TheCable

While Nigeria is still struggling to untie the legal knots around the controversial P&ID gas and supply processing agreement (GSPA), another sloppy deal has boxed the country into a tight corner, TheCable can report.

A gas supply agreement (GSA) between the Niger Delta Power Holding Company (NDPHC) Ltd and Accugas Ltd has gone sour, forcing the federal government to keep paying over $10 million monthly with or without gas supply to the Calabar Electricity Generation Company (CEGC) Ltd by Accugas.

The GSA has a take-or-pay obligation of 803 of the daily 104.8mmscf/day of gas and is backed by World Bank partial risk guarantee (PRG) as payment security.

If Nigeria is reported for defaulting in payment, the country’s credit rating will not only be downgraded, the $118 million sovereign guarantee will be called in, thereby putting the nation’s foreign assets at risk.

Although this is nowhere near the calamitous $9 billion award to P&ID by a London commercial court — currently being challenged by the federal government — there will still be questions as to how Nigeria persistently enters into agreements that are apparently skewed against the country.

One question that industry watchers have been asking is: why did Nigeria proceed to sign the PRG in spite of the objections raised by virtually every party involved — excluding, of course, Accugas but including the World Bank itself?

WHAT IS THE AGREEMENT?

On December 8, 2011, NDPHC signed the GSA with Accugas Ltd for gas supply to the 561MW Calabar power station — one of the power projects under the national integrated power project (NIPP) initiated by President Olusegun Obasanjo in 2005 under the power sector reform.

Accugas was to supply 131MMSCF of natural gas per day to Calabar, which will, in turn, generate electricity for supply to the national grid.

As payment security for the gas, the GSA provided for a “take-or-pay” obligation on NDPHC, owners of the Calabar GenCo, backed by a World Bank partial risk guarantee (PRG).

That means whether or not Calabar takes gas from Accugas, NDPHC will pay for it.

WHAT COMPLICATIONS AROSE?

Originally, gas was to be supplied to the Calabar GenCo by Addax Petroleum from its off­shore Adanga field, but there was a breakdown in negotiations between Addax and the Nigerian National Petroleum Corporation (NNPC) joint venture (JV) while the 107km gas pipeline from the Adanga field to the Calabar plant was being constructed.

Because Addax and NNPC JV could not sign their own gas development agreement (GDA), the Chinese company notified NDPHC that it could not meet the deadline to supply gas to the Calabar plant, which was at the time nearing completion.

Addax said even if the GDA was signed and the development of the field started, it would still take three years to get the gas to Calabar.

According to documents seen by TheCable, it was at this stage that NDPHC decided to approach Accugas –a consortium of Frontier Oil Ltd, Seven Energy and Accugas Ltd — as an alternative arrangement to get Calabar up and running.

Accugas also had operations close to the Calabar plant and was already supplying gas to Ibom Power Station and UNICEM.

It would only have to build a dedicated pipeline from its processing plant to join NDPHC’s planned onshore pipeline segment at Oron, Akwa Ibom state.

DEVIL IN THE DETAILS

After the necessary approvals from the Nigerian Electricity Regulatory Commission (NERC), NDPHC entered into the 20-year GSA with Accugas in 2011, with NDPHC and Calabar as the buyers and Accugas as the sellers.

The GSA was an omnibus deal with several components usually described as “side letters”, notably the account charge agreement and direct agreement.

In what it argued then as the need to prevent further delays in obtaining letters of credit for construction, testing and commissioning of its facilities, Accugas developed side agreements with alternative payment security.

This was to make NDPHC as the guarantor of Accugas’ loans and, curiously, bring in the lenders as parties to the GSA — even though it was Accugas, not NDPHC, that was taking the credit.

RAISING THE RED FLAG

In June 2013, NDPHC, through Mohammed Mahmud, the company secretary and legal adviser, forwarded the initial GSA and the “side” agreements to Mohammed Bello Adoke, then attorney-general of the federation, for review before execution.

Adoke advised NDPHC not to sign the agreements because the terms were skewed against the country, maintaining that they should be reviewed to protect the interest of the government subject to an “express approval” from the board of directors.

