The Nigerian Midstream and Downstream Regulatory Authority (NMDPRA) recently announced a significant shift in gas prices, a decision that could potentially have far-reaching implications for consumers and stakeholders alike.
The authority revealed that the price of gas procured by Electricity Generation Companies (Gencos) would experience a notable increase, soaring from $2.18 to $2.42. Additionally, the commercial sector would now be required to pay $2.92 for the acquisition of gas.
This announcement arrives amidst a backdrop of mounting complaints from Gencos regarding shortages and undersupply in the market. Moreover, the challenge of the “dollarization” of gas transactions in Nigeria, juxtaposed with the pricing of power production in naira, further complicates the situation. Despite these concerns, the NMDPRA pressed forward with the decision to adjust gas prices, asserting that such measures were aligned with the provisions outlined in the Petroleum Industry Act (PIA) 2021.
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The new rates were announced in a statement titled “Announcement on Establishment of the Year 2024 Domestic Base Price (DBP) and Applicable Wholesale Price of Natural Gas for the Strategic Sectors,” signed by Farouk Ahmed, the Chief Executive of NMDPRA (Nigerian Midstream and Downstream Petroleum Regulatory Authority).
Ahmed said that these adjustments were guided by the regulatory framework outlined in the PIA 2021.
The statement highlighted the provisions of the Petroleum Industry Act (PIA) 2021, which was signed into law by former President Muhammadu Buhari on August 16, 2021, and gazetted on August 27, 2021. It noted that the PIA provided a clear regulatory framework for establishing a market-based pricing regime for the domestic gas market in Nigeria.
According to Section 167 and the third and fourth schedules of the PIA 2021, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) was tasked with determining the domestic base price and the marketable wholesale price of natural gas supplied to strategic sectors.
These sectors included power, commercial enterprises, and gas-based industries involved in the production of various products such as ammonia, urea, methanol, polypropylene, low-sulfur diesel, and others as deemed fit by NMDPRA.
The statement outlined that the domestic base price at the marketable gas delivery point, as per Section 167(1) of the PIA and other provisions, would be determined based on regulations incorporating specific principles.
One of these principles stipulated that the price should incentivize upstream producers to supply sufficient natural gas to the domestic market voluntarily. The aim was to ensure adequate natural gas supply for domestic consumption.
With the introduction of the new pricing regime, the federal government’s subsidy, which was estimated at N1.67 trillion in January, was expected to increase significantly.
Additionally, NMDPRA clarified that the price set should not exceed the average of similar natural gas prices in major emerging countries that were significant producers of natural gas.
Another key principle highlighted by NMDPRA was the deployment of the lowest cost of gas supply based on a three-tier cost of supply framework, as well as market-related prices tied to international benchmarks.
Despite engaging in consultations with stakeholders and meticulously adhering to regulatory provisions, the NMDPRA decided to establish the Year 2024 domestic base price at $2.42/MMBtu. This decision was reached after careful consideration of various factors aimed at promoting market transparency and fostering an investor-friendly business environment, according to the agency.
However, the decision to increase gas-to-power prices in foreign currency appears to run counter to earlier statements made by Minister of Power, Chief Adebayo Adelabu. Adelabu had previously advocated for gas sales to power generators to be conducted in naira to address challenges related to dollar shortages. This shift in approach underscores the complexity of the issues at hand and highlights the need for a comprehensive strategy to address the challenges facing Nigeria’s gas sector.
Nigeria boasts substantial gas reserves, yet fully harnessing this potential has been hindered by a myriad of challenges. Pricing issues, infrastructure vandalism, and currency fluctuations have all contributed to creating a challenging operating environment for investors in the sector. These factors have, in turn, served as deterrents to investing in the sector, denoting the urgent need for resolution.
In response to the concerns surrounding gas pricing, an inter-ministerial committee has been established. Comprising officials from the Ministry of Power, Ministry of Petroleum (Gas), and other relevant offices, this committee aims to address issues surrounding gas pricing, particularly its sale in dollars.
Against the implications of the NMDPRA’s announcement, a multifaceted approach is said to be required to address the challenges facing Nigeria’s gas sector.