WEST AFRICAN GAS PIPELINE PROJECT (WAGP) WAGP Project. Tariff Setting Process (TARIFF MATTERS)

Transcription

1 BENIN GHANA NIGERIA TOGO WEST AFRICAN GAS PIPELINE PROJECT (WAGP) WAGP Project Tariff Setting Process (TARIFF MATTERS) PRESENTED BY: Ernest Abankroh, WAGPA

2 Background WAGPA s mandate emanates from the IPA and Enabling Legislation based on a Treaty signed on 31 January WAGPA s role is mainly three-pronged: Facilitating helped the Pipeline Company to go through the bureaucratic maze e.g. customs, VAT, and other Tax issues Representational Representing the 4 States Benin, Ghana, Nigeria and Togo (mostly via the Committee of Ministers or CoM) Regulatory (and Monitoring) Compliance by the Company and players within the WAGP value chain including the States Matters relating to Tariff Methodology are enshrined in the International Project Agreement (IPA)

3 Three Tariff Classes: TARIFF MATTERS Existing Tariff Methodology - Features Foundation, Standard & Industrial Development Postage Stamp Tariff (based on Reserved Capacity) Set to Achieve after tax Real Rates of Return 12% for 20 years Foundation Market only 15% for 20 years on all volumes if market forecasts are met Tariffs Decline as Market Grows Background Tariffs paid in US$ and indexed to US$ CPI Tariffs predetermined based on Cases : A to G (based on Pipeline Development Plan PDP and Market forecast) Tariffs are derived through Reference Tariffs

4 Background Existing Tariff Methodology - Features The scenario that was considered fitting based on the available Market Forecast was Case C Based on original Pipeline Development Plan, with capital costs of $614 million the tariffs to apply were: Case C Reference Tariffs (FID$) Case C Actual Reservation Charge (2010) Foundation $2.259 $2.632 Standard $1.153 $1.732 Industrial Devp t. $1.480 $1.725

5 Background Issues that emerged up to Project completion: - Project completed with undue delays - Increased project costs from $614m to circa $1bn - Below Mid Market Forecast of pipeline utilization - Pipeline Damage Security issues - IPA restrictions or limitations flaws in Tariff Methodology WAPCo requested for tariff review, WAGPA agreed to consider

6 TARIFF DESIGN WAGPA and WAPCo both agreed that the Tariff Design be simplified for the following reasons: Too unwieldy to comprehend Very inflexible with little scope, particularly, for dealing with new connections to the pipeline. Use of Reference Tariff Methodology was outmoded A Tariff system that accommodated the Pipeline s Project Cost overruns was preferred The differentials between the three tariffs, as envisaged in the IPA, would be maintained E.g a $0.10 higher rate for Standard than Foundation tariff but in real terms.

7 REVISED TARIFF METHODOLOGY KEY ISSUES Together with the proposed revision to the existing Tariff Methodology the IPA was agreed to be reviewed for possible revision, as it was timely Areas that impacted the Tariff Methodology: Cost Reviews and Allowable Costs Real Rate of Return Tariff calculation period & Periodic Reviews Depreciation (Asset Lives) Actual Tariffs Risk Sharing Other non-tariff related issues WAGPA Charge Pipeline Protection Zone Charge

8 REVISED TARIFF METHODOLOGY KEY ISSUES COST REVIEWS & ALLOWABLE COSTS WAGPA undertook a high level review of all the costs of developing the project Based on the information supplied by WAPCo, WAGPA declined to include some costs in the regulated asset base Costs: TARIFF MATTERS Costs which will be recovered through other tariffs associated with the project, e.g. costs which would be recovered elsewhere including the Credit Support Charge and the WAGPA charge Costs which will, or may, be recovered from outside the project, e.g. Insurance claims recoverable Costs which were considered to be not prudently incurred or not used and useful in respect of the provision of transmission services, e.g. Project contractor costs re: onshore installations (Wilbros) claim which related to the additional expenditure that WAPCo had to incur to complete the project as a consequence of Wilbros failure total of $231 million

9 REVISED TARIFF METHODOLOGY KEY ISSUES REAL RATE OF RETURN A single post-tax discount rate of 13.5% to be used to discount all the agreed cash flows in the revised tariff model to set an average tariff (Real Rate of Return) DEPRECIATION & ASSETS LIVES WAGPA considered that assets should be written off over their economic or technical lives* as follows: Pipelines 40 years Compressor/R&M Stations 25 years Land & Buildings 50 years Eligible Devp t Costs/Project Management Costs 30 years Other ranging between 5, 10 and 20 years WAGPA Funding 10 years *Average asset life likely to be circa 30 years

