6th ANNUAL NAEE/IAEE INTERNATIONAL CONFERENCE ENERGY RESOURCE MANAGEMENT IN A FEDERAL SYSTEM:

1. Enhancing Private Investment in Natural Gas-Fired Electricity Generation in Nigeriaby Dr. Cale CaseLAGOS, NIGERIAAPRIL 22 – 23, 2013 6th ANNUAL NAEE/IAEE INTERNATIONAL CONFERENCE ENERGY RESOURCE MANAGEMENT IN A FEDERAL SYSTEM: CHALLENGES, CONSTRAINTS AND STRATEGIES

2. Nigeria has World Class Resources and a Vast Need for Electric Power • Nigeria has placed great hope in the potential for private investment to alleviate the shortage of electricity and reduce flaring. • A market driven framework requires investing and operating environment that is compensatory, safe, stable and secure. • Transition to cost-based pricing and increased security is difficult. • Elimination of subsidies in the electricity sector will require pricing reforms through a competent regulatory framework which rewards investment and recovers charges in an efficient and fair manner. • While private investment is touted, limited thought has been given to how investment should be stimulated. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

3. Generation Market Overview • Electricity shortages hamper the ability of the Nigerian people to have a better life. • Installed capacity of nearly 7900 MW, effective capacity is 4300 MW. • Grid power is unavailable and/or unreliable to most Nigerians. Privately operated, expensive, and un-interconnected generating plants, provide back-up and stand-alone power. • National generation resources consist of three hydro-electric facilities and more than twenty gas and oil fired simple and combined cycle turbines. Many of the grid-linked power plants operate at far less than their design capacity due to a lack of natural gas, transmission and maintenance. • IPP projects operate better and are more reliable than government-owned plants. IPP plants account for nearly 25% of the effective capacity available to the nation. • The electricity supply system in Nigeria is in transition. • 2001 National Electric Power Policy (NEPP) • 2005 with the Electric Power Sector Reform Act (EPSR) • Under EPSR, the Nigerian National Electric Power Authority (NEPA) was formed and PHCN was divided into eighteen (18) successor private and public sector entities in the generation, transmission, and distribution areas. • NERC faced many hurdles getting organized, but now is fully operational and under strong leadership. • The Parliament, as part of the PIB, will determine who will have responsibility for terms and conditions of natural gas used in the production of electricity. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

4. The Gas Flaring Problem • Flaring exemplifies the irretrievable loss of resource. • Flaring happens because of two major reasons: • Gas may be a joint byproduct of oil production: “wet gas”. • Insufficient infrastructure to bring the gas to a market. • Flaring can be reduced by: • Encouraging local, regional and even distant markets • In certain circumstances reinjection is possible • Potential markets include domestic gas to power, regional international sales and increased world-wide LNG deliveries. • The Nigeria Liquefied Natural Gas Company (NLNG), a joint venture of Royal Dutch Shell and the Nigerian National Petroleum Corporation, has been in operation for more than two decades. • West Africa Gas Pipeline Co. (WAGPCo) is one success story. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

5. Gas to Power in World Markets • Gas-powered generation is the fastest growing source of world electricity.. • In many nations, the liberalization of gas and electricity regulation has eliminated shortages making it possible for third-parties to participate in competitive electricity. • U.S. experience: regulation induced shortages led to a national emergency and foretold the passage of federal regulatory reforms which stimulated technological innovation and eliminated supply shortages and led to unprecedented natural gas availability. • Abundant supplies reassured policy makers to relax restrictions on the use of gas for electrical generation. • Tariff and investment reforms eliminated end-to-end monopolies and ushered in the era of gas transportation. • Electricity sales by these merchant suppliers were aided by compensatory rate structures based on an electric utility’s “avoided” costs. • Advances in generation technology have made gas generation more cost-effective. • Other desirable features of combustion turbines include the fact that their modular component size tends to be financeable, sitable and scalable. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

6. Gas to Power in World Markets (cont.) • Increased environmental awareness: many regulatory jurisdictions in the world are making purportedly greener choices with respect to generation methods, as they work to eliminate coal and oil-fired generation and in some cases nuclear power. • Much more economically recoverable natural gas in the world than was previously thought. • Part of the reason for the proliferation of gas supplies has been the deregulation of many aspects of gas production, allowing investment to flow to its most valued position and spurring a drilling boom. • New and plentiful supplies of natural-gas have been obtained using advanced drilling and production technology. • Gas wells are now deeper than ever and directional drilling allows narrower producing zones to be tapped while hydraulic fracturing is producing gas from tight sands and shales that were previously uneconomic to access. • Transportation technology has improved as well. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

