Operators in Nigeria’s power and petroleum sectors believe that the Federal Government’s regulation of domestic natural gas pricing appears to be easy to accept theoretically but difficult to sustain in practice.
According to them, the challenge with implementing a regulated pricing regime in the domestic market is exacerbated by the widely divergent interests of major players in the industry.
They also note that one of the most significant challenges to sustainable gas pricing in Nigeria is the illiquidity of the country’s power sector, as this has severely impacted negatively on the fortunes of the nation’s gas producers.
They say the liquidity squeeze in the power sector, among other concerns, need to be addressed in order to get adequate pricing for natural gas, as well as grow power generation and supply in Nigeria. The key dilemma in Nigeria is that while lower gas prices are needed to encourage gas demand and support local industries and power generation, cost-reflective prices are needed to stimulate investment in gas infrastructure and assure supply sustainability.
Findings show that the scale of the problem is further compounded by the fact that the various domestic demand sectors have varying capacity to accommodate cost-reflective gas prices.
On the other hand, competitive tariffs in international markets can create a preferential pull for exports at the expense of the domestic market if regulated pricing results in lower returns on investments or inability of the gas supplier to cover its costs. The President of Electricity Consumers Association of Nigeria, Chijioke James, says the liquidity challenge in the power sector needs to be addressed by the government in conjunction with stakeholders if an adequate gas pricing framework can be sustained.
James, who is a lawyer and development practitioner, notes that the power sector consumes more gas than any other industry in Nigeria, adding that getting a sustainable gas pricing framework that will keep gas producers in business and attract more investors is vital.
“The gas pricing and supply situation in Nigeria is very dicey because you cannot rob Peter to pay Paul. However, the gas companies have their operating standards and they cannot operate at a loss. The gas companies are also in business to make profits just like the power generation and distribution companies,” he says.
James notes that there is a need for stakeholder engagement in order to address power sector illiquidity, as well as get a sustainable gas pricing framework for the country. He adds, “If there is any pressure on the gas producers to sell gas below profitable margin that makes gas production impossible for them, then there will be no gas available to fire the power turbines. This is why we say that there should be a gathering of stakeholders in the energy production value chain.
“The stakeholders meeting will provide room for deliberations on how to address these challenges in the power sector and how it affects a sustainable gas pricing framework. Investments in the gas sector in Nigeria are very huge and so you cannot overemphasize the need for a robust policy that will address the concerns in this industry that sustains not just the power sector, but provides support to many other sectors of our economy.”
Successive governments have made efforts to transit domestic gas pricing to a market-led regime as evidenced by the Natural Gas Strategy, 2003; Natural Gas Policy, 2004; Draft Natural Gas (Fiscal Reform) Act, 2005, also known as Draft Downstream Gas Act; Gas Master Plan, 2008; and most recently the National Gas Policy, 2017, which articulates the pricing philosophy to be adopted in the domestic market.
The National Domestic Gas Supply and Pricing Regulations issued in 2008 proposed a three-tiered pricing framework. It went further to group the entire country demand into three broad groupings.
The first group, which is the strategic domestic sector, refers to a very limited set of sectors that have a significant direct multiplier effect on the economy, such as the power sector, which will be under a regulated pricing regime which will be on the cost-of-supply basis. This pricing regime ensures low-cost gas in order to facilitate rapid economic growth.
The strategic industrial sector refers to industries that utilise gas as feedstock in the production of value-added products that are primarily destined for export or in some cases, consumed locally, such as methanol, gas-to-liquids and fertiliser, which will partake in a pseudo regulated pricing regime on product net-back prices.
The pricing of the gas for participants in this sector is intended to ensure the competitiveness of their end products in international markets in the face of competition from their counterparts in other gas producing countries.
The third group known as other commercial sectors refers to the industries that use gas as fuel as opposed to feedstock and include manufacturers of cement or steel, domestic manufacturers and industrial power consumers. These sectors have the capacity to bear high gas prices as their alternative fuel is the significantly more expensive low pour fuel oil. The pricing of gas for participants in this sector is expected to be a market-led regime.
Experts say the Federal Government’s approach to pricing regulation is critical to developing the gas value chain, adding that the government faces a balancing act between setting a price that is low enough to encourage consumption growth while at the same time being high enough to incentivize domestic production and supply.
James notes that a sustainable gas pricing framework must assure the liquidity of the value chain. He explains that the current liquidity issues bedeviling Nigeria’s power sector have impeded the development of a sustainable gas pricing framework, adding that liquidity issues in the power sector mean that gas value chain players are owed huge sums of money for gas they have supplied.
Stakeholders say that gas producers cannot get the required financial securitization to invest in an additional supply of gas to the power generating companies due to the liquidity challenges in the power sector.
They note that the government must be consistent in its signaling and messaging with regards to a sustainable gas pricing framework. Experts add that rather than pursuing quick-fix transitional regulatory interventions, the Department of Petroleum Resources should in the meantime champion the development of a gas pricing framework as envisaged in the Gas Master Plan and the more recent National Gas Policy.
On what the government is doing about the issues, the Federal Ministry of Petroleum Resources recently stated that the ultimate objective of the gas pricing reform in the Gas Master Plan was to attain a fully market-driven pricing regime.
The Director, Press, FMPR, Idang Alibi, says the government is aware of the challenges associated with gas pricing and hopes to address these concerns through its National Gas Policy. The Programme Manager, Nigeria Gas Flare Commercialisation Programme, Justice Derefaka, also says the NGFCP is one of the many ways which the government is trying to tackle the challenges associated with gas production and utilisation in Nigeria. Derefaka believes that with the National Gas Policy and the NGFCP, issues pertaining to pricing will be adequately addressed when the policies become fully operational in Nigeria. Punch
Pix: Nigeria gas line
