The proposed new price for domestic gas which takes effect 1 January 2015 is fuelling fears of possible higher tariffs on electricity with rippling effects on the economy, reports Ibrahim Apekhade Yusuf
fOR many discerning Nigerians, 2015 is certainly a year to watch for many reasons. To be sure, a lot is bound to give in the socio-economic front, especially in the area of fiscal policy pronouncement, energy supply, to mention just a few.
Interestingly, as events begin to unfold in the different critical economic sectors, analysts are convinced that one area where Nigerians will taste the bitter pill as we go into the new year is in the area of power generation, what with, the proposed new regime for domestic gas, which was recently increased from $1.5 per thousand cubic feet (MCF) to $2.5 per MCF and is expected to take effect from January 1, 2015.
Crux of the matter
The Federal Government had last Tuesday approved a new gas-to-power pricing benchmark of $2.50/mcf and $0.80/mcf as transportation costs for new capacity.
Following the announcement, there are concerns that electricity tariff would also increase by about 40 percent as power producers would now pay higher price for gas used in electricity generation.
Although the new pricing and other measures from which the government expects to ramp up grid power generation by at least 5,000 megawatts (MW) within four months, this has not shored up the level of optimism among Nigerians, many of who hold the view and very strongly too that the cost ‘burden’ on consumers is to say the least, killing.
In what it described as a “pragmatic and creative” short term approach to address the issue of inadequate gas supply to thermal generation plants across the country, the Nigerian Electricity Regulatory Commission (NERC) had approved a new gas-to-power pricing benchmark of $2.50/mcf and $0.80/mcf as transportation costs for new capacity.
The benchmark, according to the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, would equally increase with the United States annual inflation statistics.
Expectedly, the Group Executive Director (GED) in charge of Gas and Power at the Nigerian National Petroleum Corporation (NNPC), Dr. David Ige, said the new price would take effect from January 1, 2015.
Though Ige was noncommittal as to why the new price was yet to be implemented but the Chief Executive Officer of Frontier Oil Limited, operator of Uquo Marginal Field, first marginal gas field in Nigeria, Mr. Dada Thomas said matter-of-factly that gas sales contracts are long term of about 10 to 15 years, with a starting price and a price escalation formula.
“The new price prescribed by the Honourable Minister of Petroleum can only come into effect for new contracts or by mutual agreement of the two parties to an existing contract. It will therefore, take time for it to be felt in the market,” Thomas said.
Local and foreign companies involved in gas production in Nigeria, he stressed, have always shown preference for export gas because of the high price.
Justification for increase
In time past, new price regimes have always been hinged on the need to encourage investment in the sector. For instance, the price of gas-to- power was earlier increased from $0.5 cents per mcf to $1 in 2010.
It was further increased to $1.50 by 2011; $2 by the end of 2013, and $2.5 in 2014.
Conspiracy of gas producers
Gas producers are clamouring for $5 to $7 to make the domestic price to be at par with the Henry Hub price in the United States.
“The current increase from $1.5 to $2.5 per thousand standard cubic feet is very good but we are not yet near where we ought to be. We are still well below world market price. What it means for us is that it is encouraging that slowly, instead of digging ourselves into 50 feet grave, may be, we are in a 23 feet grave and with time, things will change that will allow our project to become totally economic. We need to get gas pricing domestically as attractive as may be, Henry Hub in the United States; I am not saying as in Korea because in Korea, that is the highest gas price paid in the entire world. Henry Hub is about $5, $6 or $7 right now in the United States and that is in spite of Shale gas. We need to get gas pricing moving in that region in Nigeria for you to have absolutely no reason to beg anybody to invest in gas. They will invest so much in gas; you will have so much gas that we won’t know what to do with it. This current price of $2.5 per thousand standard cubic feet is nice but is not going to have people screaming to invest in gas,” Thomas had argued.
Price not guarantee of supply
Though a new policy regime is in the offing, it is the view of analysts that this may not end the problem of incessant supply faced in the past.
Perhaps, as a way of assurance, the government, in a recent inter-ministerial press briefing involving the ministries of petroleum resources, power, NERC, Central Bank of Nigeria (CBN), Nigerian National Petroleum Corporation (NNPC), said collective effort was being made to find a lasting solution to shortages in gas supply to power plants in the country.
The National President, Liquefied Petroleum Gas Retailers Association of Nigeria, Mr. Michael Umudu said plans were in top gear to make gas supply regular.
Other stakeholders like President, Nigerian LP Gas Association, Mr. Dayo Adeshina, President, Nigerian Association of LPG Marketers, Mr. Basil Ogbuanu are of the opinion that the new price regime should be considered holistically and not in isolation.
In view of the recent development in the LPG market, however, the Department of Petroleum Resources has called for a stakeholder forum between it and LPG operators.
The DPR said the essence of the forum was to discuss topical operational issues’ in the LPG market.
Consumers to pay more
Just as a new tariff regime is already a fait accompli in domestic gas, the Executive Chairman of the Nigerian Electricity Regulatory Commission (NERC), Dr. Sam Amadi had last week announced that a new tariff regime for electricity would take effect in December 1st, a development, many economic watchers have argued, is rather unfair to the end-users.
Speaking with The Nation, Chief Frank Kokori, former General Secretary, NUPENG, said it was rather strange that the Federal Government was contemplating raising the tariff of domestic gas and electricity as a whole.
