An Analysis of The National Domestic Gas Supply and Pricing Policy: Its Strength and Shortcomings

AUTHOR: Gabriel Olamidipupo Aliu

Student (LL.B), Faculty of Law, University of Lagos.

INTRODUCTION

The Nigerian Energy Sector consists of the Petroleum Sector which contributes to about 90% of Nigeria’s foreign exchange revenues; and then the Electricity Sector which uses an estimated 85% of natural gas produced in the Nigerian Market. In a bid to pay more attention to natural gas and to tap more effectively into the natural gas fortunes of the nation, a more concerted effort has been made by various governments to revitalize the gas economy through various policies and regulations. The applicable provisions in this regard are The National Domestic Gas Supply and Pricing Policy and the National Gas Supply and Pricing Regulations. This essay will review the content of these provisions towards highlighting their advantages and disadvantages within the Nigerian Jurisdiction. It will also attempt a comparative analysis of the system in other jurisdictions in addressing the said advantages or disadvantages.

ANALYSIS OF THE NATIONAL DOMESTIC GAS SUPPLY AND PRICING POLICY

The National Domestic Gas Supply and Pricing Policy basically represents the policy aspiration as it relates to the gas sector. It highlights the imbalance in the supply and demand dimensions of gas in Nigeria and one of its stated goals is to provide solutions to the issue of gas pricing that recognizes the diversity of the ability of various industrial sub-sectors to bear gas price. This strategy for gas pricing has occasioned the grouping of the entire domestic demand into three broad categories, namely: Strategic Domestic sector, Strategic Industrial Sector and Commercial sector. While the Strategic domestic sector refers to a very limited sector that has a significant direct multiplier effect on the economy in the power sector including residential and light commercial users, the strategic industrial sector refers to industries that utilize gas as a feedstock in the production of value added product. The commercial sector uses gas as fuel as opposed to feedstock. With the different categories in the strata, it applies a differentiated pricing structure. It merely provides the framework for the determination of the prices in the various categories without necessarily stating the price itself. The Gas Pricing framework is called “a transitional pricing arrangement.” It states merely the floor price that is the lowest price that gas can be supplied to a particular category of the demand sector. The actual price is determined based on an indexation formula determined during negotiation between the parties.

With respect to the first category, it is a regulated pricing regime based on the cost of supply basis allowing a 15% rate of return to the supplier. The second category, i.e the strategic industrial sector is a pseudo regulated pricing regime based on a product netback basis. The product price used in determining the floor price is the assumed long run price of the product. This approach will better reflect the ability of the sector to pay given the price of its product. The final category is the commercial sector and it is a market led regime based on alternative fuels. The price of gas is indexed to the price of alternative fuel such as Low Pourn Fuel Oil (LPFO). For the purpose of implementation, the Downstream Gas Act, created a Gas Regulatory Commission, it also required a Domestic Gas reserves and production obligation, which requires all gas asset holders to dedicate a specific proportion of their gas reserves and product for supply to the domestic market (Domestic Reserve Obligation- DRO). In addition to the expansive provision of the policy, there’s also the regulation which basically provides for the means of enforcement.

STRENGTHS

Taking steps to advance these provisions, the Federal Government announced in 2014 the review of the Nigerian Gas Policy. Although this has been faulted by the National Gas Association on many grounds including the fact that it is presumably too detailed and may conflict with its Regulation, it is setting unachievable standards particularly as it relates to the Wholesale Market Regime and end of regulated pricing. Notwithstanding, there was an increase in the prices of products which had been approved by the Federal Ministry of Power. In general the policy has certain obvious advantages, for example, Dr Sam Amadi, National Electricity Regulatory Commission (NERC) Chairman, said the price of Gas would be a turning point for power generation and supply in the country. His opinion is also a reflection of the policy makers in the drafting of the policy itself that is to provide a constant source of gas acquisition for Generating Companies in Nigeria. More so, it will widen the investment potential of the sector and in the short-run, ensure that there is more gas to power our generators. A Gas Pricing Policy as in this situation is of immense importance in streamlining very touchy areas of the Gas Industry in any Country and to achieve the effect that is desired, of which that is dependent of the particular milieu in question.

SHORTCOMINGS

As interesting as this provision might seem however, it has been visited by a lot of criticism by stakeholders in the field. One of the major rationales for the introduction of the gas pricing policy and regulation at its inception was as a result of the fact that most of Nigeria’s Electricity Generating Companies could not afford to purchase Gas at the market rate, the Policy came to provide a framework under which Power Holding Company of Nigeria could get a constant source of Gas. However, as is customary among most Government Agencies and parastatals, one of the major hold backs to the initiatives introduced is the lack of proper implementation, thus reducing the value that could be obtained from the initiative. This position was adduced by the former minister of power at a Conference in June 2016. He decried the failure of implementation in Nigeria particularly in light of the fact that it had seen success in other jurisdictions where it was applied.

According to Frank Edozien, speaking on “Tackling Gas Supply Challenges to arrest Power Crisis in Nigeria” at a Conference organized by the National Association of Energy Correspondents (NAEC) observed that another obstacle to Gas Supply is the refusal of the National Assembly to pass the Petroleum Industry Bill (PIB) which has had the undesirable effect of stalling investment in the Power Sector. Furthermore, according to Olusegun Omisakin, reviewing the economic dimensions of the pricing policy, the international experience has shown that the very practice of DRC operates as a disincentive to foreign investors. This has precipitated a policy debate with respect to the wisdom of allocating gas resources to export projects versus holding these resources for current and future internal consumption. He also noted that “from an economic standpoint it is important to avoid a wide range of prices for the same commodity as this leads to inefficient consumption and seriously impairs inter–sectoral competitiveness of the players in the same consuming industry.” Also, it is believed that the pricing policy does not provide adequate check on the power of the minister in the exercise of his discretion in certain cases as it relates to the determination of price and the review of same under the regulation. This by itself provides an avenue for abuse of the policy as laid down.

CONCLUSION

In conclusion, regardless of the gas pricing structure within any polity, a natural gas market needs a rational gas pricing mechanism to encourage efficient consumption and development of natural gas infrastructure, while preserving the incentives to gas suppliers.

Whether this is the case in Nigeria, has precipitated different opinions from Experts. Whatever the case may be, an efficient gas pricing policy must be able to strike a balance between ensuring that prices are sufficiently high to provide returns that will attract investment and prices that are sufficiently low to be affordable to the end-user. It is the opinion of this writer that that national gas policy is integral, germane and indispensible within the Nigerian milieu, however; it must be properly thought out and made with contributions from all necessary stakeholders in order to achieve a policy that will fulfill the utilitarian goal i.e. it should create the greatest happiness of the greatest number of people.

Gabriel Olamidipupo Aliu is a 500 Level (Final Year) LL.B Student at the Faculty of Law, University of Lagos. He believes in God, dedication and smart work. He sees himself as an agent for social change and long term impact in the Nigerian society. He is highly interested in Tax Law and particularly fascinated by International Tax Rules and Energy Law.