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UNIVERSITY OF IBADAN

DEPARTMENT OF ECONOMICS
PETROLEUM AND ENERGY ECONOMICS
(ECO 723)
TERM PAPER

TOPIC:
Natural Gas Market Development in Nigeria: Pricing,
Planning, & Policy Options.

Prepared by group 7:
1.
2.
3.
4.
5.

OKE OLATUNJI OLAKUNLE


ADEBIYI MUSA AYODEJI
CLETUS IKESE ONOGWU
ERHABOR NOSAKHARE
OPUBA CHRISTIAN K.

-------------------------------

187474
188392
187490
187610
188368

December 2015

ABSTRACT
One of the major realities with natural gas is that it does not have a global
market like its counterpart, oil. For gas to be produced there must be a
waiting buyer. Gas production requires huge upfront investment. The huge
investment risks need a viable market to be mitigated. And since there is
scarcely one, the international oil companies (IOCs) have over the years
been reluctant to develop natural gas, having viewed it as uneconomic. Thus
they prefer to flare it at the wellhead rather than expend so much to get it to
the city-gate.
Over the years, several pricing related laws have been enacted and policies
made by successive government in a bid to create a market in Nigeria. Yet, a
domestic market barely exists. In this work, we adopt a step by step review
of relevant existing literatures, highlighting their major policies on the
downstream gas market. The policies contained in the Gas Master Plan (GMP)
are given pride of place. This is because they represent the downstream
market policies that would soon take the Centre stage in the country.

TABLE OF CONTENTS
ABBREVIATIONS
AND
..

ACRONYMS
iv

1.0 INTRODUCTION
. 1
2.0 AN OVERVIEW OF THE NIGERIAN
. 2
1.1

GAS

SECTOR

Brief History of Gas in Nigeria ..

.. 2
1.2
The Nigerian Downstream Gas Market
3.0

.. 5
THE NIGERIAN GAS MASTER PLAN
.. 6
3.1 Current Gas Utilization projects and Plans

9
4.0

NATIONAL NATURAL GAS POLICY

10
4.1 Policy Options For Nigeria
. 10
5.0

NATIONAL GAS PRICING FRAMEWORK IN NIGERIA

.. 14
6.0

CONCLUSIONS AND RECOMMENDATIONS

.. 17

..

REFERENCES

. 18

ABBREVIATIONS AND ACRONYMS


AG

Associated Gas

Bcf

Billion Cubic Feet

BG

British Gas

Bpd

Barrels Per Day

Bscf

Billion Standard Cubic Feet

CITA

Companies Income Tax Act

CNL

Chevron Nigeria Limited

DGO

Domestic Gas Obligation

DPR

Department of Petroleum Resources

EGL

Escravos Gas-to-Liquid

GMP

Gas Master Plan

GSA

Gas Sales Agreement

IOC

International Oil Company

IPA

International Petroleum Agreements

JV

Joint Venture

LNG

Liquefied Natural Gas

LPG

Liquefied Petroleum Gas

Mcf.