While acknowledging the fact that domestic gas is rather elitist, Kokori was quick to point out that electricity is consumed by the entire populace, stressing that the cost and pricing ought to be within the income limit of the individuals.
“The way we have become bankrupt and the power situation in Nigeria is terribly bad. Energy is being increased and Nigerians are groaning. Sadly, in this country we pay for service we hardly enjoy, at the end of the month. A new tariff in electricity is ill-conceived. Until the consumes start enjoying the value for their money, which in this case should translate to more regular supply of power, a new tariff is unthinkable and abnormal.”
Nigeria still holds short end of the stick
Although concerted efforts have been made to encourage local content in the nation’s oil and gas sub-sector, foreign domination in the sector remains widespread. The truth is self-evident.
The Oil Producers’ Trade Section (OPTS), an association of all the leading oil and gas -producing companies in Nigeria has stated in the 30 years preceding Nigeria’s adoption of a local content policy in 2005, the oil and gas industry had exported about two million jobs, spending over 95 per cent of total investments abroad, with cumulative capital flight estimated at $380 billion.
Speaking at a special session of the just-concluded 2014 Practical Nigerian Content held in Yenegoa, Bayelsa State, the Chairman of OPTS and Managing Director of Nigerian Agip Oil Company (NAOC), Mr. Ciro Antonio Pagano stated that the capital flight suffered by the Nigerian economy during the 30-year period was over 70 per cent of the country’s Gross Domestic Product (GDP) and more than the combined GDPs of five oil-producing countries of Libya, Ghana, Angola, Kenya and Ecuador.
Pagano, who cited statistics from the Nigerian Content Development and Monitoring Board (NCDMB), however, said that since the local content policy was introduced, the oil companies had worked collaboratively to reverse the outflow of oil and gas spend in favour of the local supply chain.
He said the efforts of OPTS had manifested as strides in the areas of fabrication, in-country manufacturing, indigenous asset acquisition, human capital development and funding.
Pagano said in the area of fabrication, the oil companies had supported the emergence of several indigenous companies to acquire capacity, expertise and ensure retention of over $5.4 billion in the Nigerian economy.
“In the area of manufacturing, despite recording several success stories, including SCC pipe’s pioneering feat of manufacturing the first made-in-Nigeria Double Submerged Arc Welded Helical (DSAWH) pipes and Cameron Offshore Systems’ production of the first made-in-Nigeria Subsea Christmas Tree in 2012, we are already thinking long term by signing domestication agreements with six original equipment manufacturers (OEMs) and their local partners to establish assembly/manufacturing facilities in Nigeria,” he said.
According to him, the commitment of the oil companies to Nigerian Content was key to Cameron’s decision to double its in-country valve assembly capacity in Nigeria.
Pagano, who was represented by NAOC’s General Manager in charge of Nigerian Content, Mrs. Callista Azogu, identified some of the milestones achieved in the Nigerian Content journey to include industry-wide awareness, optimal compliance, in-country sufficiency, and internationalisation.
“All industry stakeholders rightly agree that Nigerian Content is a journey, replete with its unique victories, challenges, ups and downs,” he added.
“But we should recognise that there are no magic wands in this journey. Building in-country capacity, especially for strategic industry inputs such as steel plates, deepwater bases, offshore rigs, heat exchangers, topside integration, original equipment manufacturing and others will require significant capital investment, access to advanced technological know-how, long lead times to commissioning, even longer investment payback periods and perhaps more importantly, availability of a viable local market to attract needed investments,” he further explained.
PIB to the rescue
The much touted Petroleum Industry Bill (PIB) in the view of analysts, has the potential to turnaround the nation’s petroleum sub-sector owing to the benefits therein, yet, the delay in passing the bill has robbed the industry of these benefits thus far.
It would be recalled Aminu Waziri Tambuwal, had in mid September 2014 given the Hon Ishaka Bawa-led Ad-hoc Committee on the Petroleum Industry Bill (PIB) a 21-day ultimatum to submit a report, just as Senate president David Mark also assured Nigerians that the seventh assembly will pass the bill before it winds down next year. But it remains to be seen how these promises would be kept.
The idea of the PIB began in 2007 following the recommendations of a Presidential Committee set up to carry out oil and gas sector reforms in the country. The reforms were expected to form the nucleus of Nigeria’s aspiration to become one of the most industrialised nations in the world by the year 2020.
The promising yet problematic PIB was first introduced to the National Assembly in 2009. Since then it has suffered a number of setbacks. The delays have been on account of diverse interests scrutinising its provisions. Amongst these are the interests of legislators from the country’s North pitted against those of their Southern counterparts
The bill is meant to change everything from fiscal terms to overhauling the Nigerian National Petroleum Corporation (NNPC) but its comprehensive nature has caused years of disputes between federal lawmakers, oil ministry/presidency and oil majors.
“Part of the bill’s ‘sin’ is that it attempts to allow Nigeria and Nigerians play a more active role in the industry and derive the best possible benefits from the resource under their feet. The contentious issues in the bill include the production sharing contract (PSC), a private agreement between one or more IOCs and a national oil company (NNPC in our case), which vests a license or general exclusive authorisation in the NOC, to explore for, exploit and produce hydrocarbons. PSCs seek to protect the national economic interests of host countries in the areas of technology transfer, training of local employees and preference for local suppliers. Host governments take such national obligations seriously. But the IOCs are used to taking advantage of their scientific advancement to the detriment of their host countries and would want that to continue by claiming that the bill would stall investments. PIB says no and that is its problem.”
