigerian National Petroleum Corporation ( NNPC) and Power Holding Company of Nigeria ( PHCN). The supply deals were signed with majors Royal Dutch Shell, Total, Chevron and Agip, a subsidiary of Eni, which together account for about 90% of Nigeria's gas production. Details of the agreements were not released, but in a statement NNPC said that the agreements would 'ensure that over 70% of the total gas needs of the entire power sector are met'. Furthermore, Nigeria is currently looking towards extending its current LNG terminal capacity, as well as the construction of the new Brass LNG terminal; where the federal government is expecting an FID by 2013. Any progress on these developments could drastically reduce the level of gas flaring.
A resolution on Nigeria's natural gas production is crucial for the entire region, especially neighbouring countries with low domestic gas availability.
A breakthrough came when the Chevron-operated West Africa Gas Pipeline (WAGP) begun commercial operations in early 2010 after nearly 30 years in the planning. The 569km offshore pipeline project transports up to 4bcm of gas per year from Nigerian fields to power plants in Benin, Togo and Ghana. This is a crucial bit of infrastructure in the region that facilitates the generation of electricity from natural gas. Gas flows from the Itoki export terminal in Nigeria via Lagos Beach to Takoradi in Ghana. Under the initial contract it was agreed that, at the start-up of the pipeline, some 3.8mn cubic metres per day (cm/d), or an annualised 1.4bcm would be transported. After seven years exports are planned to be increased to 2.2bcm and reach a final through flow of 4.1bcm some 15 years after start-up. The importing countries have been trying to increase the initial volume to 2.4bcm per annum, but Nigeria has not agreed to this owing to its own growing domestic gas requirements. According to BMI forecasts, Nigeria's gas production will reach 59bcm per year in 2015, up from 23.2bcm in 2009.