Million Cubic Feet

Mmcfd

Million Metric Cubic Feet per day

Mmbtu

Million British thermal unit

MOE

Ministry of Environment

MYT

Multi-Year Tariff Order

NERC

National Electricity Regulatory Commission

NGC

Nigerian Gas Company

NNPC

Nigerian National Petroleum Corporation

NLNG

Nigeria Liquefied Natural Gas

NOAA

National Oceanic and Atmospheric Administration

PA

Petroleum Act

PIB

Petroleum Industry Bill

PPTA

Petroleum Profit Tax Act

SPDC

Shell Petroleum Development Company Limited

SNG

Shell Nigeria Gas

SGPP

Sahara Gas Pipeline Project

SA

Strategic Aggregator

Tcf

Trillion Cubic Feet

TPA

Third Party Access

TPY
WAGP

Tonne per Year


West African Gas Pipeline project
5

1.0 INTRODUCTION
Exploration for oil and gas in Nigeria began in 1908, with the first
discovery being made in the Niger Delta in 1956. Nigerias first refinery
began operations in 1965, with a capacity of 38,000 bbl. /day; enough to
meet domestic requirements at the time. The demand and production of oil
in Nigeria has since increased tremendously, such that Nigerias current daily
production is estimated at about 2.5m bbl. /day, with a domestic
consumption level of 279,000 bbl. /day. At the end of 2010, Nigerias proved
oil reserves were estimated to be 37.2bn barrels, which amounts to 2.68 per
cent of the worlds reserves.
Nigeria has an estimated 182 TCF of proven natural gas reserves, the
seventh largest natural gas reserve holder in the world; High grade quality:
0% sulphur & rich in NGLs. Most gas discoveries have been made in the
process of exploring for oil; Nigeria is globally the No. 1 gas flarer : 40% of
Nigerias annual production is flared, the country accounts for 12.5% of the
gas flared in the world (Source: World Bank). The current legal and fiscal
framework for the petroleum industry is geared towards oil production and
utilization with very little focus on gas.

Nigeria has had an uphill task

trying to stop gas flaring since the discovery of natural gas. Studies show
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that without a viable domestic market this would remain elusive. Over the
years, several policies had been formulated by the government with a view
to creating a domestic market. Notwithstanding that the greatest need for
natural gas is in Nigeria, these policies failed; the domestic market barely
exists. Nigeria remains acutely short in energy capacity in the face of
abundant resources. Is something wrong somewhere?
Due to the lack of gas infrastructure and the widespread flaring of associated
gas, the Nigerian gas sector has been relatively underdeveloped. In a bid to
tackle this underdevelopment, the federal government prepared a Gas
Master Plan in 2008, the implementation of which is currently underway. The
initiative is geared at promoting natural gas production, and encouraging the
supply of natural gas to domestic power stations so as to alleviate the
countrys energy shortage. As part of the Gas Master Plan, the National Gas
Supply and Pricing Policy (Gas Pricing Policy) and the National Domestic Gas
Supply and Pricing Regulations (Policy Regulations) have been issued by the
government and both instruments impose obligations on gas producers to
set aside a predetermined portion of their gas production for supply to the
domestic market.
The Department of Gas Resources is established under the National Gas
Supply and Pricing Regulations and it is expected to ensure the availability of
gas supply to the domestic market.

2.0 AN OVERVIEW OF THE NIGERIA GAS SECTOR


2.1 Brief History of Gas in Nigeria
The name Nigeria rings a bell which is symptomatic not of its prosperity but
of its position as Africas development challenge. Nigeria holds 20% of
Africas population and 67% of West Africas population. This apparently
underscores Nigerias strategic position in Africas development agenda as
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failure to deliver economic revival in Nigeria will threaten the overall


Millennium Development Goal agenda for Africa.
Aside demography, Nigeria is hugely endowed with abundant natural
resources. Its proven natural gas reserve as at January 1, 2009 was 184tcf.
The government claims a gas reserve as high as 660tcf. Apparently, Nigerias
gas reserve is huge and of global consequence, the seventh in the world.

Crude oil was discovered in Nigeria in 1956 by the Shell DArchy at Oloibiri,
Bayelsa State. Geologically, since most crude oil is found in association with
natural gas, Nigerias natural gas was discovered at the same time as oil.
However, due to the fact that there was no use for it, until recently, most of it
was flared. As from 2007 till date, Nigeria is ranked second to Russia as
country with the highest amount of gas flared.
Apart

from

the

greenhouse

effect

of

gas

flaring

and

other

environmental pollution, Nigeria loses enormous amount of foreign exchange


through the ugly exercise. In 1998, there are about 100 gas flaring sites.
Some of them have been burning ceaselessly for 40 years. Each one of the
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bonfires has been killing human beings and the natural environment since it
was lit. The National Oceanic and Atmospheric Administration (NOAA)
claimed that Nigeria flared 596Bcf of natural gas in 2007 and consequently
lost US$1.46 billion and for IHS Global Insight, Nigeria loses US$15 million/d.
However, the Nigerian National Petroleum Corporation (NNPC) reported that
a total volume of 2,282.44Bscf of natural gas was produced in 2008 out of
which 631.19Bscf was flared. At least, if the report is anything to go by, it
means that the 40 year old bonfires are abating.

