Transcript THE CHALLENGE OF PRICING IN THE NIGERIAN DOMESTIC …

Presented by
OYETOLA OSHOBI
AT THE GULF OF
GUINEA CONFERENCE - GOG12
November 2009
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Outline
 Background
 Existing price regime
 Change is imperative
 The envisaged price regime under the
Petroleum Industry Bill
 Challenges
 Thinking ahead
 Conclusion
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Background
 It has always been thought that Nigeria is rich in oil, it
turns out it is ‘a gas province with a drop of oil.’
Therefore the Nigerian Government seeks to
 Ensure that Nigeria derives as much revenue from gas as
it does from oil.
 Develop the nation’s gas resources to drive the goal of
attaining a 10% annual GDP growth rate by 2010.
 Maximize value from gas resources for Nigeria from both
the domestic and export gas markets.
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Background
 Attaining these objectives require significant investments
 Over US$30 Billion required to develop the gas industry to
meet domestic and export demands*
 Insufficient know-how and resources
o Nigeria has about 24 banks which are statutorily required to
maintain minimum capitalization of N25 billion –
approximately US$170 Million.
o Some of the banks have liquidity problems
o Capital market suffering from global melt down hang over
o Clearly Nigeria requires private sector participation and
international financing to bridge the funding gap.
* Nigeria Gas Master Plan Presentation 26th November 2007
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Background
 Government’s strategy for attracting investment to the gas
sector was largely based on granting fiscal incentives
starting with
 AGFA,
 later incorporated into PPTA;
 and later under the CITA:
*Sections 11 and 12
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Background

NLNG commenced production and export of gas in 1999 and rapidly expanded to the 6th train. Plans for
the 7th train have currently been suspended.

The success of the NLNG and the rise in global gas prices and demand has stimulated interest in export
oriented projects which are in various stages of conceptualization and development.

Limited investor interest for projects directed at supplying gas to the domestic market.

Conversely local demand for gas has continued to expand rapidly driven mainly by the considerable
investment in gas fired power plants to increase the nation’s electricity generating capacity. It is
projected that Nigeria should have 22 of such plants with a combined capacity of 12GW by 2013.

Electric power generation is estimated to account for 70-75% of domestic gas demand.
Nigerian domestic gas and power sectors are Siamese twins and what affects one invariably affects the
other.


Already there is insufficient gas and inadequate infrastructure to meet the requirement of the existing
power plants.

The demand for gas in the domestic market far outstrips the currently available supply.

The situation is compounded by the fact about 40% of current reserves are unavailable trapped in gas
caps and are inaccessible until after production of oil this underscores the need for considerable
investments in E & P for non-associated gas.

It is obvious that the fiscal incentives alone are inadequate to drive growth in the domestic gas market.
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Existing price regime
 Until recently, the Minister was empowered to impose
special terms and conditions on licences and leases
including Government’s right to take associated gas,
free of cost at the flare, or at an agreed cost, without
payment of royalty.
 PPPRA Act empowers PPPRA to regulate the price of
petroleum products.
 The only natural gas derivative classified as a
“petroleum product” in Section 15 of the Petroleum
Act is Liquefied Petroleum Gas.
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Existing price regime
 No structure legal or regulatory framework exists currently for gas
pricing.
 The Minister has wide discretionary powers to demand, secure
and fix the price at which gas is sold in the domestic market.
 PHCN currently pays US$0.12/mmbtu of gas as opposed to
US$0.50/mmbtu at the export market.
 PHCN owes well in excess of N10 billion for gas already supplied.
 Domestic gas prices are therefore uneconomic and unsustainable.
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Change is imperative
 Stakeholders agree that there is a clear need for price change but
disagree on mechanism
 Government and producers seem to agree that a viable price
must guarantee producers an IRR 0f 15% but disagree on what
this price is
 Government
says
US$1.00/mmbtu.
between
US$0.50/mmbtu
and
 IOC’s say US$2.oo/mmbtu
 The Nigerian Gas Master Plan seeks amongst other things to
balance interests of both sides
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Policy Reforms
 Nigerian Gas Master Plan
 National Gas Supply and Pricing Policy 2008.
 National Gas Supply and Pricing Regulations 2008.
 Pricing principles underpinning the NGMP, NGSPP
and the NGSPR have been incorporated into the
“Inter-Agency Memorandum” submitted by the FGN
to the National Assembly in July 2009, proposing
amendments to the gazetted PIB.
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Price regime under the PIB
Management of the DGM
 The PIB empowers the Agency:
(a) To announce the Domestic Gas Supply Requirement for
each calendar year necessary to meet the gas demand for
strategic sectors as determined by the Government from
time to time within the domestic economy for a specific
period of time not exceeding 20 years.
(b) Request the Inspectorate to allocate the Domestic Gas
Supply Obligation to every PML.
(c) Establish an Aggregate Gas Price for the volume of the
DGSO which shall be based on the weighted average of the
purchase price and volumes of the purchased gas and this
shall be used by the Domestic Gas Aggregator as the basis
for gas supply to the domestic market.
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Price regime under the PIB
 Domestic Gas Aggregator (DGA)
 The Agency is charged with the responsibility of
establishing the DGA the functions of which shall
include:
• implementation of a gas management model for
monitoring the demand and supply of gas for
utilization within Nigeria
•acting as an
intermediary between suppliers and
purchasers of gas in the domestic gas market and
ensuring the supply of gas to the strategic sectors in
accordance with the approved national gas policy
framework;
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Powers of the DGA
 Ensuring