10 TARIFF CALCULATION PERIOD TARIFF MATTERS REVISED TARIFF METHODOLOGY KEY ISSUES Here two separate issues emerged: What is the appropriate length of time to recover the capital expenditure of the project the asset lives? What is an appropriate period over which to calculate the tariff tariff calculation period? Allied to the above a 20-year rolling calculation approach was adopted WAGPA would carry out periodic reviews and open rate base hearings 3 years for the Initial Tariff Period and 5 yearly subsequently

11 ACTUAL TARIFFS The actual Reservation Charge to be charged to Shippers each year will be derived from Real Tariffs which are charges in 2010 Dollars for reserved capacity derived from the Average Tariff. These will also be Real Foundation Tariff; Real Standard Tariff and Real Industrial Devp t Tariff Real Foundation Tariff and Real Standard Tariff will be such that the Standard Tariff will be $0.10 higher than the Foundation Tariff and Real Industrial Devp t Tariff will be 80% of the Average Tariff, within the constraint of meeting the average Tariff in any given Tariff Period RISK SHARING TARIFF MATTERS REVISED TARIFF METHODOLOGY KEY ISSUES If at the end of a Tariff Period total Revenues (sum of all revenues for the Tariff Period) collected by WAPCo from all transportation services are LESS than the total Guaranteed Revenues then WAPCo will be allowed to recover the difference through the subsequent Tariff Period, for the purpose of calculating the Tariff Based on certain definitions WAPCo was also placed at risk for certain cost thresholds, including its agreed predetermined Operating Costs

12 OPEN ACCESS Increased volumes allow for tariffs to come down, and make the pipeline company more viable, so all becomes happy One big challenge has been availability of gas. Market forecasts become an academic exercise since supply is not available The IPA has a quasi restricted access: S.26 Open Access Commencement Date (in the IPA) means: The first day of the calendar year: following the year in which the committed Reserved Capacity under Gas Transportation Agreements remaining in force and being performed according to their terms, in respect of Natural Gas sourced from the Nigerian Commercial Group Members or their Affiliates, first reaches 200 MMscfd; or which is 10 full calendar years after the Commercial Operation Date, whichever occurs first.

13 OPEN ACCESS CONT D. By the configuration of the Pipeline installations (compressors) there is no capability to have 200,000 mmbtu/d produced To leave it would mean Open access would be achieved in 10 years time! Following long and discussions with the gas producers (the Nigerian Commercial Group) agreement was reached to have Open Access on 1 July PERIOD COVERED DRC MRC REMARKS NOV. 1, JAN. 31, ,000 80,000 SHARED AMONG R&M STATIONS FEB. 1, 2012 APRIL 30, , ,000 - DITTO - MAY 1, 2012 ONWARDS 133, ,612 - DITTO -

14 Delivered Gas Price - Composition The Delivered Gas Price composition goes beyond the agreed tariff. Other cost components come in as per the table below: WAGP Gas Sales Price Components Details Unit Amount $/MMbtu Gas Purchase Gas Take or Pay Charge ELPS Transport ELPS Ship or Pay Charge WAGP Transport** WAGP Credit Support Charge WAGPA Fee* Pipeline Protection Zone charge* Fuel Gas - Commodity Fuel Gas - ELPS Transport Shipper Fee Shipper TOP Charge Delivered Gas Price ($/MMbtu) ** Tariff to be directly regulated by WAGPA * WAGPA has a very active interest

15 SUMMARY OF ISSUES RELATED TO WAGP TARIFFS In summary: There was a real challenge pertaining to the Tariff Methodology as enshrined in the IPA. Changes made ensured that the spirit of the original Tariff Methodology would be largely maintained The new Tariff Methodology has provided a more modern and userfriendly Tariff setting process for the WAGP More work needs to be done as the key principles set out in the Term Sheet need to be fully drafted and included in the overall amendments required for the IPA A more aggressive time table to secure a speedy Open Access Commencement date is now in place but this per se, is not a panacea to the gas supply challenge The tariff regulated by WAGPA is just one component in the Delivered Gas Price

16 END Questions Please?