Recent Developments in Nigerias Oil and Gas Sector includes:


Divestment of assets
The International Oil Companies (IOCs) operating in Nigeria are disposing
their interest in some onshore and shallow-water blocks, in a bid to
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rationalize their asset portfolios, and shift strategic development focus to the
deep offshore operations in Nigeria. These blocks are being disposed under
negotiated bid arrangements.
Most of the blocks are recognized oil fields, while others are gas fields. Since
most of the blocks are in the onshore and shallow-water areas of the Niger
Delta regions, the fiscal regimes applicable to joint venture operations are
applicable to these blocks.
Sale of marginal fields by the Federal Government of Nigeria (FGN)
The FGN has commenced the marginal fields licensing aimed at increasing
the participation of indigenous operators in the upstream sector of the oil
and gas industry.
The bidding process for 31 marginal fields commenced in 2013. Out of the 31
marginal fields being allocated, 16 are located onshore, while the remaining
15 are located in the continental shelf of Nigeria.
Only indigenous operators are eligible for bidding for the marginal fields.
However, some of the successful bidders would require various levels of
financial and technical support. Therefore, potential investors can partner
with these (successful) indigenous companies to provide the requisite
technical and financial support.

2.2 The Nigerian Downstream Gas Market


It is the interaction between producers and buyers that founds a market. The
gas chain entails the production, transmission, distribution, supply and the
end-consumer. The level of interaction amongst the sub-sets determines
whether or not there exists competition. Section 39 of the Companies Income
Tax Act (CITA) defines it as the marketing and distribution of natural gas for

10

commercial purpose and including power plant... gas transmission and


distribution pipelines.
The downstream gas market in Nigeria is dominated by the upstream
producers, since existing regulatory structures seem to favour them, and not
new

entrants. These producers

engage in

limited

transmission

and

distribution of gas to serve their needs.


However, Nigeria has managed to develop huge domestic gas demand
Centres such as four Power Distribution gas fired plants with peak period gas
demand of 1500mmcfd, cement industries at Benue and Lokoja, fertilizer
companies in Lagos, iron and steel plants at Ajaokuta, petrochemical,
aluminum smelting industries at various locations in the country.
There is also the need for Gas supply to residential users. The present import
of LPG in Nigeria stands at about 20,000tpy out of a total estimated market
demand of 200,000tpy. Apparently, it would be wrong to assume that there is
no solid domestic market demand in Nigeria. Thus, the acute problem is to
incentivize investment in production and marketing of gas in the domestic
market.

3.0 THE NIGERIAN GAS MASTER PLAN


In recent years it has become clear that Nigeria, already well known as a
major quality oil producer, is just as much or perhaps more of a gas than oil
province. Compared to countries with similar or even smaller gas resources
endowment, Nigeria is only on the first step of the growth ladder of gas
development.
If this resource base is properly developed and integrated into a
realistic national strategy supported by a sound implementable plan, Nigeria
has the necessary stepping-stones to enable a potentially skyrocketing
growth rate. Failure of the Federal Government of Nigeria (FGN) to take
control and drive this process will result in a fraction of the potential benefit
being realized. Just accepting the status quo and looking at each
11

International Oil Companies (IOCs) proposal in isolation potentially results in


undersized (and hence non optimum) projects, duplication, and a preference
for export only projects rather than the more challenging route of integral
domestic, regional and international developments. It should be noted that in
reality all the gas produced belongs to the Nigerian Government and thus it
is the FGN that should decide what is the best coordinated common usage
for that gas.
A National Gas plan can facilitate an orderly development of the
sector, give guidance to the IOCs as to what the desired goals are and thus
gain the Federal Government of Nigerias (FGNs) acceptance and support.
This integrated approach also enables maximization of the potential for
secondary and tertiary development benefits in Nigeria, compounding the
potential growth in country. The basis for this master plan is that it primarily
seeks to:

Eliminate the wasteful practice of gas flaring in the short term


Allow the rapid development and refurbishment of the crippled power

sector
Make gas available at commercial and affordable prices to local

markets
Widen the availability of gas to more of Nigerias underserved regions
Store gas for load balance and future use when markets or contracts

are not ready/available


Where commercial, promote gas utilization investment to replace

imported products (or release them for export)


