Firms to produce from neighbouring countries over new gas prices

With the new gas price regime expected to kick off on July 1, alongside challenges of currency devaluation and access to foreign exchange for raw materials, local manufacturers are contemplating moving their production hubs to neighbouring African countries under the African Continental Free Trade Area (AfCFTA) regime.

According to the manufacturers, it is increasingly difficult to produce locally and remain competitive, going by the new challenges they encounter.

With an upward review in the price of natural gas used for local production and dollarisation of the commodity by franchisers, which operators describe as preferred option to exporting the commodity, the cost of production is expected to rise further, spiking inflation when costs are passed to consumers.

Unlike Premium Motor Spirit (PMS) that is subsidised, the price of gas is determined by gas aggregators and franchises.

Poor access to gas undermines government’s domestic gas utilisation agenda and target to get industrial clusters to adopt gas a preferred source of energy.

Between 2019 and 2020, manufacturers spent about N143.29 billion on alternative power supply, a situation they have described as unsustainable, especially now that the cost of gas is equally rising.

This development is coming as the Minister of State for Petroleum, Timipre Sylva, at the weekend, disclosed that the country accidentally discovered 206 trillion cubic feet (tcf) of gas reserves while in search of crude oil.

Sylva, who disclosed this in Abuja at a News Agency of Nigeria (NAN) forum, said the country could discover an additional 600 tcf reserve to enable it achieve the desired development required of a gas nation.

“We have a lot of gas in this country. We have 206 tcf of gas reserves. This number is already discovered in gas reserves and this 206 tcf reserve was found while looking for oil, so it was accidentally discovered. We were actually going to look for crude oil and we found gas, and in that process of accidentally finding gas, we have found up to 206 tcf. So, the belief is that if we really aim to look for gas dedicatedly, we will find up to 600 tcf of gas,” he said.

According to the Minister, the country’s transition from gas to renewable fuel will be gradual when it has fully utilised the benefits associated with gas.

TO check the rising cost of Liquefied Natural Gas (LNG) and unstable supply in recent time, local producers are exploring migration to Compressed Natural Gas (CNG), which they have described as cheaper than the former.

LNG and CNG form sources of alternative power to local producers due to the failure of the national grid to meet their demands. But the switch to LNG and CNG has remained a mirage due to high cost, infrastructure and policy framework.

Already, many manufacturers are witnessing a shortage in available raw materials for production due to pending foreign exchange requests from the Central Bank of Nigeria (CBN), currency devaluation that has equally raised the costs of importation and clearing at the ports, as well as disruption in the supply chains occasioned by the COVID-19 pandemic.

At about $3.5 per Million British Thermal Units (MMBtu), international demand for natural gas has been on the rise, fuelling export and leaving the domestic market with frequent shortages and downtime. With an upward review to about $5.10 as against the $3.20 per MMBtu negotiated at the beginning of the year, local producers are worried about the capacity to sustain operations, alongside other costs.

For producers in the Fast Moving Consumer Goods (FMCGs) sector, textile and apparels, the country’s high inflation has made it difficult to pass on costs to consumers, despite the increasing cost of production.

Although gas providers hinge costs on infrastructure, production costs among others, Nigerian manufacturers say they are unhappy that franchisers of natural gas are “dollarising” payment of the energy source and selling to them $2.85 above the cost of producing the commodity.

A major stakeholder familiar with the discussions among value-chain operators and the Federal Government have said that rather than issue force majeure on production challenges, franchisers have been supplying gas on a two days on, three days off basis.

“We have seen an adjustment in electricity tariff in the last one year. We are seeing the same for gas. The devaluation of the currency has equally affected production costs, as what we used to pay less than N100 for, we now pay between N140-N150/scf,” the stakeholder added.

To the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf, high energy price is one of the biggest challenges faced by investors in the Nigerian economy, adding that businesses in energy-intensive sectors, like manufacturers are the worst hit.

According to him, the public power supply is epileptic while the cost of diesel has become unbearable lately, leading to the dilemma of an impending increase in gas prices.

‘‘This should not be happening in a country where the economy is still struggling to recover from recession with the first quarter 2021 GDP growth of a meagre 0.5%. Manufacturers are grappling with weak purchasing power, exchange rate depreciation, illiquidity in the foreign exchange market, high logistics costs, influx of Asian products in the domestic market, unbearable ports situation, among others.

“An elevated energy cost would put manufacturing sector in another jeopardy. It is bad enough that gas is being priced in dollars in a sector where products are being sold in local currency. The gas pricing conundrum calls for urgent government intervention. We cannot in one breath be talking about economic diversification, promoting self-reliance and taking millions of Nigerians out of poverty and simultaneously subject our manufacturers to such burdensome operating environment,” Yusuf added.

Despite domestic needs, Nigeria remains the seventh highest in the world in gas flaring, a position it has held in the last nine years. National Oil Spill Detection and Response Agency (NOSDRA), a government-run satellite tracker, said that 1.8 billion standard cubic feet (scf) per day of gas was flared in the last nine years, one that should ordinarily attract about $3.6 billion in penalty, little of which was paid.

The volume has generated 95.5 million tonnes of CO2 emissions. The flared gas is valued at $6.3 billion and it could generate 179.9 thousand GWh, data from NOSDRA showed.

In 2020 alone, natural gas valued at $1.24billion was burned by oil companies, one which could generate the yearly electricity use of 804 million citizens, according to the tracker.

According to the World Bank’s 2020 Global Gas Flaring Tracker, a leading global and independent indicator of gas flaring, Nigeria is the seventh-largest gas flaring country globally. The country is surpassed only by Russia, Iraq, Iran, the United States, Algeria and Venezuela.

All seven countries have continued to light up the global map for nine years running. While the countries have produced some 40 per cent of the world’s yearly oil production, they have also accounted for roughly two-thirds of global gas flaring, the report showed.

Although it unveiled a gazette on gas pricing, the Federal Government through the instrumentality of the Petroleum Industry Bill, last year, sought to establish an Export Parity Pricing System For Gas Producers in the country. According to the Bill, the gas-pricing template was projected to range from a floor price of $3.2 per Million British Thermal Units by January 2021.

The domestic base price is expected to be increased every year by $0.05 per MMBtu until 2037, when a price of $4 per MMBtu will apply for that year and future years. This price range, according to the Bill, should be sufficiently attractive to significantly increase gas production for the country.

The gas pricing in the Bill is seen to be within the range of gas prices in other emerging nations with significant gas production. It is therefore expected to be fully competitive with international conditions.

However, the government, according to the Bill may, by regulations, change the domestic base price to reflect changes in market conditions and supply framework

The Bill stated: “The domestic base price as of January 1, 2021 shall be $3.20 per MMBtu. The domestic base price shall be increased every year by $0.05 per MMBtu until 2037, when a price of $ 4.00 per MMBtu will apply for that year and future years.

“The Authority, may, by regulations, change the domestic base price pursuant to paragraph (1) and the yearly increase pursuant to paragraph (2) to reflect changed market conditions and supply frameworks. The objective is to establish a fully functioning free market in natural gas for domestic supplies. This is to be achieved through the voluntary supplies pursuant to subsection 110(2) 121(2).

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