Otedola’s Geregu shift: The man who saw tomorrow

Like butterflies in search of nectar, Nigeria’s armies of profit-seeking entrepreneurs are currently flirting over the hidden gemstone that the nation’s humongous but long ill-tapped power sector could avail them. Yes there have been and remain historic and contemporary challenges, but there are also quite evident gems to be tapped as Femi Otedola is now trying to do with Geregu Power. Is he the man who has seen tomorrow?  Yusuf Mohammed examines the development.

The privatisation of the power sector in 2012 was not an easy choice. But it had a predecessor exercise that helped to put it in perspective: the GSM revolution that commenced about 2001 with the coming on stream of MTN and Econet Wireless (now Airtel).

Since the process of partially privatizing the nation’s power sector was conducted seven years ago however, the nation has been inundated with a mixed bag of experiences.

On the positive side, private players have taken over the distribution and generation flanks of the market, leading to reduced direct government expenditure in the sector. However, there are still very visible hiccups even in those privatized segments, in addition to continuing flip-flops in the transmission arena that is still government-controlled.

At the head of the privatization exercise was the decision to break down the sector into its three core component parts, namely, generation, transmission and distribution. That was done but the jury remains out there as to how yet unsatisfactory services are with many yet calling for even more stringent reforms to ensure that greater value is delivered across all segments of the chain.

At the consumer end, there have been loud grumbles over the conduct of the DISCOs, and more particularly as it has to do with the estimated billing regime.

Troubled by the persisting complaints, the Federal Ministry of Power and the National Electricity Regulatory Commission have tinkered with a myriad of response approaches. The latest is the meter acquisition programme being undertaken by Meter Assets Providers, MAPS, and which is designed to help consumers get pre-paid meters that would correctly determine their exact consumption patterns while also addressing the challenges of disputes over how contentious bills were arrived at (using estimates) and the backlog of contested and unsettled bills in the post-service payment arrangement.

Already several Meter Assets Providers, including MOJEC, have been licensed by the National Electricity Regulatory Commission, NERC, to inter-mediate in this process.

If the distribution sector has been the most visible of all three components of the power chain that is quite understandable: it is the unit with which the consumer interfaces more readily. But make no mistakes about the true perking order: it begins with generation. And that is precisely the field where the bigger players are weighing in.

Only recently, billionaire investor and businessman, Femi Otedola, disclosed plans to almost completely shift his focus to the arena. Putting his money where his mouth is, he has moved to collapse his holdings in Forte Oil and is now routing the recent gains from the sale of the firm to his new-found love. Industry watchers say that within this dispensation, Otedola would be throwing in as much as $1 billion into his new Kogi State-based field vehicle, Geregu Power Plc.

To be sure, and as is to be expected of a business player of his pedigree, Otedola’s involvement with Geregu is of course not an overnight wonder.

Geregu Power Plc had been incorporated in November 2006 as one of the unbundled companies from the now-defunct Power Holding Company of Nigeria (PHCN). A gas-driven power generation facility, it began actual operations in 2007, posting a total installed capacity of 414MW at its commissioning.

For Otedola in particular, his Geregu story actually began in the thick of the then ongoing power sector privatization in 2013 and the actual purchase was consummated through Amperion Power Distribution Company Limited which is a subsidiary of Forte Oil Plc.

After that acquisition, an estimated $94 million was said to have been initially invested in the power plant. In 2018, another $350 million was similarly invested. And now, the icing on the cake: a fresh $1 billion inflow.

But what exactly is Femi Otedola seeing that is compelling him to throw in so much into Geregu and by extension the nation’s power sector that some others may not be seeing at the moment, even to the extent of giving up his juicy stake in Forte Oil?

Says an analyst, Hakeem Badru:

‘The downstream oil business will begin to see smaller margins as Dangote’s refinery in particular comes on stream in the not too distant future. Some right sizing of sorts would come into the market that will contribute to the process of eliminating the need for petrol subsidies. Over time, and even at the moment, the shadowy transfer pricing model which favours importers has had a very deleterious effect on the national economy to such a choking extent that it is very clear it would not continue forever, so the likes of Otedola may very well be taking steps now before that day comes.’

Even beyond the local factors, there is also the additional push being introduced on the global energy arena as Badru further explains without any equivocating:

‘The increase in the global use of electric cars will squash demand for refined petrol and further chisel down both upstream and downstream product prices.’

If the days of crude oil, fossil fuel and petroleum are numbered, it is however not the same for the power sector, and notably so in a country like Nigeria which is at the moment yet struggling to guarantee actual generation and delivery of 4,000mw of power. It is this window that Badru believes Otedola and the other early investors in the circuit are stepping in to fill. And this he says is notwithstanding the extant challenges that continue to assail it:

‘The power gap is massive. Going forward, tariff rates will rise to ensure stability of the supply value chain and Otedola will be in from the ground floor of price restructuring and new investment. With infrastructure in place, over time the power business will generate strong cash flow and profit at the upper end of the Geregu project’s life cycle. Demand for oil is expected to decline while power demand will increase at more market determined energy costs.’

Should this scenario pan out, then Mr. Otedola may very well be in reckoning for that good old clairvoyant title: ;the man who saw tomorrow!’

Not so fast though!

But proceeding from where we are now as a nation to where we have to get to as already envisaged and outlined in the Power Sector Road Map would involve a lot of work and funding.

According to a recent projection by electricity distribution companies, Discos, It will take as much as $100 billion or N36 trillion, to guarantee stable power supply in Nigeria. However, these funds, they say can be spread over an investment cycle of 20 years.