7. Growth in Demand and Supply Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

8. Gas to Electric Generation is Growing Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

9. Sweden from Gas Famine to Gas Feast • “There is no natural gas extraction in Sweden, which imports all the natural gas consumed there from Denmark via a pipeline that links these two countries.”, Eskilstuna, The Swedish electricity and natural gas markets 2010, The Swedish Energy Markets Inspectorate, 9/6/2011. • “Last month the company Gripen Gas completed test drillings outside Motala in the south-east of Sweden. …Research shows that there is potential in Sweden to generate 12,800 terawatt hours. That is a very large amount of gas. It would allow Sweden to keep up its current gas usage rate for 1,000 years.”11/13/2012 Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

10. International Firms have lots of Choices • Nigeria faces a competitive world for investment dollars as there are plenty of opportunities around the globe. • Multinational companies already operate in multiple jurisdictions. • Oil companies have a world full of new finds. • Power-station engineering and development companies have options as well • Financial powerhouses will follow the action, preferring “less” to “more” risk for the same return. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

11. International Firms have lots of Choices (cont.) • Investment in Nigeria will occur only when the expected value of profits – with the risk -- exceeds other opportunities available. • Gas-to-power related investment requires good returns on investment coupled with manageable supply chain and operational risks. • A a safe operating environment for personnel is paramount. • Domestic private capital for gas-to-power ventures, while limited, may be less selective about investments given the more restricted portfolio of investment opportunities. • Nigerian firms have a better understanding of submarket prospects. • Specialized knowledge and in-country experience is valuable to international companies. • Clear advantages of partnering between domestic and international firms. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

12. Security Concerns and Multinational Firms • Security concerns are of paramount importance • Theft of oil, kidnapping and violence all make international news. • Electricity and natural gas infrastructure also not immune to theft. • This not exactly conducive to fostering investment in the energy sector by domestic or international companies. • Lack of security is not a ubiquitous problem in the country, and investments can be made safely in some areas, a fact known more clearly by firms with experience in working in Nigeria Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

13. Security Concerns and Multinational Firms (cont.) • Begin where it is safe to do so and to attempt to make new areas safer. • In part the new PIB, is proposing to address this unrest by directing increased revenue to the Delta region to assist in economic development efforts through the creation of a “Petroleum Host Communities Fund”. • Sometimes owners of new investment face the official or community demands for compensation with the law, at least partially, on their side. • Official shake-downs via permitting and right of way costs as well as frequent out and out extortion for bribes, side-payments and favors create a lack of incentive to invest in the power sector. • This is especially true as developers face a fragmented system of local and state government jurisdiction. Multinational oil companies are not immune from special requests to make investments when it otherwise would not be warranted.   • Communities that resist placement of a generation station when the station does not provide electricity locally.   Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

14. Regulation of Gas-Fired Generation • Keep the regulatory system simple and build on the straightforward characteristics of the generation system. • Allow operators to achieve a single base rate for energy designed to be remunerative to an efficient operator. Rate should be market-determined under long-term contracts. • Contracts could allow for a higher rate at start up, especially if time and performance parameters are successfully met. Alternatively, payments could match the long-term performance of the unit and include performance payments to encourage reliability and consistent operation. • Terms should encourage combine cycle generation or cogeneration and reward dual-fuel capability. • Recognize the higher value of generator dispatch ability. • Encourage operators to reach new locations with gas infrastructure. • Reward the sharing of facilities and third party ownership. • Allow case by case approval of a transmission rider for extraordinary interconnection costs. • If the project is in the public interest, require the transmission utility to interconnect (and take power) and allow for recovery of those interconnection costs. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

15. Affiliate Transactions Require Extra Scrutiny • Where the market operators are either independent companies or affiliates of major oil and gas producers, insuring the successful participation of non-affiliated participants can present challenges. • Example: two power producers developing the same type of 100 MW combined cycle gas fired generation facility. One of the developers is a major oil and gas firm and the other is an unaffiliated independent producer. Conceivably, when mischief is present, the affiliated generator may benefit from a more favorable gas arrangement than the unaffiliated operator.   • Similar issues may exist with other interactions between the parties. Gas quality and pressure, pipeline costs and extension policy and more can present areas where un-affiliated generators may become disadvantaged vis-à-vis affiliates. • The opposite holds as well. Major oil and gas players are frequently targeted to make special investments including gas-to-power projects or associated natural gas infrastructure at a return that may not be compensatory. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

16. Non-ideal Framework Raises Costs and Outcomes May be less Consistent and Successful Without the institutional framework, each project becomes individually developed. Extensive and difficult obstacles handled on a case-by-case basis with great involvement of the Executive. Companies will require extensive risk premium payments and costly risk mitigation techniques. Success rate generally low. This is the Enron/AES Barge Model. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com

17. Establishing a Framework for Sustained Private Sector Participation in Gas to Power When prices provide the reasonable ability for investors to profit over the life of the investment , capital will flow to the privately financed production of electricity from natural gas and the necessary other aspects of gas supply. Profitability will necessitate appropriate compensation for commodity (energy) services and capacity in both electric and natural gas markets. The transition to market-derived prices for electricity will likely create a difficult situation for regulators. Dr. Cale Case, Tel.(307)332-7623 ccase@wyoming.com, http://CaleCase.com