Gas Pricing: NGA Faults Provisions of Draft National Gas Policy

  • Recommends ‘willing buyer-willing seller’ basis

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The Nigerian Gas Association (NGA) has faulted some provisions of the Draft National Gas Policy unveiled recently by the federal government, saying that it will encourage investment in domestic gas.

The association argued that the government would not encourage producers by rolling out of a new policy with an indeterminate transition period, just eight years after issuing the 2008 Domestic Gas Supply Pricing and Regulation, which had contemplated a five‐year transition period from 2008 to 2013.

NGA, therefore, recommended that the Domestic Supply Obligation (DSO) imposed on gas producers to set aside certain portion of their gas for the domestic market should be predicated on ‘willing buyer-willing seller’ basis.

The DSO unveiled by the administration of the late President Umaru Yar’Adua under the Gas Master Plan, had mandated oil companies to set aside a pre-determined amount of gas reserves and production for the domestic market.
It had also stipulated that the then Minister of Energy (Gas) should determine the requisite amount of gas periodically for a period lasting about five to seven years.

Under the gas master plan, all the operators were required to comply with their obligations or face penalty of $3.5 per million cubic feet (mcf) of gas under supplied, restricted export or both as the Minister of Energy (Gas) might decide.

But in its position paper during a recent stakeholders’ engagement on the draft National Gas Policy organised by the Ministry of Petroleum Resources in Abuja, the association insisted that supplying gas to the domestic market should be based on ‘willing buyer-willing seller’ agreement.

The association argued that it is now obvious that relying on the Gas Aggregation Company of Nigeria Limited (GACN)’s process cannot guarantee the desired volumes of gas to the domestic market irrespective of the assignment of DSO to operators.

According to the association, the aggregation process cannot support bankable transactions because it introduces an undue layer of uncertainty to the income stream of projects.

“While we support the allocation of Domestic Supply Obligation (DSO) to producing companies, we believe that the national objective of guaranteeing sufficient gas volumes to the domestic market can be better achieved if such DSO policy is implemented on a willing buyer, willing seller basis”, NGA said.

On the issue of gas pricing, the association argued that the 2008 Domestic Gas Supply Pricing and Regulation had contemplated a five‐year transition period from 2008 to 2013.

The association faulted the rolling out of a new policy with an indeterminate transition period eight years after, saying it would not encourage producers.

According to the association, the Wholesale Market Regime and end of regulated pricing suggested in Section 4.3.8 of the Draft Policy seem to be very far‐fetched and mostly unachievable within the short to medium term.
“We strongly support a move towards deregulated pricing on a willing buyer‐willing seller basis while retaining the existing regulatory approvals by NERC of prices for gas to power transactions”, said the President of the association, Mr. Dada Thomas.

NGA’s Publicity Secretary, Mr. Frank Uzuegbunam in a statement also noted that the draft Policy is “too detailed and prescriptive and runs the risk of ultimately conflicting with supporting regulations when put in place”.
The association also insisted that one major problem for legal separation of upstream and midstream companies as contained in the draft policy is that it will negatively impact existing commercial structures with significant additional tax costs.
According to the association, this could end up being a barrier to further investment rather than opening up the sector to increased competition.

“The Policy’s objective to incentivise investment in midstream sector may be hampered by forcing a legal separation between upstream and midstream companies. The Policy should encourage all types of partnerships between upstream producers and midstream participants including vertical integration down the value chain. New entrants who choose to play in a single part of the chain should be adequately protected by legislation/regulation”, NGA added.
The association stated that the National Gas Policy should make specific pronouncements to address payments and other dislocation in the gas-to-power value chain adding that this is essential for the sustainability of the gas industry as the power sector accounts for about 80 per cent of the domestic gas market.