Allow for the widespread distribution of gas, LPGs or even CNG to more

remote areas, regionally and internationally


Ensure and enhance the production of oil and NGL recovery, where

possible
Ensure continuity of supply to meet major existing and future contracts
Formulate a strategy that adds value for all parties and encourages
beneficial gas usage both domestically and/or through capture and,

where relevant, savings of foreign exchange


Develop an integral industry development plan (relate options to a
monetary benefit to Nigeria)
12

Ease and facilitate the decision process to speed up the approval


process

Gas development in Nigeria has been constrained by the absence of clear


fiscal terms; gas pricing mechanisms; legal and regulatory frameworks; and
inadequate financing. Consequently, government introduced a gas master
plan. The gas master plan was developed as a framework for maximizing the
value inherent in the nations gas reserves, and thus ensures the multiplier
effect of gas usage in the economy and enhances the high-value gas export
market.
The gas master plan has three main components:
I.
II.
III.

The national domestic gas supply;


Pricing policy and regulations;
The gas infrastructure blueprint.

The domestic gas supply obligation is meant to deal with the issue of
improvements in domestic gas supply by imposing supply obligations on
petroleum upstream operators.
The gas pricing policy is predicated on a pricing framework that
segregates the demand sector into three categories (domestic, industrial and
commercial), to which the different pricing regimes apply. The domestic
category consists of the use of natural gas for domestic cooking and for
power generation. This category has direct multiplier effect on the economy.
The industrial category comprises of industries that consume natural gas as
a raw material for the production of secondary product, such as methanol,
fertilizer, gas-to-liquids (GTL). The commercial category consumes natural
gas as an industrial fuel for manufacturing firms.

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The gas infrastructure blueprint was developed as an integrated


infrastructure strategy to support domestic, regional, and export LNG
markets.

3.1 Current Gas Utilization Projects and Plans


At present, various economic projects are on ground to minimize and thus,
monetize the produced associated gas being flared. These projects can be
classified into three major groups, namely:

Export oriented,
Domestic oriented, and
14

Field utilization.
The main natural gas projects on stream, by some of the major operators,
are:
The Gas Re-injection/Field Use projects.
The Natural Gas Liquids (NGLs) project of Mobil Producing.
The Gas-to-Liquid (GTL).
The Liquefied Natural Gas (NLNG) project of Shell/Elf/Agip.
The West Africa Gas Pipeline, and
Independent Power Plants (IPP).
Other major natural gas projects being planned by the major companies are:

Enhanced LNG Trains by NLNG.


New LNG plant by Mobil Producing, Agip, etc.
Enhanced Independent Power Generation.
Enhanced Industrial Use by Local Industries, and
The Liquefied Petroleum Gas (LPG) project of ChevronTexaco.

At present, the NLNG substantially accounts for gas utilization in the


export-oriented projects. The power sector is expected to account for about
60% gas utilization within the domestic oriented projects. This is expected to
generate additional power into the national grid, to complement PHCN. The
following domestic markets for natural gas are gaining momentum and
appreciation:

Distribution of lean natural gas to industrial areas.


Steel and Aluminum.
Fertilizer Agriculture.
Cement and Glass, and
Transportation - CNG.

The major field utilization projects are in:

Gas lift schemes,


Gas re-injection schemes, and
Natural gas as fuel for field uses.

4.0 NATIONAL NATURAL GAS POLICY

15

The natural gas policy was targeted at promoting a public-private


sector partnership for an orderly and speedy commercialization of the
nations gas reserves, and so contributes to the development and
diversification of the domestic economy.
The obstacles to moving from generally expressed objectives to project
implementation are many. Among the most important issues for the FGN to
address have been:

A lack of clearly stated, long-term "vision" for the sector and realistic

policy goals to promote and facilitate gas use


An inadequate or nonexistent infrastructure for the commercialization

of gas
A lack of a clear gas sector development strategy and implementation
plan, covering both policy directions and integrated investment

priorities
A lack of capacity to evaluate, correlate, and prioritize proposals
received from the private sector, together with growing reservations

about the structure of current fiscal incentives


A lack of adequate legal, fiscal, regulatory, and contractual frameworks
and institutions required to accommodate new investment proposals
from international investors while simultaneously protecting Nigeria's
interests

4.1 POLICY OPTIONS FOR NIGERIA


One of the major critical challenges of natural gas market development
centers on developing a policy framework which encourages an appropriate
market determined gas pricing as against the long history of regulated
pricing.

i.

