Wednesday,
March 03,
2021 /08:00 PM
/ By Proshare Research/ Header Image Credit: EcoGraphics
Always expect the unexpected.
The oil and gas industry is terrible at predicting anything. Always have a
back-up plan. - David Dixon
David Dixon's quotation may be true, but the fact that
the oil and gas (O&G) industry will undergo a major transition over the
next decade, is not a bullet from nowhere, as crude oil demand dips and gas demand
rises. The change in the composition of global energy demand would require a
critical review of pricing templates to ensure that the pricing of the
different energy sources is fit-for-investment. For example, gas pricing in
Nigeria until recently has been determined by will buyers and willing sellers,
allowing for a price discovery process that is market-led rather than
administratively determined.
The global march towards a less carbon-toxic
environment has meant that companies and governments have started the great
march towards friendlier power and energy sources such as gas, thereby raising
the profile of this source of energy in the global economy and production
matrix.
So far gas has not been trapped in the steely fingers
of a cartel and pricing appears to be efficient in a conventional market sense.
However, the economics of the gas market could become badly distorted if
governments decide to interfere in the market price determination by
introducing a battery of taxes, levies, and charges. The signs of these
possibilities have started to appear in countries like Nigeria where the
Petroleum Product Pricing Regulatory Agency (PPPRA) has introduced an
administrative charge of N1.23k per litre of liquified petroleum gas (LPG).
Analysts have noted that the introduction of an
administrative charge on local gas supply in Nigeria is an unfortunate
imposition of fiscal drunkenness on economic sobriety. The major challenge with
the charge is that it creates deadweight economic loss as well as discourages
the demand and supply of gas, which is an outcome at variance with the federal
governments proposed decade of gas policy set to increase gas use for
commercial and private automobiles and domestic cooking (see illustration
below).
Illustration 1 LPG; Averting
Deadweight Economic Losses
The imposition of charges on gas at a time when gas is
being encouraged as a friendlier alternative energy source is counterintuitive
and does not internalize the economic benefits from using gas rather than dual purpose
kerosene (DPK) or local firewood, both of which emit environment damaging
carbon. Economists have noted that charges on gas for obscure administrative
reasons shift the marginal cost curve of the product upwards and lead to higher
prices and lower consumer demand which combine to reduce the net present value
(NPV) of gas use. The added effect would be to discourage investment in an
industry that could grow employment along several value chains. Increasing
product cost in an inflationary environment (domestic inflation for January
2021 was 15.57%) is ill-advised say oil and gas (O&G) economists (see
illustration 2 below).
Illustration 2 LPG: Counting the
Cost
Letting the Market Speak-the Cobra Effect
The best approach to market development would be one
that openly internalizes all costs associated with the sale of gas (LPG and
LNG) and taxes chargeable are clear sales taxes rather than levies and charges
that do not have clear paths of value addition by oversight authorities. These
charges typically reflect what economists call the cobra
effect or a situation where a solution breeds worse problems
than it was meant to solve.
The charging of administrative levies on gas suppliers
increases the burden on consumers and cuts back demand for cooking gas, for
example. This results in consuming alternative sources of energy for cooking
which could prove to be hazardous to health and a blight on the government's
efforts at containing carbon emission and gradually achieving carbon
neutrality. The adverse effect of carbon emission on health would play up in
higher expenditure on public-sponsored healthcare and health infrastructure in
addition to lost manhours resulting from the vulnerability of workers exposed
to carbon-tainted workspaces.
The obvious option to dealing with these possible externalities would be for the
government to remove administrative charges and create a friendlier
market-determined price for domestic gas.
Moving forward, Cautiously
The gas age is inevitable as global demand for fossil
fuel for public cars, factories, public transportation, and domestic cooking
begin to decline and gas becomes the new oil. Nevertheless, fossil fuel will
not disappear down a rabbit hole, the demand for fossil fuel (PMS, DPK, and
AGO) will be with us for a while, but growth in demand will be constrained by
the global pivot towards gas. For instance, Britain's carbon emissions are down
by 44% while Germany's emissions are down by 29%. A trend showing that major
western economies are winding down carbon-emitting fossil fuel as an energy
source (see illustration 3 below).
Illustration 3 Oil and Gas in A
Time of Transition
The gas market will expand rapidly over the next
decade as oil gradually winds down, to integrate the gas future into its
development plans for industry and domestic users, the pricing of the product
must principally be market-determined, otherwise, price distortion emerging
from official price intervention would disrupt investment, use, and supply,
combined outcomes that would be unsavoury.
Section 1 of this report
introduces readers to the oil and gas market and explains the dynamics of how
the market works. Pointing the way forward in a gas-dominated world and how the
leaning towards gas would shape the emerging global economy and its energy
requirements.
Section 2 of the report
visits the Petroleum Industry Bill (PIB) and examines in many strong points but
draws attention to a few gaps that could prove knotty in the future, for
example, a large part of the bill fails to make a distinction between the
different types of gas: liquified petroleum gas (LPG), liquified natural gas
(LNG) and condensed petroleum gas (CNG).While section 167 and 168 of the bill
relates to LNG, the wordings are not explicit enough within the sections to
clarify the meaning of the generic term 'gas'.
In section 3 the report dissects the import of
deregulation and its impact on the gas market, insisting that for the market to
evolve to its full potential the government must avoid the temptation of price
regulation as has been the case with premium motor spirit (PMS). The
market-distorting impact of price regulation could have severe consequences for
investment, consumption, and business development.
Consideration of the regulatory mandate of oil and gas
(O&G) oversight agencies was made in section 4 where it was argued
that it was an anomaly to charge an administrative fee for a commodity that had
been price-deregulated and no service could arguably be attributed to the
administrative charge of N1.23 per litre by the Petroleum Product Pricing
Regulatory Agency (PPPRA), a cost which passes on to consumers and results in a 'deadweight' economic/market loss (see illustration 1 above).
Section 5 of the report
tackles issues of pricing of LPG and the need to keep the market both consumer
and investor-friendly to enable the country lean successfully into the new gas
age without the problems associated with the oil market. Keeping the gas
business catholic by avoiding avoidable costs and unfriendly regulatory
practices is critical to sustaining industry efficiency and competitiveness. This
significance is underlined in section 6 that makes the case for an
investor friendly market.
The concluding section of the report, section 7
reviews the impact of the global health pandemic on global supply and demand of
gas, both LPG and LNG and looks at the future of the market in a more stable
and less fragile global marketplace. The wrap-up section emphasizes that the
market was the best arbiter of price and supply/demand and the less the
potential distortions that could arise from public sector bureaucracy the
healthier the market.
Downloadable Version of Memo to
the Market: PPPRA and the Nigerian Gas Market, Avoiding a Robinhood
1. Full Report: Memo to the Market: PPPRA and the Nigerian Gas Market, Avoiding a Robinhood - Mar 02, 2021
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