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2009, the year of gas turbulence for manufacturers

Franklin Alli
As the year 2009  wraps up, investors   in the industrial sector of the economy have described the year as one of gas turbulence.  

In fact, industry watchers say no quarter of the year passed by without  a row between members of the Manufacturers Association of Nigeria (MAN) and some of the gas companies .  

Each time gas companies and their suppliers threatened to hike the price of the commodity , MAN cried out and run to the Federal Government for intervention telling 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.

In the past five years, as a result of the inadequate public supply of electricity to run production many manufacturing industries  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.

“It is disheartening to point out that persistent increase in the ex-depot price of LPFO automatically affect the price of gas, which was cheaper and safer alternative source of power supply in the country.

This development which is inimical to the growth of the manufacturing sector is capable of stirring up restiveness within the sector,” said Chairman MAN Gas Users Group, Prince Felix Oba Okojie.

He noted that from the period the concept of deregulation was hatched to date, industrial consumers have witnessed at least four price bursts particularly in LPFO from N25.40 to N48, N57. N64 and N72 per litre, while there is sharp decline in the price of petroleum products globally.

For example, Natural Gas price in the United State has come down to $9.24 per mscf for commercial while for industrial use it is $4.51 per mscf, which come to N24.68 per scm.

According to Okojie, manufacturers massive investments have now become totally eroded due to the abnormality in the present gas price mechanism
The negative development, he maintained, will not only affect the direct users of LPFO but will also affect the users of gas as the price of gas is benchmarked against LPFO prices which as at today comes to about N58.70 per scm.

It is important to point out that manufacturers are not averse to the concept of deregulation, all we are saying is that Gas should be detached from being benchmarked against LPFO as the constant fluctuations in the pricing will not be healthy for industrial Gas Users in terms of production planning and costing.

There is no where in the world where Gas is benchmarked against any petroleum product.    

We would like to remind the Government that the supply situation of petroleum products particularly the LPFO is comatose, and given the sorry state of our public electricity supply, it will be unwise in our thinking to effect the implementation of deregulation at this point in time particularly in the absence of dependable infrastructure without giving a special relief package to manufacturers with a view to cushioning the effects of the increase in the price of LPFO and AGO.

Nigeria became an exception to this arrangement because at the time focus was placed on gas, Government wanted it to be the cheapest and affordable industrial fuel in the market and was also intended to serve as a sort of incentive to manufacturers who could not get adequate supply of electricity for production.

In 1999, the Federal Government took effective steps to stop the flaring of gas and consistently encouraged the private sector particularly local manufacturers to use natural gas in production. The intention was to make up for the shortfall of supply of electricity as well as reduce the flaring of the country’s abundant gas.

LPFO was the cheapest and regulated product at that time. Government had to benchmark Gas against the price so that Gas would be at least 30 per cent cheaper than LPFO, which was itself the cheapest petroleum product. That is precisely the origin of the pricing of Gas and the arrangement is only peculiar to Nigeria.

It was this laudable initiative of government that encouraged manufacturers to invest heavily in the conversion of production process and further trained personnel to be compliant with the change over to the use of natural gas.

There is no doubt that with this acceptable initiative, companies which were on the verge of collapse due to the high cost of diesel and other conventional energy sources breathed a sigh of relief and bounced back to.

It is therefore regrettable that within the past one year, manufacturers have been bedeviled with problems of inordinate pricing mechanism.

It is also important to emphasize that gas suppliers enjoy a complete monopoly within their franchise areas, which is one of the factors responsible  for  the   current   practice   which   they   have   adopted   in reviewing their prices arbitrarily and frequently.    

Manufacturers are completely in the dark with regards to their cost structure arrangements for receiving supply of gas from their principals particularly the Nigerian Gas Company Limited (NGC), and at what cost.

As a result, the end users are extremely vulnerable and completely subjected to the whims and caprices of the gas suppliers.

The growth of the manufacturing sector is grossly hampered with the huge burden of energy cost caused by acute power shortage and high price of LPFO, gas and diesel, products that ordinarily should be very cheap as they are natural resource of the country.

In order to maintain a tense free 2010 between them and gas companies MAN, has proposed the following recommendations.

*In view of the continued escalation of price of LPFO as a result of importation, deregulation and other variable cost attached  to it such as sea freight and inland transportation, it is no longer economical and logical to benchmark gas price against the price of LPFO.

* That the pricing strategy of natural   gas  should   be  changed from  the   present bench marking on LPFO by taking into consideration the cost elements of producing and distributing a standard cubic metre of gas.

*Government through the appropriate regulatory agencies should now fix the price of gas with due involvement of all the stakeholders like Nigerian Gas Company Limited (NGC), Distributors as well as manufacturers/consumers. The new price of Gas should have no link with LPFO as gas is a natural resource of the nation and much of it is being flared as waste.   

*Government should endavour to break the monopoly of the franchisers by making the pipelines accessible to other licensed distributors.

*Make the Nation’s Refineries work to reduce dependence on importation of petroleum products, in particular, LPFO and AGO.


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