• Monday, July 22, 2024
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Gas pricing: Regulated price path vs willing producer’s price path

Gas pricing: Regulated price path vs willing producer’s price path

I asked the EVP upstream at the just concluded Oil & Gas Week what the position of the NNPCL is on the real elephant in the room, “the government’s Regulated Price Path (RPP) vs. . Willing Producers’ Price Path (WPPP),” but the question was ignored deliberately. I also noticed that during the Content Management Development Board Seminar Day, when the same question was posed to an official from NMDPRA, the question was not directly responded to.

I agree that one of the fears Mr President has had is whether he wants the regulator, based on their technical simulation models for:

Solution Gas

Non-Associated Gas

Associated Gas

To remove the national reference price that places a limit for calculating gas prices and that allows it to float based on the bending moment formula for measuring gas prices, gas prices will become too expensive for the nineteen (19) thermal plants connected to the national grid and would hence raise the prices that the GENCO’s charge in the final settlement statements to the market operator, thereby raising the unit cost of electricity tariff to consumers at a time when the government has had to scale back on:

Fuel subsidy

FX subsidy

Remove power subsidies for the most compliant consumers by banding consumers according to their zip codes.

Read also: NMDPRA to release new gas pricing template

But the government needs to understand that a willing producer’s price path, which is currently the framework for gas exports exclusive of the domestic gas delivery obligations, is one of the key solutions to unlocking Nigeria’s energy security for everything from:

Electricity generation for an especially on-grid and off-grid captive energy framework

supply to gas-based industries that require gas for manufacturing UREA or ammonium nitrate-based fertiliser.

polypropylene and polyethylene crystals

The SA to the President on Energy, Minister of State for Petroleum—Oil, and Minister of State for Petroleum—Gas lists as a main core of their achievement in the last ten (10) months in office an executive order that has sought to:

Provide fiscal incentives like rebates for companies committed to opening final investment decisions for non-associated gas fields that are like temporary band-aids to a critical underlying problem, but that doesn’t actually address “incentive” for bringing in real capital to invest in Nigeria because the government has issued a directive in its Petroleum Industry Act of 2021 that companies that are invested in these fields must, as a matter of obligation, supply a portion of their output to the domestic markets at a price the government has set through a formula generated by the use of a national reference price in determining the domestic base price per standard cubic feet of gas.

A nation of 209 million people that is currently running a 51 percent budget deficit with a 52 percent debt-to-GDP ratio that is currently at crisis levels at 12 percent higher than the 40 percent level set by the Fiscal Responsibility Act of 2007 should not be celebrating a 10-month achievement—an FID of $550 million opened through a joint venture between Total Energies and NNPCL. The true test that the fiscal incentives on gas truly were the masterstroke that the economy was looking for is that we will see the IOCs begin to commission FIDs from $10 billion and above, given that the same Total Energies took $6 billion to Angola to invest.

The question we should ask is this: Is it cheaper to re-inject or flare natural gas for an IOC producing onshore, nearshore, or offshore the associated gas trapped from wellheads during drilling, or does the unit economics of piping gas through under-sea pipes to gas gathering points for separation, treatment, and processing (in the absence of floating LNG vessels that can stay by rigs—offshore) make a good balance sheet decision? Not only is the problem of building high-pressure transmission pipes from gas gathering points to pressure metering and reduction stations (PMRS) a major problem because of issues like:

Carbon steel importation

Inconsistency of FX in planning procurement decisions and timelines

Issues around right of way, especially as it regards compensation

The bigger issue is: Will the pipes have enough methane feedstock to run through them if and when these high-pressure transmission pipes that currently stand at around 4,315 km (and really need to be doubled) like yesterday come onstream?

As the government looks for solutions to complex problems that seem to be linked, it is important to always remember that the markets have to run themselves efficiently, and it is only an efficient market that can enable price to find a true north for its forward curve.

The Ministry of Petroleum Resources, working with its regulators and NNPC’s NGML to deregulate the domestic base price (DBP) for natural gas by removing the national reference price that places a cap in its pricing model and allowing it to float in such a way that it tracks diesel prices by 40 percent at every given time, will automatically unlock institutional-level investments in not only non-associated gas wells but also deep-water assets that produce more associated gas offshore. The boards of companies make decisions to bring capital into an economy because it has been seen from indices that it shows hard evidence that it will get the best possible return at the lowest risk possible.

And while we can argue that only a percentage (%) of gas produced and processed is actually obligated under the DGDO, we need to understand that markets are always competing for capital, and investors will go where the laws align the most with free market principles.