NNPC, Shell, Others Fined $20m for Breaching Gas Supply Contract

The Nigerian National Petroleum Corporation (NNPC), Shell Petroleum Development Company (SPDC) and Chevron Nigeria Limited, owners of N-Gas, the main supplier of gas to Ghana’s Volta River Authority (VRA), through the West African Gas Pipeline (WAGP) are paying a fine of $20 million for failure to meet their contractual obligations on gas supply to the Ghana’s electricity producing company.
N-gas, a company jointly-owned by Shell, Chevron and the NNPC, buys gas from oil companies in Nigeria and transport the gas to its customers in Benin, Togo and Ghana, through the $1 billion WAGP, which is operated by the West African Gas Pipeline Company (WAPCo).
The International Project Agreement (IPA) signed in May 2003 by WAGPCo and the governments of Benin, Ghana, Nigeria and Togo, with the secretariat of the Economic community of and West African States (ECOWAS) as witness, provides that N-Gas be allocated a space in the pipeline that could transport up to 200 million standard cubicfeet of gas per day.
Sources said that gas supply from N-Gas to VRA had fallen to 50 million standard cubic feet from around 80 million six months ago, about 70 million standard cubic feet (58 per cent) below the expected 120 million contractual volume due to VRA.
The shortfall, it was learnt, had forced Ghana’s largest power producer, VRA to spend $55million every three weeks to import crude oil to power its thermal plants.
The development has worsened Ghana’s power supply as electricity generation from hydro sources is currently at risk due to poor inflows of water into the Akosombo, Kpong and Bui dams.
N-Gas has consequently been fined $20 million for failure to meet its contractual obligations, out of which $10 million has been paid, while $10 million is outstanding.
The fine, it was learnt, is however far below the damages suffered by VRA as the contractual agreement that provides for the fine was based on crude oil price of $35 and below, while the price has since gone up to over $100 per barrel.
The Business Development Manager of the VRA, Kofi Ellis, was quoted by GhanaWeb as saying that Nigeria’s domestic gas demand currently outstrips production, making it difficult for N-Gas to supply the full contractual volume to Ghana.
“The level we get now is about 50 million. Total demand in Nigeria is about 1.6 billion standard cubic feet of gas, and the production is about one billion. So ideally, you would say Nigeria should not even put any gas in for Ghana because it’s not enough for them.
“But they are doing something to increase production to two billion by 2015, and the idea is that when they are able to improve it to two billion there will be enough for the domestic market. Because our price is much better than the domestic market, they will definitely put full gas in the pipeline for us at that stage. As it stands, they are only trying to help us.”
He said the price of gas is half the price of crude oil for an equivalent amount of electricity generation, and that “the idea of Ghana gas is purely to try and reduce our cost of production by bringing VRA’s plants from crude production to gas production.”
He also spoke on the issue of compensation from the N-Gas arising from its inability to supply the volume specified in the 20-year contract.
“The contract says that if you don’t give me gas, you have to pay to enable me buy crude oil for the shortfall. But this contract was signed more than 10 years ago when the crude oil price was below $20/barrel.
At the time of negotiating the contract, we agreed that because we didn’t know what the future price of crude oil would be, we would price it at a default rate of $35/barrel. We expected that within the contract period, even if the price of crude oil doubled, it would fall within that price range.
“Now the crude oil price has jumped from that low level to more than $100/barrel. Using the $35 price, compensation for the entire contract period came to about $20million. They’ve paid us $10million already. So what is left is $10million for the remainder of the contract period,” he said.
The country’s current gas demand is about 300 million standard cubic feet. The imminent completion of the Atuabo pipeline linked to the Jubilee oil field is expected to bring on-stream at least 120 million standard cubic feet of gas. Given the unreliability of Nigeria’s gas, a supply volume of 80 million from them would still leave a deficit of some 100 million cubic feet.
Over the long-term (2014-2021), the VRA projects electricity demand to grow at an average of 10 per cent annually, rising from 1,950MW to 3,300MW in 2021.
The VRA has therefore started negotiations with other gas suppliers in Nigeria for the supply of additional gas via the West Africa Gas Pipeline, which is designed to carry up to 200 million cubic feet of gas.
Before the recent drop in gas supply, N-Gas was being allocated 134mmscf space in the 475mmscf capacity pipeline but could only deliver about 60mmscf of gas to the pipeline, leaving the $1billion facility to be sub-optimally utilised.
Due to the non-utilisation of the pipeline by N-Gas, sub-regional ministers, otherwise referred to as the Committee of Ministers of the West African Countries involved in the pipeline project plan to amend the IPA to enable other entities to use the pipeline.

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