Unviable commercial terms limits gas investments in Nigeria

Nigeria will need to resolve its conflicting commercial terms that has seen it offer gas at different prices to power plants, manufacturing companies and for domestic use to deepen gas reserve exploitation beyond the current 25 per cent.

Under the current terms, domestic gas pricing through the Domestic Supply Obligation (DSO) which is mainly gas supplied to legacy power plants stands at $2.50/mmscf with an additional 80 cents transport cost, while commercial gas, which is supplied to local manufacturers for their operations including power generation is $7.38/mmscf.

The problem with this picture is that the bulk of Nigeria’s domestic gas consumption goes to industrial and commercial customers who use it to generate their own power and for manufacturing purpose but they have to rely on this expensive commercial gas.

Gas producers in Nigeria prefer to export natural gas where international price hovers around $3.00 and have guaranteed payment in iron-clad gas purchase agreements rather than a discounted and uncertain local market. Also it does not require huge infrastructure.

The commercial gas price is usually announced by the Minister of Petroleum each year and the 2016 commercial gas price is at $7.38/mmscf. Commercial customers who want to bypass this arrangement and purchase gas at a cheaper international price contend with a high exchange rate and absence of infrastructure to receive the Liquefied Natural Gas (LNG).

“With the exchange rate being so high, buying gas at commercial price of $7.38 makes production quite unattractive. It is therefore more profitable for most of the industry to discontinue buying commercial gas for their own power generation and rather take power from the Grid which as it is today is still selling power under the old business model assumption of $1=N200 for Domestic Gas Supply,” Chuks Nwani, energy lawyer told BusinessDay in an email response.

But grid power is insufficient. According to Nigerian Electricity System Operator, current generation is put at 3,400 in a country with over 170 million people. This has forced industries to rely on diesel powered generators increasing cost of production and price of goods and services.

President Muhammadu Buhari on October 27 unveiled the ministry of petroleum resources roadmap for the sector dubbed ‘7Big wins’. It stated that its plan to drive a revolution in commercial framework implementation is through introduction of production sharing contract terms.

It hopes to achieve sustainable supply growth in gas to the domestic market through bankable Gas Supply Agreements in the short-term and facilitating the creation of a fully commercialised liquid gas market in commercially enforceable GSA in the long-term.

But sector roadmaps are a dime a dozen. Nigeria released a comprehensive gas masterplan in 2008 but its implementation is stifled by lack of funds, failure to resolve commercial terms and create a stable fiscal and regulatory environment.

“Stability in policies and a legal framework is the critical consideration here. Although security is a big issue, uncertainty in the legal and fiscal framework makes it impossible for capital to flow. Investors and entrepreneurs can model risks but not uncertainty,” Isreal Aye, oil and gas consultant and managing partner of Sterling Partnership told BusinessDay.

Analysts urge the federal government to strive for balance between domestic gas price and commercial gas price and rethink a mandatory domestic gas obligation for producers.

“It is my view that both domestic gas price and commercial gas consumed locally should be at par and rather subjecting it to a rigid number should be benchmarked at what is obtainable in international market less fifteen percent.  With this, a gas producer will at all times be able to trade only his profit margin in the domestic supply while competing effectively in the market,” Nwani said.

Wesley Omonfoman, an energy consultant said supply issues have to be resolved along with a discussion on commercial terms.

“Urgent issues include passage of the PIB to spell out clear fiscal terms for new gas development projects, particularly non associated gas development projects, restart the stalled marginal fields bid round as marginal fields operated by indigenous operators are the best source of increasing gas supply to the domestic market,” he said.

He also urged the Federal government to provide payment guarantees to gas suppliers who provide gas to power plants who owe gas suppliers billions of naira and address the large scale pipeline sabotage in the Niger Delta arising from renewed militancy in the region.

 ISAAC ANYAOGU