Curiously, again, Mahmud wrote back to Adoke on September 12, 2013 saying “all draft agreements connected to the gas supply by Accusgas, including Direct Agreement and the Account Charge Agreement, have been extensively amended to make it clear in every instance that the security granted to Accusgas is limited to the funds they are entitled to be paid as the gas seller”.

Mahmud also asked Adoke to direct the Transmission Company of Nigeria (TCN) “to execute the Payment Security Agreement [which] has been with them for a while without response despite His Excellency, the Vice President’s directive that they execute the agreement immediately”.

The vice-president at the time was Namadi Sambo, who was by law the chairman of NDPHC and also of the NIPP.

Adoke responded again, in a memo dated October 4, 2013, saying the amended agreement “in reality puts the Contractor (NDPHC) in the position of the Borrower’s (Accugas) financial surety as well as its guarantor for performance under the GSA, thereby effectively transferring to the Contractor obligations that customarily should be borne by the Borrower”.

He said in view of the reasons he listed in his two-page letter, “it is my considered opinion that the execution of the Agreements is not in the interest of the Contractor (NDPHC/CEGE)… I am therefore unable to consent to the Draft Agreements”.

In November 2013, the managing director of NDPHC, James Olotu, wrote to Adoke saying all the agreements had been reviewed and changes made to protect the country, but Adoke wrote back that the “securitization agreements” allowed Accugas to draw down on funds provided by NDPHC in the designated accounts and that the issues he raised had not been sufficiently addressed.

In all, the renegotiation of the agreements took about three years, the touchy issue being the payment security in the “side” agreements.

However, by 2014, NDPHC had completed the construction of the Calabar plant.

With the station facing idleness, NDPHC/CGCL and Accugas signed an interim gas sales agreement for gas supply.

NEW LEASE OF LIFE?

In 2015, Accugas was offered what was supposed to be a new life with the World Bank PRG under the Nigerian Electricity and Gas Improvement Project (NEGIP) facility granted to the country.

While this would address concerns over the previous agreements that would have put the repayment burden on NDPHC, the PRG could open up Nigeria as a sovereign entity to possible international consequences in the event of a default.

More so, the Nigerian Bulk Electricity Trading Company (NBET) and NDPHC were not comfortable with the new arrangement.

NBET is the body that buys power from the generating companies through power purchase agreements (PPAs) and sells to the distribution companies through vesting contracts.

Documents seen by TheCable revealed that both bodies pointed out adverse liquidity challenges in the Nigeria electricity supply industry which would affect the performance of the payment obligation under the GSA.

In a November 21, 2016 memo to Marilyn Amobi, the NBET managing director, Ade Ipaye, the deputy chief of staff in the office of Vice-President Yemi Osinbajo, expressed disappointment that despite the signing of the PRG at the state house on November 3, 2016, NBET was yet to endorse three “vital documents” — (1) the GSA and related deed of amendment (2) the support agreement and (3) the reimbursement and credit agreement.

Reminding her that the minister of finance, then Kemi Adeosu, and the World Bank had signed the agreement, Ipaye said Osinbajo had “directed that all stakeholders work together assiduously on sorting out all outstanding disputes and execute the required documents no later than the 24th November 2016. Copies of the executed documents should also be sent to the office of the Vice President by the 25th November 2016”.

Ipaye attached a copy of the complaint sent to Osinbajo by Philip Iheanacho, the CEO of Seven Energy International, a member of the Accugas consortium, over the delay in signing the PRG.

AMOBI STANDS HER GROUND

In her response to Ipaye, dated November 28, 2016, Amobi said NBET had signed its own portions of the support agreements and the reimbursement and credit agreement — it is not a party to the GSA — but warned that there was trouble ahead.

According to her, NBET was worried about the “sustainability of the transaction”, pointing out such issues as “the near insolvency situation of the electricity market, the absent immediate market liquidity solution”.

She said NBET and NDPHC would not be able to honour the associated financial obligations to Accugas under the “take-or-pay” GSA.

