Nigeria has Africa’s biggest gas reserves and though 75 percent of its electricity is generated from gas-fired thermal plants, over 80 million people lack access to electricity.
Industry operators say a key reason for this development is the Federal Government’s stranglehold on regulating gas prices, which is disrupting the market and ruining business assumptions of investors. Ironically, improving energy access is the government’s argument against a liberalised gas-pricing regime.
In July, the Federal Government cut gas prices from $2.50/MMBtu to $2.18/MMBtu after it adopted the recommendation of the technical ad hoc committee that involved organised labour to reduce the price of gas to power, ostensibly to prevent a higher electricity tariff increase.
By lowering the price of natural gas, a critical feedstock in the production of electricity, the FG was counting on reducing the price at which it is sold to Power generating companies (GenCos) and thereby affecting how electricity is priced.
The Federal Government placed on gas producers, a domestic gas supply obligation, which mandates them to sell a certain percentage of the gas produced to legacy power plants at a controlled price regardless of their cost of production and business assumptions. Gas producers often didn’t keenly follow through and traded in the international market based on investment-friendly terms.
However, the idea is haunting the market. For investors, it has removed the motivation for new investments as projects continue to suffer delays. It is having a negative impact on the business of gas producers supplying to the domestic market and partly accounts for the soaring price of cooking gas.
Electricity generation companies buying gas under (willing seller willing buyer) arrangements were forced to cut prices and gas producers responded by lowering volumes supplied to the local market, some operators told BusinessDay.
This has made the international market more attractive as GenCos, industries and even homes largely reliant on cooking gas, scamper for scarce volumes. Prices have now gone through the roof as cooking prices saw over 60 percent price increase according to NBS data in less than one year.
According to data from the NNPC’s financial and operations report, total gas supply for the period April 2020 to April 2021 stood at 3,081.77 Billion Cubic Feet (BCF) out of which 548.34 BCF was commercialized for domestic use while 1,398.78 BCF were exported.
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According to the International Energy Agency website data as at July 2021 when Nigeria reviewed gas pricing downwards, natural gas was sold at about $7/Mscf on the international gas market.
Industry operators say there is 40 percent liquidity in the gas to power value chain, saying it needs more liquidity and the government should rather focus on increasing liquidity to 100 percent to assure suppliers of payment as and when due, as opposed to reducing prices.
Since 2015, the price of gas for power generation under DSO has remained $2.50/Mscf despite changes in the international market and increase in cost of gas infrastructure.
Analysts have long canvassed for an end to the price regulation by the government but the government has kept the practice.
“Willing buyer, willing seller market is what the industry needs to get the industry to achieve the gas utilisation objective of the government,” said Chinwendu Enechi, an associate director at Andersen Tax.
Enechi said gas investment is not cheap so operators will want to sell gas at a price that will enable them to recover their cost.
“With the constant naira devaluation, it makes it more difficult for operators as cost is indexed in dollars,” said Enechi.
PIA offers no respite
The new Petroleum Industry Act stipulates the terms for what is now termed as ‘Domestic Gas Delivery Obligations’ based on the ‘Domestic Gas Demand Requirements’ which is the total amount of marketable natural gas required for all wholesale customers of strategic sectors including power.
The law says it wants to promote bilateral contracting between wholesale customers of strategic sectors and gas suppliers on a free market basis after the market becomes developed but continues to regulate it.
Yet it fails to establish market-based pricing for gas.
“In terms of pricing, the expectation of a market-based pricing regime which would boost investments in the gas-to-power value chain was not met in the PIA, as the pricing framework is still regulated, although the floor price for the power sector is not stated in the Act,” Ivie Ehanmo, an energy lawyer said in a note.
She said that with price control, insufficient payment of invoices by GenCos, legacy debts to the gas suppliers and uncertainty around the price of gas- ‘what’s in it for investors?’ she asked.
The Nigerian Midstream & Downstream Petroleum Regulatory Authority, the newly minted regulator by the PIA has begun consultation with stakeholders to determine the Domestic Base Price for gas.
According to the PIA, DBP will be determined by reference to countries with significant reserves and production of natural gas, lowest cost of gas supply based on three tier cost of supply framework and market related prices tied to international benchmarks.
The result of the stakeholder engagement will determine whether Nigeria will come close to having a market-based gas pricing regime.
Regulated pricing has not improved the margins of utilities who rely on government subsidies and further distorts the market for gas producers.
“The gas supply industry must be anchored on a willing-seller willing-buyer framework to unlock further investments in gas exploration and delivery infrastructure. There should be a removal of price controls and concessional gas tariffs for sections of the market that are critical to achieving overall economic growth objectives,” said the Nigerian Gas Association, a trade group of gas producers in a recent communique.
Gas is sold based on its international price. To fix the price in Nigeria for those supplying the gas the domestic power market is to pretend that investments and profits can be legislated.
The power sector is already suffering the effects of inadequate investment and the government policy creates further disincentive for investments.
International Oil Companies (IOCs) producing gas are turning their focus to the international market and abandoning the domestic market leading to constant shortage. The consequences are poor power supply, unemployment, increased social malaise, insecurity and a general state of discord.
The same IOCs who are delaying taking investment decisions on oil and gas projects in Nigeria have been announcing big ticket investments in other countries with less gas than Nigeria. Total Energies is pouring money into Mozambique’s gas sector building new LNG trains while ExxonMobil is spending billions of dollars in new developments in Guyana.
In 2020, the government declared a decade of gas and has been encouraging oil and gas companies to stop flaring gas, but rather convert it for domestic use.
These companies may find it more cost effective to continue flaring rather than converting the gas at high cost, but with little opportunity to recoup costs and make healthy margins that will encourage continuous investment.
So analysts say the government may be shooting itself in the foot by making a decision that contradicts everything it has set about to achieve.
Industry operators say the benefits of ensuring an environment conducive for investment both for local and foreign investors, far outweigh whatever short term gains, the government hopes to make while awaiting the full removal of subsidies, which it plans to pursue next year 2022.
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