that the DGSR is met through the
implementation of the DGSO
Ensure availability of adequate volume of gas for the
strategic sectors
Open and manage an escrow account with an escrow
agent approved by the Agency
Direct purchasers of gas to make payment into the
escrow account in accordance with the payment
schedule agreed by the suppliers, purchasers and the
DGA.
Make payment to the supplier in accordance with the
Aggregate Gas Price.
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Implementing the DGSO
 Where a licensee has failed to fulfill its DGSO, the licensee
may amongst other penalties be liable to a fine or be
prevented from supplying gas for any export project during
the default period.
 Where the domestic and export gas market has attained a
level of maturity that reflects fully competitive conditions.
The Agency may suspend the issuance of new Gas Purchase
Orders by the Aggregator.
 The Bill preserves the rights of purchasers and suppliers to
enter into GSAs for the domestic market on terms and
conditions freely decided for volumes in excess of the
DGSO without any discrimination in terms of access to
midstream pipelines.
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Price regime under the PIB
Wholesale Gas Market
 The Agency is to make recommendations to the Minister to
issue regulations defining the class or classes of customers
that shall from time to time constitute wholesale customers
under the Act and the qualifying criteria for such
classification.
*Section 385 IAM
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Price regime under the PIB
Wholesale Gas Pricing
 Wholesale gas in excess of the Domestic Gas
Supply Obligations between a supplier and
customer shall be negotiated directly between
parties on a transparent arms length basis and the
transfer price between an upstream producer and
a midstream or downstream purchaser shall
reflect the cost of transfer in line with the pricing
principles stipulated in in the bill.
*Section 393 IAM
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Price regime under the PIB
Gas Pricing
 The appropriate Regulatory Institution (Agency or Authority)
is empowered, where it determines the following:
(a) that a particular licensed activity is a monopoly service
(b) that competition has not yet developed to such an
extent as to protect the interest of customers
(c) that a particular licensee is a dominant provider
to regulate gas prices or revenues earned by licensees in
respect of such activities in a manner consistent with
pricing principles stipulated in the PIB
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Price regime under the PIB
Gas Pricing
 The bill requires the Regulator to consult with
licensees, industry participants and stakeholders
before undertaking a gas pricing review or establishing
a methodology for regulating prices and revenues
earned by licensees providing monopoly or dominant
services.
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Price regime under the PIB
Pricing Principles
 The Regulatory Institutions are to be guided by following Gas
Pricing Principles set out in the Act:
(a) Gas prices shall be disaggregated into the component
elements of the supply chain including costs of
wholesale gas, transportation, distribution and supply.
(b) Prices charged for each licensed activity shall reflect the
costs incurred for the efficient provision of that activity.
(c) Prices charged shall permit a reasonable return for
licensees on their investments
(d) Prices shall not discriminate between customers with
similar characteristics such as similar size or
consumption profile.
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Price regime under the PIB
Approval of Tariffs and Pricing
 Approval and publication of charging structures, tariff and
pricing structure are required of licensees*
1.(a)Tariff and tariff methodologies in the downstream gas
sector subject to the approval of the Regulatory Institutions
(2) Tariff charged for use of gas transportation or distribution
network shall reflect
(a) efficient investments and capital costs
(b) efficient operating and maintenance expenses and
(c) a reasonable return for licensees on their
investments.
*Section 392 (1)
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Price regime under the PIB
(4) Regulated customer prices shall reflect:
(a) The reasonable costs incurred in the purchase of
wholesale gas.
(b) The transportation tariff.
(c) The distribution tariff if the customer is connected
to a distribution network.
(d) Efficient supply charges covering billing, metering
and other services relating to gas supply.
(e) A reasonable return for the supplier.
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Price regime under the PIB
Network Code
 The Regulatory Institutions namely (NAMIRA and the PPRA)
are to establish a network code* for the midstream and
downstream gas network.
 The Code will include provisions for connection charging
methodology, the structure of charges and applicable tariffs for
using the transportation network and distribution network.
NAMIRA - National Midstream Regulatory Agency
PPRA - Petroleum Pricing Regulatory Authority
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*Section 384 (1) (2) Inter-Agency Memorandum “IAM”
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Challenges
 Appropriate pricing of power.
 Appropriate pricing of alternative fuels (petroleum
products).
 Need to strictly monitor the strategic domestic sector.
 Investor already faces a number of risks in the market



Political risk
Market risk
Foreign exchange/inflation risk
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Challenges
 Low purchasing power of Nigerian consumer.
 Culture of government subsidy/Socio-political
backlash.

It does not help that past governments have not been very
accountable in use of public funds.
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Thinking Ahead
 Dealing with the socio-political backlash
 Petroleum products deregulation experience
 Power reform experience.
 Need for government to exert political will and to be
prepared to be very unpopular
 Need to adopt a carrot and stick approach
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Conclusions
 Appropriate pricing of not only gas but power and
petroleum products as well is an imperative for the
development of a viable DGM and also for the long
term sustainable growth of the Nigerian economy.
 The present administration owes it to the current and
future generations of Nigeria to take the very difficult
and unpopular decisions necessary to actualize these
objectives.
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Thank you.
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