Energy Risk Management in the Nigerian Market and the Value of the ERP Designation Razaq Ahmed, CFA, ERP Executive Director Energy and Investments Sart Partners, Nigeria October 2014 The views expressed in the following material are the author’s and do not necessarily represent the views of the Global Association of Risk Professionals (GARP), its Membership or its Management. 2! Table of Content 1.  Nigerian Energy Market: Evolution, Size and Projection 2.  The Need for Risk Management 3.  The Value of The ERP Designation 4.  Wrap-Up 5.  Q & A 3 | © 2014 Global Association of Risk Professionals. All rights reserved. Today’s Interactive session is a blend of 3 focused areas Energy Risk Management Nigerian Energy Market Today’s interactive session Value of ERP Designation 4 | © 2014 Global Association of Risk Professionals. All rights reserved. Nigeria: The Energy Market Space The energy value chain is long, interwoven. It interfaces with every facet of the economy Natural Gas Crude Oil Coal Electricity Refined Pet. Product §  Proved Reserves: 37bln barrels §  Reserves: 180 tcf §  Reserves: 209 Mln Short Tons §  Available Capacity: 7GW §  Refinery Capacity: 445k b/d §  Production: 2.3 mln b/d §  Production: 3.2 bcf/d §  Production: 0.035 Mln Short Tons §  Avg Generation: ~3 GW §  Capacity utilisation: 25% - 30% §  Reserve Life: 42 yrs §  Consumption: 0.7 bcf/d §  Consumption: 0.035 Mln Short Tons §  Requirement: 20GW §  Consumption: 385k b/d Data Source: IEA, NERC 5 | © 2014 Global Association of Risk Professionals. All rights reserved. Nigeria: The Energy Market Space The energy value chain is long, interwoven. It interfaces with every facet of the economy Natural Gas Crude Oil Coal Electricity Refined Pet. Product §  Proved Reserves: 37bln barrels §  Reserves: 180 tcf §  Reserves: 209 Mln Short Tons §  Available Capacity: 7GW §  Refinery Capacity: 445k b/d §  Production: 2.3 mln b/d §  Production: 3.2 bcf/d §  Production: 0.035 Mln Short Tons §  Avg Generation: ~3 GW §  Capacity utilisation: 25% - 30% §  Reserve Life: 42 yrs §  Consumption: 0.7 bcf/d §  Consumption: 0.035 Mln Short Tons §  Requirement: 20GW §  Consumption: 385k b/d Data Source: IEA, NERC 6 | © 2014 Global Association of Risk Professionals. All rights reserved. Afam Integrated Gas and Power Project The Afam Integrated gas and power project is a 650MW Combined Cycle Power Plant and 240MMscf/d (Okoloma) Gas plant. Okoloma Gas Plant with nameplate capacity to process 240 mmscf/d. Supplies gas for power into Afam VI and into the domestic gas grid 7 | © 2014 Global Association of Risk Professionals. All rights reserved. Electricity Consumption Evolution: Nigeria vs. Peers 200 Population Evolution Numbers in millions 180 Angola Libya 160 Nigeria South Africa -1 Electricity Net Consumption (in billion kilowatt hour) 250 200 Angola Libya Nigeria South Africa 140 150 120 100 100 80 60 50 40 20 0 0 1980 1985 1990 1995 2000 2005 2010 1980 – 2013 Growth : Population 1980 1985 1990 1995 2000 2005 2010 1980 – 2013 Growth: Electricity Consumption •  Nigeria: 133% (CAGR: 2.6%) •  Nigeria: 413% (CAGR: 5.1%) •  South Africa: 68% (CAGR: 1.6%) •  South Africa: 156% (CAGR: 2.9%) •  Angola: 158% (CAGR: 2.9%) •  Angola: 589% (CAGR: 6.0%) •  Libya: 103% (CAGR: 2.2%) •  Libya: 597% (CAGR: 6.1%) *Electric power consumption measures the production of power plants and combined heat and power plants less transmission, distribution, and transformation losses and own use by heat and power plants. Data Source: IEA (1980 – 2011), Sart Partners’ estimates (2012-2013) 8 | © 2014 Global Association of Risk Professionals. All rights reserved. Electricity Consumption Evolution: Nigeria vs. Peers Electricity Consumption Per Capita In kilowatt hour 6,000 5,000 Angola Libya Nigeria South Africa 50 -2 2013: Installed Capacity In GW 45 40 35 4,000 30 25 3,000 20 2,000 15 10 1,000 5 - 1980 1985 1990 1995 2000 2005 2010 Angola Libya Nigeria South Africa •  An average South African consumes 30x more electricity than an average Nigerian •  An average Libyan consumes 18x more electricity than an average Nigerian *Electric power consumption measures the