Specifically, they are calling for the deployment of $10 billion or N3.6 trillion in the distribution networks within an initial 5-year span. Beyond this phase, they say that their projections on what should be spent to boost the overall power supply value chain as it has to do with the Discos within the projected 20 year period comes to about $40 billion or N14.4 trillion.

Further, another $4.2 billion would be required for the interface project that is being developed for the transmission network, and in furtherance of the Transmission Company of Nigeria, TCN’s expansion plan.

Tackling the power dragon

The crisis of power in Nigeria has continued to be a central factor in the nation’s continuing underdevelopment and low level of global economic competitiveness and this has most copiously been elaborated upon over time.

Much premium is placed on it in annual Global Competitiveness Index, GCI reports even as the November 2018 edition of the Monthly Business Expectations Survey Report of the Central Bank of Nigeria (CBN) similarly emphasized once again that ‘the most compelling factor constraining businesses in Nigeria is insufficient power supply.’

Given that electricity is a most important ingredient required for businesses to function and expand, its poor supply compels businesses to make supplementary provisions that invariably lead to overall higher electricity costs. This in turn, drives business costs higher, reduces competitiveness and hobbles entrepreneurial energy. In more specific terms, the Manufacturers Association of Nigeria has estimated that the pressure exerted on businesses in Nigeria on account of their having to generate additional power by themselves puts as much as a 40 per cent mark up on product costs compared to the operational situation in other jurisdictions where stable power is guaranteed. In even more specific cash terms, manufacturers spend over N246 billion fuelling generators.

It is one critical reason why MAN is not enamoured of the African Continental Free Trade Agreement, AfCFTA.

Not to be left out is the finding from the World Bank which affirms that “power outages and deficient power infrastructure in Sub-Saharan Africa had a measurable negative impact on economic growth.”

As for the European Union which recently committed €156.3m or N53.9bn in financing instruments to Nigeria’s power sector, there is indeed an urgent need to recalibrate the power systems in the country to stave off the continuing losses that run up to N1.3bn daily.

Addressing the Second Seminar for the Preparation of Performance Improvement Plans by the Nigerian electricity distribution companies, the Head of Trade and Economic Section of the EU Delegation, Filippo Amato, said:

“You will agree with me that since the first Performance Improvement Plan seminar that was held in March last year, the Nigerian electricity supply industry is still facing deterioration and the liquidity crisis is keeping the system under stress.

“Despite efforts made by all of you in tackling some of the key impediments to the development of the sector, the industry losses are still growing at a rate of at least N1.3bn per day and nowadays, the average operational capacity of the grid hovers around 4,500 megawatts and 5,500MW and cannot meet the needs of a growing population and industrial users.”

Brighter days may yet be ahead

Analysts say that the lingering power supply instability in the country, if well handled could mark the beginning of a new deal for the nation on several fronts. This is more so given the nation’s positioning as the most populous and the largest economy on the continent. Further, the nation is blessed with large oil, gas, hydro and solar deposits and assets. What they say have been missing over the years are the right policies and will to drive the processes.

On his part, Otedola says his acquisition/investment in Geregu is in consonance with his commitment to the Federal Government’s power sector recovery plan.

Announcing the completion of the acquisition of Forte Oil Plc by Prudent Energy Services Limited after several months of negotiations, the billionaire investor assured that he does indeed have very great plans for Geregu Power Plc. We believe him.

Burning the bridges

There is a Bible parable made popular by Jesus Christ himself in which he talks about a merchant who finds a pearl of inestimable value and sells all that he has in order to get it. Perhaps Otedola has read it.

Before the current move, the mogul controlled a 75 percent majority stake in Forte Oil. He had also been a principal player in the sector with an active portfolio that straddled Zenon Oil, AP Plc and Forte Oil. Now he is giving up all of that.

In a formal statement issued June 19 2019, Otedola said: “A few years ago, my team and I embarked on an arduous task of transforming a moribund petroleum marketing business, African Petroleum Plc (formerly British Petroleum) into Forte Oil Plc; a leading integrated solutions provider with solid footprints in downstream petroleum marketing, Upstream Services and Power Generation and one in which we built intrinsic value to the benefits of our shareholders.”

“We have divested from our marketing and upstream businesses and shall from now on focus and consolidate on the gains of our power generation business, Geregu Power Plc. We wish our successors the very best and urge them to build on our legacies which have been established since 1964.”

The shape of things to come

Coming to specifics, a report by Proshare outlines some of the expected outlines of Otedola’s Geregu power strategy to include boosting domestic power supply by at least 400 additional megawatts, operating a power plant that would be supplied feedstock from a SIEMENS 3 x 138MW V94.2 Gas Plant, and ‘partly bridging the current power supply gap between consumer demand and national grid supply which would be partially offset by the full operation and future expansion of the plant.’

Others are creating ‘a more efficient nexus between the power generation value chain and the retail power market, which has been characterized by difficult conversations between generating companies (Gencos), distribution companies (Discos) and the regulatory authorities, the Nigerian Electricity Regulation Council (NERC)’ and institutionalizing ‘a smoother generation framework through integrating feedstock production and power generation, thereby relieving the power value chain of challenges that regularly occur between gas suppliers and energy providers.       Nigerian Gas Company (NGC) will still supply gas to Geregu, but with its storage and gas infusion plant in play the energy process is cheaper based on economies of scale, this may be a significant game-changing move for Otedola against the backdrop of the Dangote 650,000bpd Lekki Oil refinery coming into contention in 2020.’

Even before Otedola, other prominent business players that had ventured into the generation sector include Deji Adeleke of Pacific Energy which is operator of the Olorunsogo Power Plant and Tony Elumelu of Transcorp which operates the Ughelli thermal plant in Delta State.

Remember the California gold rush? It is looking like it has already begun in the power sector here.