On Monday, the Nigerian Midstream and Downstream Petroleum Regulatory Authority announced the establishment of the year 2024 Domestic Base Price and applicable wholesale price on natural gas for the strategic sectors.
The announcement saw an increase in the price of natural gas for the strategic domestic sectors including power generation companies by 11 percent. The move is in line with the provisions of the Petroleum Industry Act, 2021, assented to by former President Muhammadu Buhari on the 16th of August 2021 and gazetted on the 27th of August 2021.
The PIA provides a clear regulatory framework for the determination of a Market-based pricing regime for the domestic gas market in Nigeria.
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Specifically, Section 167, the Third and Fourth Schedule of the PIA 2021, mandated the NMDPRA to determine the Domestic Base Price (DBP) and the marketable wholesale price of natural gas supplied to the strategic sectors.
The Chief Executive Officer of the NMDPRA, Farouk Ahmed, had while making the announcement said natural gas for power generation companies would now be $2.42 per metric million British thermal unit, higher than the previous rate of $2.18mmbtu. All the other 2 strategic sectors being Gas-Based Industries (GBI)and Gas to Commercial (GTC) take a cue from the DBP in their price build up.
The adjustment in price has been generating a lot of interest from the public. While some commentators had questioned the justification for the increase despite complaints of shortages and undersupply of gas by the power generation companies (GenCos), others have said that with the new price increase, the subsidy to be paid by the Federal Government in 2024, which was pegged at N1.67tn in January this year, would increase markedly.
The purpose of this article is to provide a context as to why the NMDPRA, in compliance with the provisions of the PIA, took the decision to adjust the DBP and how Nigerians will benefit from the decision of the midstream and downstream petroleum regulator.
For a start, let’s deal with the question on why the wholesale price of gas to power plants was increased marginally. Recall that in July 2021, the gas price to power plants was reduced from $2.5/mbtu to $2.18/mbtu. The purpose of the change in price then was to allow quick desired industrial revolution embarked upon by the administration of former President Muhammadu Buhari.
Since then, the gas price to power has remained unchanged despite all the inflationary pressures and increasing operating costs over the last 3 years, while power plants continue to complain of insufficient gas supply.
It is expected that the slight price increase to $2.42 /mbtu, which is still lower than the pre-2021 price, together with the presidential executive orders, focused security management, completion of critical infrastructure, settlement of legacy arrears, will allow upstream gas producers to bring more gas to the domestic market and power plants.
The Petroleum Industry Act (PIA), passed in August 2021, mandates the Authority to determine the best prices for overall gas market development. Specifically, Section 167, the Third and Fourth schedule of the PIA 2021, mandated the Authority to determine and announce on a yearly basis, the wholesale domestic base price of natural gas and the wholesale price of marketable gas to the power, commercial and gas-based industry strategic sectors. It is instructive to state that before a final decision was taken on the matter, stakeholders across the value chain were consulted as part of the process as mandated by the PIA. The NMDPRA, as the Regulator, also took steps that will move the overall gas market forward.
It is a well-known fact that in recent times, the Nigerian economy has been battling with issues of galloping inflation. Figures obtained from the National Bureau of Statistics showed that inflation had risen from 21.91 percent as of February 2023 to 31.71 percent in February 2024. It is for this reason that the PIA also allows, subject to certain limitations, for upward price adjustment on a yearly basis to account for inflation on a yearly amount or percentage.
It is instructive to also state that the new price template is not determined arbitrarily. There are factors that the NMDPRA must take into consideration before arriving at the new price template. It is in line with the provisions of the PIA that the domestic base price was computed according to approved principles. One of the principles is that the price must be of a level to bring forward sufficient natural gas supplies for the domestic market on a voluntary basis by the upstream petroleum industry.
The second principle is that the price must not be higher than the average of similar natural gas prices in major emerging countries that are significant producers of natural gas based on countries determined by the Authority.
The third principle in determining prices is that the lowest cost of gas supply must be based on three-tier costs of supply framework, while market-related prices must also be tied to international benchmarks. It is in line with the above stated principles that the change to the domestic base price of gas rose by about 11 percent.
However, it must be stated that the impact of the gas price increase on the cost of electricity tariffs is just a conservative increase of about N4/kWh passed on to electricity customers. This is because not all electricity generation is gas-based. Additionally, electricity tariffs are impacted more significantly by inflation, devaluation, and Aggregate, Technical, Commercial, and Collection (ATC&C) losses. It is also possible for this increase to be fully absorbed by the high-income band, but the final increase to grid tariffs will be communicated by the Nigeria Electricity Regulatory Commission.
Those who are pondering over the reason for the gas price review, given the recent passage of the Petroleum Industry Act, should know that increased gas pricing would incentivize gas suppliers to bring on-stream gas from higher cost fields. Without significant new gas development, the shortfall in gas supply by 2030 is expected to be as high as 3 BCF per day, exacerbating gas constraints to the power sector, and severely affecting facility utilization for commercial, GBI sectors, and export markets. This is why the PIA 2021 empowers the Authority to set prices of natural gas and to facilitate a shift to a willing buyer/willing seller market.
With this development, it is expected that new gas projects would start coming on-stream in late 2024 and with the new gas price, existing gas supply agreements will remain valid though new pricing is expected to take immediate effect.
With the new gas prices, it is expected that Nigeria will continue to be competitive in comparison with other gas producing countries, and mitigations have been designed to cushion the impact on the lower income population, which would be rolled out accordingly.
In conclusion, the NMDPRA would conduct quarterly reviews to update pricing assumptions and models as macroeconomic conditions change while the next price announcement is expected on 1st April 2025.