production of power plants and combined heat and power plants less transmission, distribution, and transformation losses and own use by heat and power plants. Data Source: IEA (1980 – 2011), Sart Partners’ estimates (2012-2013) 9 | © 2014 Global Association of Risk Professionals. All rights reserved. Where does Nigeria’s Primary Energy Come From? Angola: Primary energy consumption Hydro Natural Gas Nigeria: Primary energy consumption Oil Oil Biomass Biomass Hydro Natural Gas South Africa Primary energy consumption Renewable Nuclear Libya: Primary energy consumption Natural Gas Hydro Oil Oil Natural Gas Coal Data Source: IEA 10 | © 2014 Global Association of Risk Professionals. All rights reserved. Nigerian Electricity Market: How Big Can It Get? Incremental Investment in Generation Only Scenarios of Required Capacity In GW 120 112 Scenario 5: 50% of SA per Capita Consumption $105bln (NGN 17Tln) 90 Scenario 4: 40% of SA per Capita Consumption $83bln (NGN 14Tln) 67 Scenario 3: 30% of SA per Capita Consumption $60bln (NGN 10Tln) 45 Scenario 2: 20% of SA per Capita Consumption $38bln (NGN 6Tln) 22 Scenario 1: 10% of SA per Capita Consumption $22bln (NGN 4Tln) 100 80 60 40 20 7 - Nigeria: Available Capacity Scenarios 11 | © 2014 Global Association of Risk Professionals. All rights reserved. Data Source: Author’s estimation Nigerian Electricity Market: The New Ecosystem Feed stocks Generation Transmission Distribution Consumers Players Players Players Players §  IOCs §  6 Privatized Discos §  Independents §  7 Independent Power Plants (IPP) §  Transmission Company of Nigeria (TCN) managed my Manitoba Hydro International (Canada) §  11 Privatized Distribution Companies §  174 million people §  Gas, Hydro §  Marginal Fields §  10 National Integrated Power Plants (NIPPs), also privatized Regulatory environment Regulatory environment §  NAPIMS and DPR §  The Federal Ministry of Power §  Nigerian Gas Company (NGC) §  Nigerian Electricity Regulatory Commission (NERC) §  Gas Aggregation Company of Nigeria (GACN) §  Energy Commission of Nigeria (ECN) §  Rural Electrification Agency (REA) §  Presidential Task Force on Power 12 | © 2014 Global Association of Risk Professionals. All rights reserved. §  Houses, streetlights §  Industries §  SMEs Nigerian Electricity Market: National Generation Risk Profile Sources of Electricity Generation Other Renewables Nuclear Hydro Coal Natural Gas 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Nigeria 7 GW Brazil 114 GW South Africa 45 GW Data Source: IEA, Sart Partners 13 | © 2014 Global Association of Risk Professionals. All rights reserved. Angola 1.7 GW Canada China UK 139 GW 1145 GW 89 GW How Should the Next GW of Electricity be Generated? -1 Global Carbon Footprint C02 Emission in Million Metric Tones 35,000 30,000 25,000 20,000 Global C02 Emission has grown by a factor of Asia & Oceania Middle East 15,000 Africa Eurasia 10,000 between 1980 – 2012 Europe Central and South America 5,000 North America 1980 1984 1988 1992 1.8x 1996 Data Source: IEA, Sart Partners 14 | © 2014 Global Association of Risk Professionals. All rights reserved. 2000 2004 2008 2012 How Should the Next GW of Electricity be Generated? -2 Global C02 Emission Per Capita In Metric Tones North America Europe Middle East Asia & Oceania Who is Driving Global Per Capita C02 Footprint? Central & South America Eurasia Africa World §  Noticeable decline in C02 per capita in North America and Europe despite sluggish population growth 18 16 §  Global C02 growth drivers are Middle East and Asia 14 §  Africa has been growth neutral 12 10 8 Emission saving GW are becoming more commercially viable globally: 6 4 §  Long term winners: Renewables 2 §  Long term losers: Fossil Fuel 1980 1984 1988 1992 1996 2000 Data Source: IEA, Sart Partners 15 | © 2014 Global Association of Risk Professionals. All rights reserved. 