Structural Restructuring
16

A sustainable private sector involvement in the gas sector requires


comprehensive changes in Nigerias current legal and regulatory and
institutional framework for gas utilization to address the absence of
transparent, competitive markets throughout the gas chain.
Another option involves a limited role as regulator focused solely on the gas
sector. However, the trend worldwide is to converge regulators. The United
Kingdom recently accepted the wisdom in this with the merger of electricity
regulator- OFFER, with the gas regulator-OFGAS to create OFGEM. This
structure is more efficient as it pools regulatory resources, is more likely to
reduce possibilities of regulatory capture and will ensure consistency of
decisions across sectors.
The complexity of the regulatory challenges that will arise from the
deregulation and restructuring of the gas and power sectors in Nigeria
combined with the fact that regulatory experience locally is very limited, and
certainly unsophisticated, suggests that a combined downstream regulator
for these related sectors will be more in Nigerias best interests. The latter
idea has some attraction given the potential regulatory synergies that will
result from a multi sectoral role and the yet unparallel institutional
experience of the DPR as a regulator of a complex industry.
ii.

Institutional reforms

Gas Sector Regulator Necessary arrangements must be initiated ahead of


the major legal reform to the legal framework to establish an independent
and effective sector regulator with capabilities of supervising the conduct of
operating firms and the economic effects of actions taken or proposed to be
taken by the firms. The eventual role of the DPR post deregulation must
therefore be clarified as urgently as possible in order to set the stage for the
necessary institutional arrangements for sector reform.

17

Investors will measure the potential of regulatory risk from the key
benchmarks of good regulatory design: independence, expertise and
accountability. Hence, the instruments providing for the establishment of a
sector regulator must be drafted with these elements in mind.
Capacity building - The lack of institutional capacity in conducting bid
assessment procedures and in conducting effective negotiations for major
infrastructure projects with sophisticated multinational entities is apparent
throughout the Nigerian public sector. These limitations are even more
apparent in the DPR. The weakness of the DPR as a regulatory institution can
however be addressed by a focused technical assistance and institutional
capacity building program. Such a program, geared towards developing
expertise on infrastructure procurement and on how to react to and
undertake an informed assessment of project proposals cannot be over
emphasized given the focus of the government on power generation.
iii.

Market structure options

A clarification of the future role of NGC is essential if restructuring options


are to be pursued effectively. The options regarding NGC include whether to
retain government ownership with regulatory oversight reposed in an
independent body; or whether to fully privatize the corporation. Both options
have implications for industry restructuring.
Retention of government ownership in NGC will require a very strong
regulatory institution to regulate NGCs activities. In consideration of
Nigerias lack of a history of monopoly regulation and the regulatory risk that
often results from the establishment of a new regulatory institution, this
model will not be as attractive to private sector investment as its alternative.
A limited role for NGC as a purely gas transmission company is
advised. Structural reform must commence with the functional unbundling of
NGC from gas distribution and/or marketing.
18

Cross shareholding interests throughout the chain must be limited in order


to minimize possibilities of transfer pricing and pass - through of costs from
one segment to the other and, ultimately to the consumer. This is a
significant antitrust issue that requires the attention of the government in
view of its potential macro economic impact. The policy dilemma here
arises from the level of government interest in upstream oil and gas
production weighed against the imperative of significantly reducing its
interest in the NGC to such a threshold that will ensure that these interests
do not constitute a significant threat to competition in a deregulated market.
Of equal significance in the context of the potential antitrust impact of
related party transactions and cross shareholdings is the relationship of the
gas producers to their downstream subsidiaries.
iv.

Legal and Regulatory Reforms

The legal and regulatory reforms necessary to attract private sector


participation in the gas industry will require that principles of commercial and
technical arrangements be entrenched in the revised legal and regulatory
framework for the sector.
These principles could either be recorded through necessary specific
amendments to the legal framework; otherwise new frameworks could be
drafted. As the current framework is unstructured and can be subject to
confusing interpretations, the repeal of these instruments is recommended
to the extent that that they affect gas development. Rather, new sector
regulations should be prepared, including design of new regulatory
structures/frameworks.
Deliverables expected from the introduction of a gas - specific legal and
regulatory framework would include:
a. A new gas policy

19

b.

