Understanding the Dynamics of Domestic Gas Pricing and the Unregulated Gas Market in Nigeria

Contributor: Janeth Udoka

Introduction:

The natural gas sector in Nigeria plays a vital role in the country’s energy landscape and possesses considerable potential to stimulate economic growth and development. As of January 2024, Nigeria is endowed with abundant gas resources, totaling 209.26 trillion cubic feet (TCF) of both Associated and Non-Associated gas, with reserves estimated at 102.59 TCF^[1]. Given Nigeria’s vast gas resources, the Federal Government has made the swift development of the domestic gas sector a central strategy for achieving significant GDP growth. While gas exports provide considerable financial benefits to the government through tax revenues and equity dividends, the government recognizes that enhancing domestic consumption and adding value to natural gas presents broader strategic benefits. Consequently, the Petroleum Industry Act (PIA) of 2021 requires all lessees to comply with the Domestic Gas Delivery Obligations (DGDO) by March 1st each year. These obligations are designed to fulfill the domestic gas demand as outlined by regulators, compelling lessees to deliver volumes of marketable natural gas (MNG) to the domestic market via either regulated or free market avenues^[2].

Nigeria’s domestic gas market exhibits a complex interaction between the regulated pricing structure and market forces. According to the Gas Pricing and Domestic Demand Regulations, 2023 (the “Pricing and Demand Reg”), the gas market in Nigeria is primarily divided into the Regulated Domestic Gas Market and the Unregulated Market, creating a sophisticated environment^[3].

PRICING MECHANISM FOR MARKETABLE NATURAL GAS

In March 2024, the Authority introduced a revised pricing structure for natural gas in strategic sectors, resulting in an 11% increase in power sector prices. The Domestic Base Price (DBP) for the power sector increased from $2.18 to $2.42 per MMBTU, while commercial sector pricing was adjusted to $2.92 per MMBTU, up from $2.50 per MMBTU. These changes align with the provisions in the PIA^[4], The Authority is required to announce the DBP on an annual basis. It is important to highlight that this increase in price aligns with the executive orders issued by President Tinubu, which provide tax credit incentives for Non-Associated Gas (NAG) greenfield projects in designated regions, with gas production set to commence by January 1, 2029^[5].

The Petroleum Industry Act (PIA) seeks to create a free market for petroleum products in Nigeria; however, the Authority maintains the authority to regulate specific elements concerning costs and pricing under particular conditions. The Authority is authorized to establish cost benchmarks for midstream and downstream petroleum activities^[6], to guarantee a uniform methodology within the industry, the Authority is also empowered to create pricing and tariff structures for natural gas in midstream and downstream operations, as well as for petroleum products. These structures are determined by the fair market value of the relevant commodities.^[7] petroleum products, promoting transparency and fairness in pricing.

The entity is also authorized to oversee the implementation of petroleum product pricing, including pricing formulas and frameworks, as well as to regulate the Development Bank of the Philippines (DBP) and the prices that apply to wholesale customers in strategic sectors, gas distributors, and retailers. The strategic sectors encompass the power sector, the commercial sector, and gas-based industries.

REGULATED AND UNREGULATED DOMESTIC NATURAL GAS MARKETS

The Authority is required to assess and publish the domestic gas demand needs for the strategic sectors before the 1st of March each year, and thereafter, convey this information to the Commission^[8]. The specified requirements denote the total quantity of marketable natural gas required by all wholesale clients engaged in the strategic sectors classified as both the regulated and unregulated domestic markets.

The Unregulated Gas Market

The unregulated gas market in Nigeria includes gas sale transactions that are not governed by mandatory pricing regulations. This market mainly caters to industrial and commercial consumers who have the requisite bargaining power to negotiate gas prices directly with producers. Unlike the regulated market, where prices are capped, the prices in the unregulated market are influenced by the forces of supply and demand, allowing for negotiations between willing sellers and buyers according to current market conditions.

Which transactions occur in the Unregulated Gas Market?

1. Sale of marketable natural gas to the Strategic Sectors: Despite the mandatory regulated pricing framework applicable to the Strategic Sectors, an upstream producer who has satisfied its domestic gas delivery obligations may sell marketable natural gas volumes to the Strategic Sectors based on mutually agreed terms.
2. Customers whose export gas volumes surpass their domestic consumption^[9].
3. Customers of the Strategic Sectors who choose to negotiate gas sale contracts directly (bypassing the gas aggregator) with upstream producers and who find such gas sale contracts satisfactory for its requirements.
4. Sale of marketable natural gas to the customers who are not part of the Strategic Sectors^[10].
5. Sale of marketable natural gas to gas retailers, wholesale gas suppliers, gas distributors and exporters.
6. Sale of raw gas: Domestic sale and export of raw gas^[11].

Unregulated Pricing

The Pricing and Demand Reg provides for two unregulated pricing mechanisms:

1. Free Market Price

The Free Market Price serves as the fundamental basis of the Unregulated Gas Market, established through the unrestricted interplay of supply and demand. Producers and consumers engage in price negotiations influenced by prevailing market conditions, production expenses, and their respective bargaining strengths. This system promotes competition, encourages efficiency, and may result in reduced prices for consumers. Nevertheless, it also renders the market susceptible to price fluctuations and possible imbalances in market power.

1. Transfer Price

The transfer price is a theoretical price for gas exchange between related entities, based on arm’s length pricing. It ensures transactions reflect market values and helps curb tax evasion, profit shifting, and transfer pricing manipulation. However, unregulated pricing mechanisms are not exclusive to unregulated markets, and market-based principles can still be applied in regulated markets, creating a complex pricing environment^[12].

