Gas producers squeezed after FG’s pricing intervention
The reduction of gas prices from $2.50/MMBtu to $1.50/MMBtu by the Federal Government to keep electricity tariff low is taking a toll on the margins of producers and causing shortages in the local market.
The government announced the gas price reduction in July after it adopted the recommendation of the technical ad hoc committee that involved the organised labour, to reduce the price of gas to power ostensibly to check electricity tariff increase.
Analysts say while this move seemed a necessary step at the time to cushion the effect of higher electricity tariffs, it is, however, 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 relying on cooking gas, scamper for scarce volumes. Prices have now gone through the roof as cooking gas prices saw over a 60 percent rise in less than one year, according to data from the National Bureau of Statistics (NBS).
According to the NNPC’s financial and operations report, the 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 commercialised for domestic use while 1,398.78 BCF were exported.
Analysts have long canvassed for an end to the price regulation 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, associate director, oil, gas and power at Andersen Tax.
Enechi said gas investment is not cheap so operators will want to sell gas at a price that will enable them recover their cost.
“With the constant naira devaluation, it makes it more difficult for operators as cost is indexed in dollars,” said Enechi.
The new Petroleum Industry Act (PIA) 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 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.
“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.
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 (DBP) for gas.
According to the PIA, DBP will be determined by reference to countries with significant reserves and production of natural gas, the lowest cost of gas supply based on the 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 that 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 international price. To fix the price in Nigeria for those supplying it to 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’s policy creates a further disincentive for investments.
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.
In 2020, the government declared a decade of gas and has been encouraging oil & 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 a high cost, but with little opportunity to recoup costs and make healthy margins that will encourage continuous investment.
Analysts say the government may be shooting itself in the foot by making a decision that contradicts everything it has set about to achieve.