Nigerian manufacturers say they are unhappy that franchisers of natural gas are dollarising payment of the energy source and selling to them at $$7.45 per standard cubic meter (scm), which is above the international price.
They say the situation is compounding their energy woes and raises production costs while lowering their competitive capacity.
“The persistent increase in the price of natural gas used by our members to power their plants and machineries has reached a crisis dimension,” Mansur Ahmed, president, Manufacturers Association Of Nigeria (MAN), said at an interactive forum on gas pricing in Lagos on April 30.
“Similarly, the continued denomination of price of gas in US dollars has made the product perpetually exorbitant and gradually getting outside the reach of majority of the manufacturers, particularly the small and medium industries,” he said.
The federal government had on January 4 this year gazetted a gas pricing framework for textile industries with a view to cutting down price for key players in the sub-sector. Many manufacturers are, however, unhappy that this was not extended to all players in the sector to reduce the huge impact which energy costs make on their margins.
Energy cost has continued to occupy 40 percent of manufacturing expenditure in Africa’s most populous country. While small- and medium-scale manufacturers use fuel-powered generators, large enterprises use gas and low-pour fuel oil (LPFO) to power their factories.
Expenditure on alternative energy source amounted to N93.1 billion in 2018 and N117.38 billion in 2017, according to MAN’s data.
Michael Adebayo, chairman, Gas Users Group of MAN, recalled that in 1999, the federal government took the bold initiative of stopping gas flaring and encouraged private sector operators, particularly manufacturers, to invest in gas infrastructure and utilisation.
The main objective of this initiative was to make gas cheaper than LPFO by about 30 percent and provide a cleaner industrial environment for the manufacturing sector in Nigeria.
“Manufacturers were motivated by this noble objective and invested heavily in converting their various production technologies and processes to the use of natural gas. Initially, most manufacturers benefited from this scheme as they were saved from constant power supply challenges and high cost of diesel. However, the gas pricing controversy started in 2008, when one of the franchisers, with the knowledge of the Nigerian Gas Company (NGC), increased the price of gas from N21.05 per scm to N67.63 on the basis that the company was bench-marking their price with the Petroleum Products Price Regulation and Monitoring Agency (PPPRA) template for fixing petroleum products and thereby adjusted its price accordingly,” he recalled.
This triggered series of negotiations between MAN and the franchisers on the one hand and the Nigerian Gas Company (NGC) with the Nigeria National Petroleum Corporation (NNPC) on the other hand, prompting the government to intervene, he said, adding that an increase of 15 percent from the initial price was later agreed to by all parties.
This adjustment was to enable franchisers to recoup their investments, he said..
He explained that that was not meant to be a permanent feature in the price of gas.
“Unfortunately, gas franchisers saw this adjustment as an opportunity and used it as the basis to increase prices, thereby undermining the Gas Sale Purchase Agreement (GSPA), which was collectively signed by MAN members.
In 2010, gas franchisers demanded for another increase in price without any amendment to the GSPA, triggering another controversy which created a prolonged dispute that almost grounded the manufacturing sector, he stated.
He said the benchmarking of the price of gas to the US dollars has made the process very volatile and has been responsible for the various increases in the price of gas over time.
He said benchmarking the price of gas to the dollar exchange rate is not in sync with the CBN directive of transacting businesses in Nigeria in the local currency.
“It is also instructive that while the average price of gas globally has been ranging in between and around $2.5 per scm. The case in Nigeria, where it is $7.45 per scm, is worrisome and with this kind of differential, Nigeria manufacturers cannot and may never be competitive,” he said.
However, Ibe Kachikwu, minister of state for petroleum resources, said the Federal Government is careful not to dictate a price for gas.
He spoke through Timothy Okon, his senior technical adviser.
“What we are trying to avoid is to remove human elements in the market. It needs to be market-drive and we wanted a price which matches with international pricing,” Kachikwu said.
He explained that the model used to arrive at certain figures for gas is not known to the law.
He, however, acknowledged that the distribution tariff is higher than transportation’s and sometimes higher than gas itself which is abnormal.
He assured that the federal government would release a new gas pricing template before May 29 to address some of the controversies around gas.
“If the international price of gas is $5, why should the end user in Nigeria pay $8?” he asked. “We are unable to see how the current structure conforms to the rules that have been set,” he stated.