The Federal government will cease to fix the price of natural gas and allow buyers and sellers to determine their own prices when the new draft national gas policy is approved.
“The purpose of the fiscal framework is to make gas standalone, separate from oil. Hence, gas projects will be developed based on their economics and not dependent on or consolidated against oil taxation,” states the draft policy document now presented for input of stakeholders.
Under the current model, the Petroleum Minister announces gas pricing and for 2016, it is fixed at $7.38 per thousand cubic feet (mmscf). Domestic gas pricing through the Domestic Supply Obligation (DSO), which is mainly gas supplied to power plants is $2.50/mmscf with an additional 80 cents transport cost, though international gas prices is currently about $3.03 (Henry hub pricing index).
Industries are compelled to buy at $7.38/mmscf from local gas producers, which they find prohibitive. Gas producers are compelled to sell at $2.50/mmscf to power plants who buy the bulk of the gas, a pricing regime they say is unsustainable, thereby creating a strange pricing system that have kept investors away and encourage oil companies to flare the gas.
“We want to achieve with these policies, a clean break from the past. We must understand that the previous ways of conducting petroleum business in Nigeria has not been sustainable and so cannot continue,” said Gbite Adeniji senior technical adviser to the Minister of State for Petroleum Resources.
The proposed fiscal framework intends to remove distortions in Associated Gas Framework Agreement (AGFA). The AGFA codified in section 11 of Petroleum Profits Tax Act, empowers operators to recover costs from oil income. But this provision is said to cause distortions.
Oil companies who do not have oil operations are unable to expense their gas costs against oil operations in the manner that upstream investors in gas projects can, hence they complain of discrimination.
Also some oil companies have been accused of building elaborate gas infrastructure purely to include in their cost oil base for offset against their oil profits, which ultimately is paid for by the Nigerian government.
A further distortion is that it has created a situation where the only gas infrastructure not built for fiscal purposes has been built by the government through the Nigerian Gas Company.
Also when oil price is low, which is the current situation, the ability to collect tax on oil profit declines.
The policy will therefore ensure that gas project costs are attributed to gas projects, and not allowed to cross-subsidise oil projects.
“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 Dada Thomas, Nigerian Gas Association, President,
However, an industry source expressed concern that the policy could prove counter-productive.
“I think this idea could be a serious drawback for the spurt of growth recently witnessed in the gas industry especially if the replacement framework does not provide commensurate incentives as AGFA.”
“The incentives offered with AGFA may only be reviewed if the domestic gas industry has matured and supply is robust, infrastructure is adequate and flexible and payment discipline is established.”
What is not in dispute is the need for deep reforms in the gas sector, which will achieve a market driven framework to create stability in pricing and spur investments.
“Uncertainty in the legal and fiscal framework makes it impossible for capital to flow. Investors and entrepreneurs can model risks but not uncertainty,” Isreal Aye, oil and gas consultant and managing partner of Sterling Partnership told MetroBusinessnews.
The new framework further creates a separate fiscal treatment for exploration, production and midstream gas activities. Government intends to relax royalty and tax rates for gas, and incentivise entry into the midstream.
It also aims to promote increased exploration and production activity in the onshore frontier areas by providing globally competitive incentives including reduced royalty rates for gas and under production sharing contracts (PSCs), introduction of more favourable production allowances and hydrocarbon tax in the event of gas production.
The new policy will retain Domestic Gas Sales Obligations while compliance would be considered a precondition for future license renewals.