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NERC, DisCos in crucial talks to raise tariff by 200%

NERC, DisCos in crucial talks to raise tariff by 200% %Post Title







The federal government’s new gas pricing policy that allows producers to sell at a controlled price regardless of their cost of production and business assumptions has come under criticism.

Nigeria has Africa’s biggest gas reserves and though 75 percent of its electricity is generated from gas-fired thermal plants, over 80 million people lack access to electricity.

Industry operators say a key reason for this development is the Federal Government’s stranglehold on regulating gas prices, which is disrupting the market and ruining business assumptions of investors.

The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) on Monday reviewed the price of natural gas for power generation companies and commercial users.

According to a statement from NMDPRA, companies in the power sector will pay $2.42 per million British thermal units (MMBTU) for wholesale gas purchases while commercial users will buy natural gas at $2.92 per MMBTU.

Additionally, the NMDPRA sets the floor prices for gas-based industries such as producers of ammonia, methanol, low sulphur diesel at $0.90 per MMBTU while the ceiling price is $2.42 per MMBTU.

Experts surveyed by BusinessDay said the NMDPRA should focus on breaking down the bureaucracy of approvals in midstream and downstream business rather than the idea of price fixing which is hurting the market and removing the motivation for new investments.

“The international price of gas has dropped by 35 percent in the last six months and is projected to continue that way for most of the year, or at least until next winter. Why did they not raise the price when the market was good?” a senior gas specialist told BusinessDay.

He added: “The government should stop setting prices; they do such a clumsy job of it. They need to get out of the way and allow willing sellers deal with willing buyers so that the industry can truly open.

“How does increasing manufacturing costs help with that? Where is the offset? What exceptions have they fixed for the cooking gas industry, and for food processing? With whom did NMDPRA consult – the new economic council?”

Chinedu Onyeka, an energy sector expert familiar with upstream business, said the policy of price setting distorts the domestic markets because it does not allow global and domestic events to feed into the market as new information.

“Globally gas prices are falling, but we are raising prices domestically,” Onyeka said.

He noted that Nigeria should be transitioning to a willing seller and willing buyer market.

“Supply should be turned off to any entity that cannot pay its bills (subsidized or not),” Onyeka said.

Sources said the concept of regulated pricing has made the international market more attractive as power generation companies, industries and even homes largely reliant on cooking gas, scamper for scarce volumes. Prices have now gone through the roof as cooking prices (12kg) saw over 46.8 percent price increase, according to National Bureau of Statistics data in less than one year.

Analysts have long canvassed for an end to the price regulation by the government but the government has kept the practice.

“Willing buyer, willing seller market is what the industry needs to get the industry to achieve the gas utilisation objective of the government,” said Adeola Adenikinju, the president of the Nigerian Economic Society said.

Adenikinju said gas investment is not cheap, so operators will want to sell gas at a price that will enable them to recover their cost.

“With the constant naira devaluation, it makes it more difficult for operators as cost is indexed in dollars,” said Adenikinju said.

PIA offers no respite

The new Petroleum Industry Act stipulates the terms for what is now termed as ‘Domestic Gas Delivery Obligations’ based on the ‘Domestic Gas Demand Requirements’ which is the total amount of marketable natural gas required for all wholesale customers of strategic sectors including power.

The law said it wants to promote bilateral contracting between wholesale customers of strategic sectors and gas suppliers on a free market basis after the market becomes developed but continues to regulate it.

“In terms of pricing, the expectation of a market-based pricing regime which would boost investments in the gas-to-power value chain was not met in the PIA, as the pricing framework is still regulated, although the floor price for the power sector is not stated in the Act,” Ivie Ehanmo, an energy lawyer said in a note.

She said that with price control, insufficient payment of invoices by GenCos, legacy debts to the gas suppliers and uncertainty around the price of gas- ‘what’s in it for investors?’ she asked.

BusinessDay’s findings showed International Oil Companies (IOCs) producing gas are turning their focus to the international market and abandoning the domestic market leading to constant shortage.

The same IOCs who are delaying taking investment decisions on oil and gas projects in Nigeria have been announcing big ticket investments in other countries with less gas than Nigeria. Total Energies is pouring money into Mozambique’s gas sector building new LNG trains while ExxonMobil is spending billions of dollars in new developments in Guyana.

In 2020, the government declared a decade of gas and has been encouraging oil and gas companies to stop flaring gas, but rather convert it for domestic use.

“One of the most foundational obstacles to ending permanent gas flaring is that gas pricing was mostly fixed and not floating based on the bending moment formular where gas tracks diesel prices by 40 percent per time,” Kelvin Emmanuel, cofounder of Dairy Hills said. (BusinessDay)

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