“The transaction is only sustainable if the distribution companies are fully settling their invoices by NBET for the electricity delivered at their respective grid supply points (GSPs). The electricity market is currently collecting less than 25% of the aggregated invoices,” she said.

She also warned that except “very significant improvements are made in revenue collection and remittances by DisCos, the entire remittances currently received by NBET would barely be sufficient to pay for gas volumes to run the five GE Frane 9E gas turbines at Calabar. This has serious implications not only for other GenCos but for the other seven (7) NIPP plants in commercial operation”.

In other words, the entire revenue from electricity in the country was not enough to pay Accugas for gas supply to Calabar GenCo alone, much less those of the other GenCos, both government-owned and private.

She warned that given the financial state of the industry, “it is reasonable to assume that NDPHC/NBET will default in paying for the gas and Accugas Ltd will definitely draw on the Letter of Credit to be established with JP Morgan Chase, consequently causing the downgrading of Nigeria’s Sovereign Credit Rating”.

“This would be worsened when eventually JP Morgan Chase calls on the World Bank Partial Risk Guarantee to recover its full exposure in the payment default. The projected monthly default is in the region of US$8m monthly at the current market settlement rate whereas the World Bank has placed the limit on the PRG for this project at US$112Million,” she added.

Despite all the red flags spotted by NBET, NDPHC and even the World Bank over the likelihood that there would be a default, Accugas and the World Bank, in February 2017, approached federal government again with a proposal to sign the PRG agreement.

In May 2017, NDPHC was cleared to sign the PRG by Abubakar Malami, the attorney-general of the federation.

Osinbajo, as chairman of the board of directors of NDPHC, then gave the anticipatory approval for the signing of the PRG, sending it for another endorsement by President Muhammadu Buhari who was on medical leave in the UK. Osinbajo was the acting president.

AND NOW, TROUBLE KNOCKS ON THE DOOR…

The project is now facing challenges on several fronts — as a result of the inability of the Transmission Company of Nigeria to transport power from the Calabar plant because of capacity issues and others because of low tariffs in the country which are not cost-reflective.

NDPHC had managed to pay Accugas under the N701 billion power intervention fund of the federal government which terminated in December 2018.

After that, it began to default and the federal government had to start making payments of over $10 million monthly to prevent the activation of the default clause by Accugas.

TheCable understands that since the amended GSA became effective, TCN has been dispatching power at a very low level — a situation that means less use of gas even though NDPHC must continue to pay in full under the take-or-pay obligation in the GSA.

While Calabar itself does not have issues, TCN could only take 70MW instead of the capacity of 115MW of each turbine. The turbines have a total capacity of 561MW.

As a result, the turbines have been regularly required to shut down and start up, with loads lowered or raised frequently as requested by TCN but outside of the technical limits stipulated by the manufacturers, TheCable understands.

These incidents have increased maintenance costs incurred by NDPHC and are beginning to impact on the efficiency of the plants.

NDPHC has been groaning under low tariff, making it virtually impossible to meet its financial obligations.

According to insiders at the ministry of power, the generation tariff of N18 per kilowatt hour (kWh) paid by NBET for the NDPHC plants is among the lowest of all centrally-dispatched gas thermal plants in the country. NBET pays other gas-fired plants N23/kWh.

NBET has refused to enter into a PPA with NDPHC because Calabar is still government-owned and until it is privatised, it is not entitled to a fully commercial power purchase agreement that would have boosted its tariff revenue.

ANY WAY OUT?

TheCable understands that the federal government is worried about the developments.

NDPHC was, at a point, indebted to Accugas to the tune of $70 million, but there is an outstanding of $30 million after the ministry of power had stepped in to settle some of the claims.

A possible solution, according to industry experts, is for NDPHC  to raise at least $10 million from its current revenue to offset part of the cost in the hope that the federal government will raise the balance of $30 million to pay off Accugas.

TheCable understands that all options are now being weighed as the sloppy deal weighs heavily on Nigeria.

Meanwhile, Nigeria must continue to pay the full current gas bill of over $10 million monthly to Accugas, failing which JP Morgan Chase may call in the PRG.