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. OKE OLATUNJI OLAKUNLE ------- 1874742. ADEBIYI MUSA AYODEJI ------- 1883923. CLETUS IKESE ONOGWU ------- 1874904. ERHABOR NOSAKHARE ------- 1876105. OPUBA CHRISTIAN K. ------- 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

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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

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1.0 INTRODUCTION …………………………………………………………………………………………………. 1

2.0 AN OVERVIEW OF THE NIGERIAN GAS SECTOR …..………………………………………………. 2

1.0 Brief History of Gas in Nigeria ……..………………………………………………………….. 2

1.1 The Nigerian Downstream Gas Market …………………………………………………….. 5

3.0 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

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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

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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 Tonne per Year

WAGP West African Gas Pipeline project

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. Nigeria’s first refinery began operations in 1965, with a capacity of

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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 Nigeria’s 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, Nigeria’s proved oil reserves were estimated to be 37.2bn barrels,

which amounts to 2.68 per cent of the world’s 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 Nigeria’s 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 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

country’s 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.

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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

Africa’s development challenge‟. Nigeria holds 20% of Africa’s population and 67% of West

Africa’s population. This apparently underscores Nigeria’s strategic position in Africa’s

development agenda as 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, Nigeria’s gas reserve is huge and of global consequence,

the seventh in the world.

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Crude oil was discovered in Nigeria in 1956 by the Shell D‟Archy at Oloibiri, Bayelsa State.

Geologically, since most crude oil is found in association with natural gas, Nigeria’s 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 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.

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Recent Developments in Nigeria’s 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 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.

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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 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 Centre’s 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,

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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 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 Nigeria’s

(FGN’s) 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 Nigeria’s underserved regions

Store gas for load balance and future use when markets or contracts are not

ready/available

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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)

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 nation’s 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. The national domestic gas supply;

II. Pricing policy and regulations;

III. 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

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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.

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

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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 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.

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4.0 NATIONAL NATURAL GAS POLICY

The natural gas policy was targeted at promoting a public-private sector partnership for an orderly and speedy commercialization of the nation’s 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

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A sustainable private sector involvement in the gas sector requires comprehensive changes in

Nigeria’s 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 Nigeria’s 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.

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.

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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 NGC’s activities. In consideration of Nigeria’s 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.

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

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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

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

infrastructure providers, transmission and distribution companies, gas marketers and

downstream project developers.

d. A code of conduct for all participants regarding market behavior

e.

v. Introduce Market Competition

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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 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

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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 government’s 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 ensure low cost gas access to these sectors in order to

stimulate rapid economic growth and development.

ii. 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 buyers.

iii. 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:

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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. 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.

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6.0 CONCLUSIONS AND RECOMMENDATIONS

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

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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 21–23, 2011, in Jakarta, Indonesia).

Natural Gas Reserves in Nigeria at http://www.oilgasarticles.com/articles/89/Natural-Gas-Reserves-i.

Idigbe, K. I. and Olafuyi, O. A. (2003): The Nigerian Domestic Gas Market – Foreign Investors Participation, Proceedings of the World Petroleum Congress (WPC) 2nd Regional Conference, Doha, Qatar, (December 8 – 11, 2003).

Federal Government of Nigeria (1992): Associated Gas Framework Agreement, (AGFA); The Gas Master Plan (2010); The Anticipated Petroleum Industry Bill.

Adjeh, G. O. (1988): The LPG Option for Gas Utilization in Nigeria, B.Eng. Thesis submitted to the Department of Petroleum Engineering, Uni. of Benin, Benin City, Nigeria

Federal Government of Nigeria (1992): Associated Gas Framework Agreement, (AGFA); The Gas Master Plan (2010); The Anticipated Petroleum Industry Bill.

DPR (2002): Annual Oil and Gas Reports on Fields.

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