Why gas supply to domestic market remains a challenge

gas plants
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The supplier of gas in a market dominated by export is not likely to supply to a domestic market at a price less than Export Parity Price (EPP) because the marginal incremental cost of supply should not be less than the dominant portfolio price for export gas which is EPP.

Prices shall not discriminate between customers with similar characteristics, such as similar size or a similar consumption profile in the same sector.

Supporting this argument at the Society of Petroleum Engineers (SPE )Technical meeting recently, Timothy Okon, an assistant  to the  former minister of State for Petroleum, said the producer or supplier of gas is neutral to whether gas is supplied to the domestic or export market as long as it receives payment on an export parity basis.

He however stated that arising from the economic principles mentioned, Nigeria can restate the aggregate price equation so that Export Parity Price (EPP) can now become preferred pricing for anchoring the sector-based pricing framework.

The State’s objective is to include the Strategic Export Sector which it intends to incentivise with lower gas prices linked to end product pricing.

Investments in the export of fertilizers, petrochemicals can only be sustainable if higher pricing for the commercial sector is set through an adjustment mechanism to ensure that the EPP is the aggregate price which is guaranteed to the supplier.

According to him when the adjustment factor is multiplied by the EPP it now becomes the price for the commercial sector at specific prices.

To date, Nigeria‚Äôs domestic gas prices are kept at a regulated low level, which does not cover the cost required to fully develop its gas resources.¬† Of the 162 TCF reported gas reserves, about 75% will require the building of new infrastructure to deliver these gas resources to the domestic market. The current regulated gas price of USD 2.50/mmbtu falls short of the price required to attract investment for these new gas developments. The gas sector should transition into a liberalised market based on the ‚Äėwilling buyer, willing seller‚Äô principle and ensure the existence of a competitive fiscal regime to support upstream gas development.

Other key challenges  to unlocking Nigeria’s gas potential  across the gas value chain  according to the managing director of ExxonMobil Paul McGrath  such as  inadequate infrastructure along the value chain; regulated low prices; legacy debt related to gas and power supply and the challenging business environment must be  must be resolved .

Infrastructure along the gas and power value chain remains inadequate. Particularly, Nigeria lacks sufficient pipelines to deliver gas from the fields where it is produced to the current and potential off-takers such power plants, manufacturers. In addition, the transmission and distribution systems lack the capacity to deliver the generated electricity to businesses and other consumers.

Building infrastructure requires a sustained joint effort of the stakeholders led by government. Active government support will help enable a stable investment climate, acceptable commercial terms and contractual risks.

The above elements will help in attracting the required private investments which would strengthen existing off-takers and ultimately lead to emergence of new buyers and suppliers.

A conducive business environment is essential towards achieving a diversified economy he said. Critical elements of a conducive business environment include: security of life and property, improved efficiency of regulatory bodies and stability of laws and policies.

The Oil  Producing Trade Section( OPTS) of the Lagos Chambers of Commerce and Industries, he said believes that improving the regulatory, judicial and legislative framework in line with global standards (dispute resolution, contract sanctity) would promote investor confidence and significantly improve Nigeria’s ease of doing business towards growing and diversifying the economy.

According to James Okereke of Chevron Nigeria, to have a sustainable domestic gas supply in a regulated market, not purely determined by demand & supply dynamics, the following building blocks should be considered in the gas pricing framework:  Stability and predictability of policies, regulations and guidelines are essential in maintaining the sanctity of long-term gas supply contracts.

Payment security to ensure healthy cash flow is essential for the development of gas sector and economics to cover costs and guarantee return on investments.

Robust (healthy, vigorous and continuous) engagement amongst key stakeholders is key to underpin more sustainable strategy and framework. With this and other key enablers, Nigeria should benefit from its huge gas resources to develop its economy.

 

Olusola Bello

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