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Another Burden for Industrialists

By Franklin Alli
Manufacturers to pay more for gas as NNPC benchmark its price with current market price of low pour fuel oil published monthly by the Pipeline and Products Marketing Company (PPMC) a subsidiary of the Nigerian National Petroleum Corporation, Franklin Alli reports>

Industrilization outfit
Industrilization outfit

Manufacturing industries that depend on natural gas to power their generators and boilers may have to pay more for the commodity as local gas manufacturers and suppliers will now benchmark price with current market price of low pour fuel oil (LPFO) published monthly by the Pipeline and Products Marketing Company (PPMC) a subsidiary of the Nigerian National Petroleum Corporation (NNPC).

NNPC in May announced a new LPFO price in conformance to market realities at N48 from the fixed N25.40 which has been in existence for four years, which the price of gas has been discounted against to make it the cheapest fuel in Nigeria. An official of one of the gas companies told Financial Vanguard, weekend that the impending change in pricing is being propelled by the pump price of Low Pour Fuel Oil (LPFO) as referenced by the PPMC.

The source further disclosed that another factor compelling gas companies to consider a new price regime is premised on Article 10.2 of standard GSPA which provides that applicable gas price shall be based on the current national price of LPFO. Gas is being sold for N21.40 per cubic units and the new price for billing customers will likely be reviewed upward by more than 200 per cent.

In the past five years, as a result of the deplorable state of public power supply to industries and homes, discerning industrialists took the bull by the horn and invested in alternative power supply such as black oil popularly called Low Pour Fuel Oil (LPFO), however, the steady rise in the price of the black oil forced some of the operators to made further investment in gas driven plants.

Of course, the current national price of LPFO as published by the Petroleum Product Pricing and Regulatory Agency (PPPRA), which is the body charged with the responsibility of approving pricing benchmarks for all petroleum products in Nigeria, has ceased being N25.40 per litre since their May 2008 publication. The current figures for all petroleum products have been published on the agency’s website.
In addition, Article 10.2 of the GSPA further provides, inter alia, that “In future, if any new pricing mechanism evolves, such will be communicated and administered”.

The source further cited the rising cost of construction and maintenance of gas pipelines as another reasons for up review of gas price.
“For the local gas companies and gas suppliers, the recent price increases in international energy and steel prices have exacerbated the market-related problems confronting them. Maintaining an artificially low gas price in this environment will ensure that investing in gas distribution infrastructure will remain an unviable prospect.

“We foresee a situation where the current tariffs will lead to a shortfall in revenue level required to carry out the required maintenance and upgrades of the existing gas supply infrastructure. This is turn will lead to a curtailment in the supply of natural gas to existing domestic consumers.” he said.

This provision provides sector operators with the legal platform to inform their customers of the new pricing regime and administer same.

“We are constantly guided by the provisions of the GSPA in all our dealings with our customers. We need to adopt a price that ensures sustained supply throughout the value chain. We must adopt a reference price that would encourage companies willing to invest in gas exploration production and processing infrastructure,” source said, stressing that the recent approval of the National Gas Master Plan and the Gas Infrastructure Blueprint makes it clear that there is a sizeable investment requirement for the development of domestic gas supply infrastructure.

In May 2008, PPMC announced a price review for LPFO from N25.40 to N48.00. The change was a reflection of NNPC’s commitment to embrace deregulation of the oil & gas sector driven by market realities. Operators say PPMC’s price for LPFO has remained static in the last 4 years at well below the true market price.

The former price of N25.40 clearly takes no cognizance of the levels of inflation in the last 4 years. This static price only served to distort the market.

The government’s deregulation agenda has seen the partial deregulation of the downstream sector with industrial and commercial products like ATK and Lubes fully deregulated while mass market products like PMS and Kerosene remain regulated and sold at subsidized fixed prices. The new price is seen as a push towards complete deregulation of the sector as the subsidy on petroleum products is unsustainable.

The commercial end user price of natural gas according to our contracts is linked to the pump price of Low Pour Fuel Oil (LPFO), being the least cost alternative.

Commenting on the implications of the anticipated hike in gas price, an industrialist said that manufacturers are concerned because the implication of this is that the prices of products from the manufacturing concerns may also experience a commensurate increase for them to break even. “It will have spiralling effect on the cost of production of goods and services on one hand, but more importantly, this action will affect every home in Nigeria; it could lead to increased wood cutting, deforestation and adverse consequences of climatic change,” he said.

It would greatly reduce the purchasing power of all our citizens and potentially trigger spiral inflation and thereby inflict untold hardship on the average Nigerian”, he said.

He stated that “It has been reported that this current decision to hike the prices of gas is based on the Petroleum Products Price Regulatory Agency (PPPRA) pricing template for imported Low Pour Fuel Oil (LPFO) as in contrast with the usual pricing benchmark by PPMC”.

“The unprecedented hike is therefore generally viewed as grossly unilateral, inconsistent, and set to erode the country’s energy prospects as it affects gas sector development particularly the domestic pricing, supply and utilization”, he said.

Some of the gas companies had now benchmarked the price of their gas with that of the Petroleum Products Pricing Regulatory Agency (PPPRA) which they felt was more realistic. It took the intervention of the National Assembly to prevail on the gas companies to go back to status quo.

Some of the gas companies had said the rising cost of construction and maintenance of gas pipelines had necessitated their clamour for industrial users to buy the commodity at appropriate price. According to them, for the local gas companies and gas suppliers, the recent increase in the international price of energy and steel products had exacerbated the market related problems confronting them.

“Maintaining an artificial low gas price in this environment will ensure that investing in gas distribution infrastructure will remain a non-viable prospect.

“We foresee a situation where the current tariff would lead to increased revenue required to carry our maintenance work and upgrade of the existing infrastructure. This will lead to increase in supply to existing consumers,” an official of one of the gas companies said.
But an employee of one of the companies said that the workers may lose their jobs if the price of gas is too high. This is because, according to him, some companies might in the event of trying to cut costs and meet production level downsize their staff strength.

It will be recalled that last year, similar attempt for price increase generated a row between some of the gas companies and members of the Manufacturers Association of Nigeria (MAN). MAN was disturbed that a new price regime would hammer more companies to close factories, particularly at Apapa and Ikeja industrial axis, and, thus, rendered thousands of workers jobless. The Association noted that early part of 2008 witnessed relatively stable supply of petroleum products. However, the stability was shattered in the last quarter of 2008 and the first quarter of 2009.

The initial shortages were contained only to be resuscitated through the deregulation of petroleum prices. This action seems to be across the board in respect of all downstream petroleum products with serious consequences for the prices of (PMS) petrol), AGO(diesel) and LPFO (black oil). This was foreseen by us, and about eighteen months ago, we made passionate pleas for the reduction in the price of AGO, and permission to partner with NNPC to import LPFO directly. Promise was given that evaporated into promises.


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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.