Gas Pricing: Oil Firms, PHCN to Revise Accord

FOLLOWING PRESIDENT GOODLUCK Jonathan's approval of new prices for gas-to-power, oil companies that supply gas to the Power Holding Company of Nigeria (PHCN) are planning to meet with the power utility company to revise previous agreements on gas supply.

President Jonathan recently approved the implementation of a new gas-to-power price in the domestic market as part of the efforts to encourage the producers to make more gas available for electricity generation in the country.

These producers supply gas to the Nigerian Gas Company (NGC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC), which markets the gas for domestic uses.

Before the new price regime, the gas producers had concentrated on supplying to the Liquefied Natural Gas (LNG) project for export as they claimed that the domestic price was clearly a disincentive to investment.

 

Gas price increase

But under the approved price regime, the price of gas will increase progressively from its current 20 cents per million British thermal unit (mmbtu) to $1/mmbtu by the end of 2010 and $2/mmbtu by the end of 2013.

Managing Director of Shell Petroleum Development Company (SPDC), and Chairman of Shell Companies in Nigeria, Mr. Mutui Sunmonu, told journalists in Lagos last week that the new price increase was necessary for the country to meet its domestic gas ambition.

"If you ask me as an investor whether I am completely happy with it, I will say that I will like to see more; I will like to see the price for 2012 and 2013 fast-tracked to 2011. But on a more serious note, I think it is a great improvement from where we are at the moment," he said.

Gas producers, of which Shell is a major player, had argued that the price regime of 20 cents per million British Thermal Unit (mmbtu) could not support the needed investment required for them to meet the domestic demand. They had also insisted that the price of gas was one of the most critical enablers for sustained gas supply to the power sector.

 

Power Sector

The power sector currently consumes about 700mn standard cubic feet per day (mmcf/d) of gas and this is set to grow to about 2,500mmcf/d by 2014.

The new price will however, be capped by export parity, which implies that at no time will the Power Holding Company (PHCN) pay more for gas than the export projects are paying for gas.

In essence, should export prices fall below the new approved prices, the lower of the two is what would be paid by the power sector. Each price change will be triggered only when the gas sector has demonstrated that it has developed sufficient gas to attain a particular threshold of electricity generation of 4,700megawatts by end of 2010; 6,200megawatts by end of 2011; 8,200mw by 2012.

The Federal Government was set to liberalise the gas-to-power pricing regime to ensure that PHCN generation companies and independent power producers procure gas from multinational oil companies at market determined rates.

All the stakeholders had agreed that supply of gas for power would have to be liberalised to bring its price closer to the price at which it is currently being sold for LNG export.

On the inability of the PHCN to pay for gas supply, even at the old rate of 20 cents per mmbtu, it was gathered that the World Bank will provide risk guarantee to gas producers in the event of PHCN being unable to pay the new rate.

Out of the N459, 103,103,252,394 owed by PHCN, a total of N10,037,187,532.42 was incurred on fuel and gas supplies by SPDC and the Nigeria Gas Company (NGC).

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