Concerns Heighten over Domestic Gas Pricing

…as FG raises committee to resolve issue

-By Gideon Osaka

The recent spike in the exchange rate of the Naira to the dollar induced by the corona virus pandemic and ongoing reforms in Nigeria’s power sector are among factors that are triggering concerns over the continuous disparity in the export and domestic prices of natural gas produced in Nigeria, Valuechain can report.

The call for gas producers to equalise gas prices for domestic and export customers comes at a time the impact of COVID-19 has caused a dip in global gas prices, a benefit that gas-based industries like fertilizer, petrochemical and methanol plants, should have also enjoyed in terms of lower gas price.

According to Valuechain findings, two stark ironies exist with respect to how Nigeria exploits its huge gas resources. First is that the country’s gas sector is export-oriented. With plans to expand the country’s export foot prints following the execution of the Final Investment Decision (FID) for the expansion of the NLNG trains to Train 7, exports of the country’s gas is set to witness an upsurge. While export market thrives, there is a domestic market that suffers huge energy crisis and shortages.

Second, is that domestic users (power sector, fertiliser and other gas-based industries) pay significantly more for gas than international customers (export) and this more than any other problem, is once again fuelling concerns among stakeholders of an inevitable impact on Nigeria’s power and industrial sectors at this time effects of COVID19 is biting hard on the economy.
Valuechain reports that for instance, inefficiency in the generation level of the country’s electricity market along with poor revenue collection by the distribution networks have disincentivised gas producers from allocating greater volumes of gas to the domestic market, which is dominated by the electricity industry.
Investigations by Valuechain show that the widening gap between domestic and export parity prices continue to have “inevitable impact” on the country’s power sector in particular.

For instance, the absence of a market-reflective tariff has continued to bedevil the power sector and this situation is said to be presently responsible for most of the over N1 trillion liquidity gap that has been threatening to derail the power sector reforms.

The Association of Nigerian Electricity Distributors, (ANED) in a recent appeal to the federal government to find a way to help bring down the price of gas in the interest of the sustainability of the power sector, noted that intervention on gas pricing was key as the cost of gas remains one of the key determinants of the electricity tariff in Nigeria.

Sunday Oduntan, the Executive Director of Research and Advocacy of ANED in a statement noted that while the cost of gas (and generation) will rise due to forex fluctuations, the tariff is fixed in Naira and may not account for this difference especially because of the absence of a commitment to adhering to periodic tariff reviews.

He said: “As we all know, today, the price of gas for local power production is a little over $3 for one million British Thermal Units (mmbtu). Meanwhile, in this same country, the cost at which LNG exports gas is less than half the same amount.

“This cost of gas presently accounts for almost 70% of all the input the plants utilise to generate power. Except we begin to consider solutions from that angle, we may not make much headway in providing the cheap electricity Nigerians need to move the country to an industrial giant.”

This situation, based on findings by our reporter is even better for the power sector compared with the commercial and industrial sectors.

A source familiar with gas pricing said that while the Nigerian Gas Company (NGC) bills power generation companies’ $2.5 (per one million mmbtu), industrial consumers pay as high as $7.59 which is way above current global prices of $2.1 as at August 2020.

The source said: “For instance, January 2020 CBN FX rate – N305; March 2020 CBN FX rate – N360; August 2020 CBN FX rate – N379. And it keeps showing in our monthly Invoice for Natural Gas supplied while Natural Gas price for GenCos is $2.5 commercial and industrial users is $7.59.

We pay based on $7.59 which is way above current global prices of $2.1 as of today. It’s a serious issue, discouraging gas adoption.”
This situation, the source said “Is like saying from now henceforth consumers in the country will buy PMS or DPK in dollars at any filling station. Why is Gas priced in dollars, sold to Gencos at discount while other industries buy it higher?”

Continuing, the source lamented that: “This year, CBN FX rate adjustment has chopped into our profitability big time. It has made us poorer and difficult to meet our credit funding obligations.”