2004 2008 2012 Nigerian Electricity Market: The Risk Spectrum -1 Electricity market privatization in Nigeria is changing the risk profile of the industry in the following dimensions: Multi-Stakeholders Increased number of private actors: Gas producers, Gencos, Discos, others Green Technology Global sustainability requires increased intensity of carbon saving technology Social Performance Industry growth means increased community footprint and community engagements Policy and Regulation More active regulatory oversight from licensing to pricing 16 | © 2014 Global Association of Risk Professionals. All rights reserved. Investment Massive private sector capital requirement from generation to distribution Nigerian Electricity Market: The Risk Spectrum Electricity market privatization in Nigeria is changing the risk profile of the industry in the following dimensions: Power Transmission Risk Green Technology Global sustainability requires increased intensity of carbon saving technology Regulatory risks Country risks Social Performance Industry growth means increased community footprint and community engagements Policy and Regulation More active regulatory oversight from licensing to pricing Market risks Gas Transportation Risk 17 | © 2014 Global Association of Risk Professionals. All rights reserved. Multi-Stakeholders Increased number of private actors: Gas producers, Gencos, Discos, others Credit risks Investment Massive private sector capital requirement from generation to distribution Gas-to-Power Credit Risk Management: The World Bank PRG in Nigeria Indemnity Agreement Federal Government of Nigeria Banks Project Agreement PRG Support Agreement Gas Producers (L/C Beneficiary) Aggregator Guidelines Tie – In Agreement Gas Supply Agreement Strategic Aggregator (GACN) Transporters (NGC) 18 | © 2014 Global Association of Risk Professionals. All rights reserved. Power Generating Companies Gas Transportation Agreement (GTA) Credit Risk Management: Bankable PPA with NBET Backed by World Bank PRG Indemnity Agreement Federal Government of Nigeria Banks Project Agreement Power Generators (L/C Beneficiary) PPA Vesting Contracts PPAs NBET 19 | © 2014 Global Association of Risk Professionals. All rights reserved. Discos and Eligible Customers Price Risk Management: MYTO and NGMP Gas to Power Price (Implied in MYTO II) $/mbtu MYTO II End User Tariff Build Up Export Sales (Avg Costs) Non-Tech Losses Transmission Losses Transmission Tariff 3.00 Uncollected Sales Distribution Losses Distribution Tariff Generation Tariff 30 2.50 (NGN/kWh - nominal) 25 2.00 1.50 22.2 20.8 21.1 21.7 2013 2014 2015 22.9 20 15 10 5 1.00 2012 2014 2016 2018 2020 0 Market Risks §  Gas-to-Power Pricing: Guided by Nigerian Gas Master Plan (NGMP) §  Power Price: Guided by the Multi Year Tariff Order (MYTO II) 20 | © 2014 Global Association of Risk Professionals. All rights reserved. 2012 2016 The Value of The ERP Designation An end-to-end coverage of the energy ecosystem 25%: Oil, gas and Coal Markets 15%: Financially Traded Energy Products and Structured Transaction 15%: Energy Commodity Price Formation and Market Risk Financial Products and Risk Management Physical Energy Commodities and Market 15%: Credit, Counterparty and Country Risk Assessment 5%: Enterprise Risk Management and Business Ethics 21 | © 2014 Global Association of Risk Professionals. All rights reserved. 25%: Electricity Markets and Renewable Generation Q&A Thank You 22 | © 2014 Global Association of Risk Professionals. All rights reserved. Contact Razaq Ahmed Tel +234(0) 703 926 2406 [email protected] www.sartpartners.com 23 | © 2014 Global Association of Risk Professionals. All rights reserved. Creating a culture of risk awareness® Global Association of Risk Professionals 111 Town Square Place 14th Floor Jersey City, New Jersey 07310 U.S.A. + 1 201.719.7210 2nd Floor Bengal Wing 9A Devonshire Square London, EC2M 4YN U.K. + 44 (0) 20 7397 9630 www.garp.org About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 risk management practitioners and researchers from banks, investment management firms, government agencies, academic institutions, and corporations from more than 195 countries and territories. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk Professional (ERP®) Exams; certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels. www.garp.org. 24 | © 2014 Global Association of Risk Professionals. All rights reserved.