A new gas code containing grid codes, distribution codes, safety


codes, access rules and other relevant sector regulations like principles

for establishing infrastructure tariffs and gas pricing policies


c. c. Contractual frameworks including operating licenses and draft
concession

terms

for

distribution

companies,

infrastructure
gas

providers,

marketers

and

transmission

downstream

and

project

developers.
d. A code of conduct for all participants regarding market behavior
e.
v. Introduce Market Competition
The expected benefits that can result in a competitive market can only be
achieved if the market is functioning properly. The sector regulator can
ensure this through effective antitrust and economic regulation of sector
participants. In order to protect the competitive environment that should
develop in consequence of the reforms, an open access regime for pipelines
and associated facilities should be introduced. If buyers and sellers were to
allowed to have access to one another over spare capacity in transportation
facilities, including upstream facilities, more sellers of natural gas will be
encouraged to enter the market.

5.0

NATIONAL

GAS

PRICING

FRAMEWORK

IN

NIGERIA
As earlier noted, natural gas pricing forms one of the factors upon which the
realization of the Nigerian dream of developing both domestic and
export/regional markets is based. The challenge is primarily determining an
appropriate gas pricing framework that encourages efficiency in production
and consumption. The complexity of this challenge is worsened by the widely
divergent interests of major players in the industry. While the growth of the
economy through new gas based industries and consequent employment
generation would be attractive to government, other industrial players
20

particularly the IOCs are driven mostly by profit maximization. The scope and
space of domestic gas market development in Nigeria depend significantly
on the signals the underlying pricing mechanism sends to both prospective
suppliers and consumers. Hence, the core of gas pricing in Nigeria revolves
around achieving economic pricing such that it provides sufficient incentive
for the efficient producer to remain in business.
The need for a pricing strategy that recognizes the diversity in the
ability of the various industrial subsectors to bear gas price cannot be
overstated. Apart from enabling and sustain diversity of the demand sectors,
thereby enabling Nigeria to benefit from the industrialization potential that is
inherent in natural gas, the pricing strategy is also aimed at enabling the
selective maximization of net revenues for Nigerian gas from sectors that are
most able to deliver that direct economic benefit. From a gas pricing strategy
perspective, government has grouped the entire domestic demand into three
broad groupings. This grouping is in recognition of the fact that the different
demand sectors have different strategic benefits to the country and different
pricing considerations.
The objective of this Pricing Policy as stated by the government is to
create structures and a transparent framework for gas pricing that supports
the governments aspiration for accelerated domestic economic growth via
rapid gas based industrialization and maximizing value from high value LNG
and pipeline exports. It should be noted that the government does not fix gas
prices, but provides a framework for establishing the minimum gas price
The pricing policy establishes 3 broad categories for buyers of gas as
follows:
i.

Strategic Domestic Sector: This refers to a limited set of sectors


that have a significant direct multiplier effect on the economy namely
the Power Sector. The strategic intent in gas pricing is to facilitate and

21

ensure low cost gas access to these sectors in order to stimulate rapid
ii.

economic growth and development.


Strategic Industrial Sector: This refers to industries that utilize gas
as feedstock in the production of value added products which are
either meant for export or domestic consumption. Strategically, these
sectors ensure that value is added to Nigerian gas before it is
exported. Projects in this group are Methanol, GTL and Fertilizer. For
this sector, the strategic intent in pricing is to ensure that feed gas
price is affordable and predictable in order to ensure competitiveness
of the products in international markets in the face of competition from
other gas producing countries that provide gas at very low prices to

iii.

buyers.
Strategic Commercial Sectors: This refers to sectors that use gas
as

fuel

as

opposed

to

feedstock.