The Regulated Domestic Market

The Nigerian Gas Aggregation Company Limited (NGAC) is a domestic gas aggregator that consolidates natural gas from multiple sources, including producers and suppliers and delivers it to domestic consumers in strategic sectors. Under Section 11 of the Gas Pricing Domestic Demand Regulations, the aggregator must acquire domestic gas delivery obligation volumes assigned by the Commission by March 15, ensuring efficient distribution and use of natural gas throughout the nation^[13].

The Domestic Gas Aggregator (DGA) is responsible for monitoring domestic gas demand, executing the DGDO, and implementing a natural gas management framework. This ensures transparency in transactions between suppliers and wholesale customers. The DGA must also establish an escrow account for customer payments for marketable natural gas, which will be disbursed to producer clients for their natural gas supplies^[14].

A wholesale customer that has submitted the necessary gas volumes in accordance with the domestic gas requirements to the Authority and intends to engage with the DGA must propose these volumes and formally apply to the DGA for a corresponding gas purchase order.

Following a thorough due diligence process, the DGA will issue a gas purchase order to the wholesale customer, which will detail the following elements:

1. The supplier designated to provide the required natural gas.
2. The specified quantity and quality of marketable natural gas to be delivered.
3. The price to be paid by the wholesale customer, consistent with the principles governing the determination of the DBP.
4. The designated location for the delivery of the gas volumes as established by the DGA.
5. The delivery schedule and any additional details as required by the DGA.

The DGA issues gas purchase orders to producers to confirm gas allocation to wholesale customers. Producers and wholesale customers can establish a Gas Purchase and Sale Agreement (GPSA) to meet domestic market demand. The agreement outlines the producer’s Domestic Gas Delivery Obligations (DGDO) and may include an escrow account mechanism. Existing GPSAs must be amended by the DGA to comply with Act provisions^[15].

Gas purchase orders from the DGA allow parties to bypass the escrow mechanism and enter into market-based Gas Purchase and Sale Agreements (GPSAs), with the lessee’s Domestic Gas Delivery Obligation (DGDO) being met. If these agreements meet or exceed the DGDO, the gas volume is excluded from the regulated domestic market. Non-compliance with escrow mechanisms can result in administrative penalties. If voluntary supplies fail to meet domestic demand, the DGA must implement a curtailment plan approved by the Authority.

Conclusion:

Nigeria’s domestic gas market should be optimized by balancing regulated and unregulated market mechanisms. The government should promote transparency, competitive pricing, and investment in gas infrastructure while ensuring compliance with the Petroleum Industry Act. Expanding free-market negotiations and incentivizing producers to meet domestic obligations will stimulate efficiency and innovation. Robust oversight of the regulated market, including adherence to Domestic Gas Delivery Obligations, will ensure a steady supply of gas to strategic sectors. This will accelerate economic growth, attract investments, and enhance domestic gas resource utilization, ensuring sustainable energy security.

SNIPPET:
TO OPTIMIZE NIGERIA’S DOMESTIC GAS MARKET AND LEVERAGE ITS VAST NATURAL GAS RESOURCES, IT IS ESSENTIAL TO STRIKE A BALANCE BETWEEN REGULATED AND UNREGULATED MARKET MECHANISMS.

KEYWORDS:
DOMESTIC GAS PRICING, UNREGULATED GAS MARKET, NATURAL GAS SECTOR

DOMESTIC GAS DELIVERY OBLIGATIONS (DGDO), PETROLEUM INDUSTRY ACT (PIA), GAS PURCHASE AND SALE AGREEMENT (GPSA), REGULATED DOMESTIC MARKET, FREE MARKET PRICE, TRANSFER PRICE, NATURAL GAS AGGREGATION, ESCROW MECHANISM, GAS PRICING AND DOMESTIC DEMAND REGULATIONS (GPDDR), TAX CREDIT INCENTIVES, RAW GAS SALES

1. Available at https://www.nuprc.gov.ng/nigerias-oil-and-gas-reserves-soar-nuprc-unveils-impressive-figures/ accessed November 2024. ↑
2. TOPE ADEBAYO LP; FUELLING NIGERIA’S FUTURE: A ROADMAP FOR DOMESTIC GAS PRICING AND REGULATION (PART 1) available at https://topeadebayolp.com/wp-content/uploads/2024/08/FUELLING-NIGERIAS-FUTURE-A-ROADMAP-FOR-DOMESTIC-GAS-PRICING-AND-REGULATION-PART-1.pdf accessed November 2024. ↑
3. The Interplay Between the Domestic Gas Pricing Framework and the Unregulated Gas Market: A Focus on Nigeria. TEMPLARS ThoughtLab, Yemisi Awonuga, Nabila Gaduya, available at https://www.templars-law.com/app/uploads/2024/08/The-Interplay-Between-the-Domestic-Gas-Pricing-Framework-and-the-Unregulated-Gas-Market.pdf accessed November 2024. ↑
4. Section 167 (1) PIA 2021. ↑
5. Available at https://africaoilgasreport.com/2024/04/gas-monetization/gas-price-hike-nigeria-nods-again-to-upstream-producers-demand/#:~:text=Under%20the%20 new%20pricing%20regime,been%20at%20%242.18%20since%202021 accessed November 2024. ↑
6. Section 32(d) PIA 2021. ↑
7. Section 32(e) PIA 2021. ↑
8. Sections 173(2) & 173(1) PIA 2021. ↑
9. Section 173(3), PIA 2021. ↑
10. Section 7, Pricing and Demand Reg. ↑
11. Section 5(2), Pricing and Demand Reg. ↑
12. ↑
13. Ibid. ↑
14. section 154 (g). PIA 2021. ↑
15. Section 156. PIA 2021. ↑