Commenting on the domestic gas pricing dilemma in a recent media interview, the President of the Nigerian Gas Association (NGA) Audrey Joe-Ezigbo, said that the main problem has been on one hand, the government’s intent on ensuring lower gas prices in order to ensure affordability of the end product to the final consumer, including power; and on the other hand, investors’ need to ensure gas prices that are reflective of the spectrum of their infrastructure cost profiles and other variables that impact on the viability of their investments.

“The intention of government is a laudable one but in practice, this is difficult to sustain, especially if we want to see any tangible results in the short to medium terms.” she said.

“We cannot be trying to impose a social objective on an entity whose primary motive is profit-oriented, especially when we are not in a strong enough position to do so. We hardly manufacture any infrastructure components in-country so the bulk of the requirements on any infrastructure project will be imported, backed by dollar-denominated contracts. Loans are sourced in dollars to back projects and must be repaid in dollars. There is already significant value erosion based on the challenges related to forex revenues versus Naira receipts and the constraints around sourcing dollars at the CBN rates. If we step back to look at it properly, investors are not being unreasonable when they ask for better pricing.”

Speaking further, she said: “We need to allow more investors to come in on better terms and then see how competitive forces over time begin to put pressure on margins and force prices down. Competition is supposed to drive tariffs but what we have is a reverse scenario where regulation is driving tariffs. This is unsustainable and we are already living in the fallout of this.
Gas business is capital intensive and in order to encourage the much-needed investment into the sector, it must be treated as a business product not a social service. The Government cannot fund the development of this sector. It must therefore put in place incentives to attract investors. One of the incentives is a profitable pricing mechanism that would be deemed to be commercially viable to investors, both local and foreign.”

On what pricing structure and mechanism to be preferably adopted for the Nigerian gas sector, she said the preferred pricing mechanism for the Nigerian gas market would be the Willing Buyer-Willing Seller pricing model.

This model, she said, advocates for a fair price agreed upon by both the buyer and the seller of the gas product, armed with knowledge about the dynamics of the product and under no forced obligation to transact with a price that is deemed unfeasible.

“Our reality is that we already have these types of transactions happening in the country. We should allow market-reflective tariffs that support investment economics needed to ensure expansions in the gas infrastructure backbone across the country,” Ezeigbo said.

As a good first step on the journey to full market liberalization and an end to the age-long disparity between domestic and export gas prices, the Minister of State for Petroleum Resources, Chief Timipre Sylva, recently inaugurated a domestic Gas Pricing Framework Review Committee in Abuja charging them to come up with recommendations that can help end the price disparity with a view to positioning the gas sector as a catalyst to drive the nation’s economic development.

“A significant element of the Federal Government’s economic development plan was to move Nigeria from being a crude oil export-based economy to an attractive oil and gas-based industry economy. This is in realization of the availability and great potential of gas to drive economic development”, he said.

He charged members of the Committee to review the existing domestic gas pricing structure and benchmark it with the global pricing mechanism, stressing that the current situation where the price of gas in the domestic market was higher than export price was not sustainable.

He listed the Committee’s terms of reference to include: Reviewing the existing domestic gas pricing structure in such a manner that will attract investment in the domestic gas market as well as ensure viability of the entire gas value chain and making recommendations on appropriate gas price for the respective segments of the gas value chain.

Other terms of references include: Reviewing the National Gas Policy and advising on related issues and concerns with regards to gas pricing and downstream gas sector development and evaluating recent and current government initiatives on gas pricing with a view to linking domestic gas pricing with the LNG export parity price.

In his remarks, the Group Managing Director of the NNPC, Mallam Mele Kyari, agreed that right pricing was an important factor in the entire process of restructuring the sector in order to attract investments.
Responding, Chairman of the Committee and NNPC Chief Operating Officer, Gas and Power, Engr. Usman Yusuf, pledged to conduct the affairs of the Committee in a diligent and professional manner.
He said members would be guided by national interest in their deliberations, adding that the Committee would deliver its report within the stipulated 30-day period.
Members of the Committee were drawn from the Ministry of Petroleum Resources, Nigerian National Petroleum Corporation, Department of Petroleum Resources, Manufacturers Association of Nigeria, and other agencies.