Flawed pricing keeps investors on Nigeria’s gas sidelines

Nigeria’s drive to transform its vast natural gas reserves into electricity, industrial growth and export competitiveness has been undermined by a flawed domestic pricing regime that continues to discourage investment and push producers towards foreign markets, industry leaders warned.

Despite possessing 215.19 trillion cubic feet (tcf) of proven gas reserves and ranking among the world’s largest gas holders, Nigeria remains one of the most energy-poor nations globally, generating barely 4,000 megawatts (MW) to 5,000MW of electricity for a population exceeding 220 million people.

Industry executives made this known during a panel session on Building Nigeria’s Energy Future at BusinessDay’s CEO Forum themed, “From Stability to Shared Prosperity.”

They said the problem is not resource availability but the commercial environment surrounding domestic gas supply, where regulated prices, payment uncertainties and policy distortions have combined to keep billions of dollars of potential investment on the sidelines.

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“The biggest off-taker of the gas resources that we produce in Nigeria today is the power sector and there has historically been a very poor commercial framework around pricing,” said Adegbite Falade, MD/CEO, Aradel Holdings.

“We have tended to legislate pricing and those prices do not reflect the development exposure. So there’s a strong disincentive for upstream suppliers to invest in gas.”

He argued that Nigeria has reached a stage where domestic gas pricing should be driven by a willing buyer, willing seller framework rather than administrative controls.

“Government still wants to protect certain interests through legislation, but what it does is punish a part of the value chain and disincentivise investment,” he said. 

The investment challenge is compounded by payment insecurity and infrastructure deficits, particularly in gas transportation networks.

“One of the biggest incentives in investing in infrastructure, whether power plants, gas plants or transmission pipelines, is the issue of securitising payments,” Falade said. “You need stable creditworthiness projected into the future that gives confidence to raise capital.” 

The consequences are increasingly visible across the economy as manufacturers continue to grapple with some of the highest energy costs in Africa. At the same time, power plants operate at below their installed capacity due to inadequate gas supply and transportation infrastructure.

Also, producers increasingly favour export markets where commercial terms are clearer, payments are more secure, and returns better reflect investment risks.

Effiong Okon, chief executive officer designate of Seplat Energy, said pricing distortions have contributed to wider dysfunction across the electricity value chain.

“The chain is broken,” Okon said. “Every part of that value chain must work, from upstream gas production to transportation, generation, transmission and distribution.” 

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Industry executives believed reforms that allow market-driven pricing and improve payment security could unlock the investments needed to deepen domestic gas utilisation and support industrial growth.

For Africa’s largest gas market, they argued, attracting capital will depend less on discovering new reserves and more on creating commercial conditions that make investment worthwhile.