Unlike

the

two

previous

classifications, projects in this category are a potential major direct


revenue earner for Nigerian gas in view of their capacity to bear high
gas prices as the competing alternative fuel is LPFO. Typical sectors in
this category include cement and domestic manufacturing industries,
industrial power etc.
Three distinct price regimes are evident in the framework, corresponding to
three different approaches for determining the floor price. The three
approaches include:
1. Cost of supply basis (regulated pricing regime)
2. Product netback price basis and (pseudo-regulated pricing regime)
3. Alternative fuels basis (market led regime).
The Regulated Pricing Regime (cost of supply basis): This pricing
approach applies specifically to the strategic domestic sectors of power. The
floor price for this category is determined primarily by establishing the
lowest cost of supply that allows a 15% rate of return to the supplier. This
has been established as $0.1/mmbtu for a limited volume of gas reserves.

22

These reserves will therefore be assumed dedicated to the strategic


domestic sector.
The Pseudo-Regulated Pricing Regime (Product Netback basis): The
second floor price determination approach applies strictly to strategic
industrial sectors i.e. sectors that use the gas as feedstock. For this group,
the floor price is not based on the cost of supply of the gas, but on the
netback of the product price. The product price used in determining the floor
price is the assumed long run price of the product. With this approach, the
pricing of gas will better reflect the ability of the sector to pay given the price
of its product. However, since the intention of this policy is not to support
sectors that are unviable i.e. sectors whose netback price translates to a gas
floor price lower than the cost of supply of gas, the consideration of
affordability will not be at the expense of sustainability of gas supply.
The Market Led Regime (Alternative Fuels Basis): The third floor price
determination approach applies to all other sectors that use gas as fuel or
wholesale buyers buying gas for subsequent resale. For this category, the
price of gas is indexed to the price of alternative fuel such as LPFO. The
indexation will be established during negotiation.
It is assumed that pricing for each demand sector will transit to the next
higher pricing band once a saturation level has been attained. For example,
for the strategic domestic sector, once the domestic requirement has been
met (domestic saturation point) and power is now being exported, the
framework proposes that export power benefits from a relatively higher
price, determined by the net backing philosophy applied to strategic
industrial sectors such as methanol.

6.0 CONCLUSIONS AND RECOMMENDATIONS


Development of the domestic gas market in the country is
invariably fraught with challenges. Moreover, gas markets rarely
23

develop without at least some degree of government intervention;


the risks associated with infrastructure development are simply
too high. Because policymakers must balance so many different
priorities and at the same time address all parts of the gas value
chain, there is unlikely to be a perfect solution, and many policies
will have something of a second-best character. However, it is
possible to anticipate some of the pitfalls that will arise in
connection with different policies and to try to mitigate them to
the extent possible.
Governments can play an important role in underwriting the
risks of infrastructure development themselves, as in China, or in
establishing a sufficiently stable regulatory framework to provide
confidence in long-term cost recovery for suppliers. On the
demand side, prospective gas consumers must be reassured that
planned gas supplies will indeed materialize before they will be
willing to make major investments in gas-consuming facilities.
Governments must simultaneously pursue risk mitigation for both
gas suppliers and gas users; an overly narrow focus on either the
supply or demand side can lead to major setbacks.
Oil and gas has different project dynamics and must always
be separately regulated to achieve coherent and sustainable
development in gas. Nigeria has always treated gas as an
appendage of oil. This is crucial to the foot-dragging
developmental pace in the gas sector making the emergence of
competition illusory. Nevertheless, we need to add that correct
economic and regulatory policy choices alone cannot spur the
development of a gas market. Rather, these choices must be
supported by a high degree of government commitment.

REFERENCES

24

Olusegun A. Omisakin, Natural Gas Pricing: International Experience and


Policy options For Nigeria. Department of Economics, University of Ibadan,
Nigeria
Strategic Gas Plan for Nigeria, Joint UNDP/World Bank Energy Sector
Management Assistance Programme (ESMAP), February 2004.
The Policy Tightrope in Gas-Producing Countries: Stimulating Domestic
Demand Without Discouraging Supply, Mark C. Thurber and Joseph Chang
(Advance Summit paper from the 2011 Pacific Energy Summit, held February
2123, 2011, in Jakarta, Indonesia).
Natural
Gas
Reserves
in
Nigeria
http://www.oilgasarticles.com/articles/89/Natural-Gas-Reserves-i.

at

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