THE DYNAMICS OF NATURAL GAS PRICES IN NIGERIA AND THE REST OF US. (PART TWO) By Olabode Sowunmi

Enter the elephant in the room! The strategic intent in pricing is to facilitate the supply of these sectors to low cost gas in order to catalyze rapid economic growth. The government’s plan for power generation expects the large majority of power generation to come from gas-fired power plants. This is the main driver of the forecasted increase in demand for domestic natural gas of 11.4% per annum between 2012 and 2025.

In reexamining the previously mentioned Gas Master Plan (GMP) its breakdown can be said to consist of three main sections:

1 Gas Pricing Policy which provides a framework for establishing minimum prices gas buyers can be charged for gas. The thinking behind this is that the key domestic sectors that demand gas e.g. power, methanol, fertilizer industries, etc, have varying capacities to bear increases in gas prices;

2 Domestic Gas Supply Obligation (DSO) which stipulates that every gas producer must allocate a certain proportion of their output to supply the domestic market. Here the policy makers want a situation where gas is always available in the local market.

3 Gas Infrastructure Blueprint which outlines the process for establishing three gas gathering and processing facilities. Also included here is a gas transportation pipeline network to enhance the supply of gas. The Ajaokuta-Kaduna-Kano (AKK) pipeline project is the brainchild of this policy.

It is in resonance to point one above (Gas Pricing Policy) that the FG, In Kano, announced the reduction in gas tariffs. Obviously it is expected that given that the pricing of gas accounted for more than 60% of the cost to produced power, this reduction would result in lower prices in power tariffs. This in turn will help combat the economic challenges which are a reality of the COVID-19 times. Moving forward, a similar proactive action to support point two (that of the DSO) is that of necessitating the industry producers (Gas Field Operators) to give their feedback and commentary on how the developments have impacted their business. As to be expected, we have come to realize that central to the concerns of the operators is the value-chain profitability and organizational sustainability. And, so when organized labor, sent in notices that they rejected FG’s gas price reduction as being too small, they were stepping into unchartered waters! To the labor unions, it was all about putting more pressure on the government to reduce prices. However, what they do not know is that those pressures if accented to can ultimately lead to the collapse of the industry. A consequence of which will include hundreds of their members losing their employment. Talk about cutting your nose to spite your face!

To put it in context, we need to examine the fiscals or financials of the epoch making events that occured at the Kano event. To begin with, the theme of the forum was ‘optimising the economic development capacity of the Ajaokuta-Kaduan-Kano (AKK) Gas Pipeline Project’. At the event, it was re-emphasized that the project is expected to be functional in 2023 starting with a Two Billion Cubic Feet (2 BCF) of gas flow for use in the gas-to-power value chain and for the industry. The unresolved issue is that there isn’t a clear roadmap of how gas suppliers will implement the gas price reduction. Also, is there going to be a directive from the National Electricity Regulatory Commission (NERC) and the Department of Petroleum resources (DPR) to the industry as the designated industry regulators? Will the directive itself be gazetted? There is also the small issue of the gas transportation cost. Will it remain at $0.80/mscf or will there be a correspondent reduction? How will the transportation costs affect non-DSOs? How does it affect the various Gas Supply Agreements (GSAs)? Does this imply that they will all be re-negotiated? These and more are issues that the labor unions may be totally unaware of, hence the necessity of having them in these technical meetings if only as observers.

It should be understood that organized labor is not unreasonable. It may be intransigent in certain negotiations but there is always logic to the madness. Equally important is that the unions cannot act beyond what they know. This is where the wisdom of the Gas Aggregation Company of Nigeria (GACN)’s gathering of stakeholders that did not include the unions needs to be questioned. There are others whom the GACN have not considered stakeholders, who in their own right are influenced by the sector or have authority over the sector to influence it. This includes but not limited to the Legislators of the National Assembly, the Gas Users Group of the Manufacturers Association of Nigeria, Civil Society organizations and the media. In today’s industry, some of these groups are seen as a nuisance; but the truth be told, the reality lies in the fact that those responsible for stakeholder mapping may not be appropriately competent in constructive engagement of the groups. However that is a completely different discussion.

Resting on the shoulders of the government is the responsibility to make the industry value-chain sustainable. Government is also the defacto and dejure ‘big brother’ that is responsible for the economy. This of necessity includes the human resources that drive the economy. These resources are represented by the organized labour unions. This is at the crux of the argument that when GACN as a government organization does not include the unions and others they are inadvertently creating new problems while solving old ones.

In conclusion, permit me to borrow the immortal words of Albert Einstein. He once said, “The problems that exist in the world today cannot be solved by the level of thinking that created them”. Our thinking needed to resolve the many issues on the industry needs to change. The individualistic, silo oriented, group think methods needs to go away. We need to begin by ensuring that all our thinking needs to consider anyone that the industry affects. This holistic thought process as simple as it sounds is the foundation for solutions. It’s not technology, it’s not policy and it’s not more money even as important as these things are. It’s all about a thinking pattern that will change the current corporate culture. Lest we forget, culture always defeats strategy! And it’s that new culture of holistic thinking that will be the foundation for all successes.

Sowunmi Olabode III is a consultant to the House Committee on Gas, aide to the Senate President and CEO of Cabtree Limited.