Operators seek right gas pricing incentives to boost domestic demand 

Operators and industry experts in the oil and gas sector of the Nigerian economy say only a favourable gas pricing incentive, encouraged by forward looking government directive, will attract the desired investment to boost domestic gas demand.

They observe that Nigeria’s gas development in the medium term could derive much from local demands as well as producing for export, if not in volume but in value. But they however opine that the key to unlocking the growth potential in domestic gas with all its predictable benefits will be government getting away from unrealistic prices.

Analysts say that to achieve the local gas demand projection, the domestic market must be made attractive to investors who need to invest huge capital upfront in gas processing and pipeline for distribution.

Rolake Akinkugbe, head, Energy and Natural Resources, FBN Quest, in an interview with BusinessDay, said gas demand for power in Nigeria could reach 5 billion scf by 2017, but however pointed out that supply was likely to fall short due to limited incentives for companies to invest in gas processing plants and pipelines to supply the local market.

According to Akinkugbe, “The government raised the price of gas from $1.80 per MMBTU to $2.50 per MMBTU in August 2014, but more than 50 percent of Nigeria’s 6 billion scf daily productions are still exported as LNG and another 2billion scf is either flared or re-injected into oil wells. Less than 2 billion scf is being used domestically for industrial and power generation use.”

She said that improved gas prices could help secure off takers for produced gas at higher price, although the regulated price of electricity would still hinder the ability of power plants operators to raise the price of feedstock.

“Given the sheer demand for gas, the prospects are bright, but whether that gas can reach its desired market is a completely separate issue,” she said.

Industry players maintain that while it is not difficult to decipher, utilisation of gas has assumed a new dimension for both economic and technological development, stressing that achieving the desire result in local gas supply or the lack of it will remain a very sensitive issue with government involvement in unrealistic prices.

The solution to this is simple and not in any way complicated, a local gas market without government interference in pricing will definitely be attractive to investors, Kareem Jubril Adedayo, an energy expert with Ecobank, observed.
Adedayo said government determination to keep cost of electricity low was hindering this development, as a cost reflective gas price would translate to higher tariff for electricity consumers.
He is however optimistic that in the long run, when such investment are matched by improvement in power generation and transmission, price will definitely find a lower level than the expected interim surge should the government decide to deregulate the industry.
“There are some levels of improvement among local gas producers and I expect them to be the major driver of local gas market in 2016. Producers with high gas production are likely to begin commercialisation to cushion the effect of revenue drop from crude oil production. I also expect a push for higher gas price among producers supplying power plants, although I believe export and non-commercialised gas are still going to dominate the industry,” he said.

Reports from the gas master plan of the government among other thing were suppose to achieve short term gas availability that will focus on meeting immediate power sector requirements, jump-start the domestic gas-based industries and more importantly, provide a base load of domestic gas volumes that will underpin a major investment in gas infrastructure.

Wumi Iledare, director, Emerald Energy Institute, University of Port Harcourt, Rivers State, observes that the gas market is still evolving, adding that perhaps a Gas Purchase agreement per contract can help as the domestic gas market evolves.

“Export parity pricing with respect to LNG may not be the best way to go if the domestic market is to be expanded for gas. This is intertwined with the tariff paid by electricity consumers as well, more so if gas remains the primary input for power generation,” he said.