New Domestic Base Price for Gas: Impact on Power Sector, Commercial and Gas-based Industries

The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) officially announced a new Domestic Base Price (DBP) for natural gas at $2.42 per Million Metric British Thermal Units (MMBTU) in line with the requirements of the Petroleum Industry Act (PIA) for the regulator to announce a DBP annually.

In his words, the Authority Chief Executive, NMDPRA, Engr. Farouk Ahmed stated that the new price announcement is part of the PIA regulatory framework in setting a standard price for natural gas consumption in Nigeria.

Under the new pricing regime governed by the PIA, Farouk explained that the domestic base price at the marketable gas delivery point under Section 167 (1) and other provisions of the PIA shall always be determined based on extant regulations and the clear provisions of the applicable laws.

As prescribed in the PIA, the NMDPRA Chief Executive emphasized that going forward, the price of natural gas must be of a level to bring forward sufficient natural gas supplies for the domestic market on a voluntary basis by the upstream producers.

According to him, other principles that guided the determination of the DBP include, “The price shall not be higher than the average of similar natural gas prices in major emerging countries that are significant producers of natural gas. The lowest cost of gas supply shall be based on the three-tier cost of supply framework; Market-related prices tied to international benchmarks.”

He added that the new domestic base price was agreed upon after due consultation with key stakeholders and taking into cognizance the provisions of the PIA, as well as the gazetted gas pricing and domestic demand regulations.

As the debate continues to build up on the latest DBP gas price regime across Nigeria, The Energy Republic conducted an extensive investigation on the new domestic base price for gas, with emphasis from prominent industry stakeholders on the impact of the DBP on the Nigerian power sector, as well as commercial sector and Gas-based Industries.

Based on our findings, the report shows that the new domestic base price of gas represents an +11% increase from the previous gas to power price.

However, the actual impact of the gas price increase on the cost of electricity tariffs could be a conservative increase of ~3% or approximately NGN 4/kWh that is being delivered to electricity customers. This is because not all electricity generation is gas-based.

Additionally, electricity tariffs are impacted more significantly by inflation, devaluation, and ATC&C losses. This increase can be fully absorbed by the high-income bands.

Impact on Commercial and Gas-based Industries
In the commercial sector, the new domestic base price could see fast-moving consumer goods (FMCG) companies using gas for self-generated power, resulting in reduced operating costs by 0.2% if the gains of the new DBP are passed on to the end users by the gas suppliers.

Similarly, for other manufacturers (e.g. cement) that use gas for fuel (process heat), the new domestic base price of gas could see reduced operating costs by up to ~7%.

Furthermore, the impact on gas-based industries such as fertilizer plants is potentially positive or zero as the floor price remains unchanged but the contractual price is determined by Schedule 4 of the Petroleum Industry Act (PIA).

In summary, the new Domestic Base Price is a positive step towards a cost-reflective pricing regime in the gas value chain that will provide the basis for a willing buyer-willing seller market in the near future.

Source: The Energy Republic

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