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PPPRA and the Nigerian Gas Market: Avoiding a Robinhood

Oil & Gas	3716 VIEWS
Oil & Gas
3716 VIEWS

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

Proshare Nigeria Pvt. Ltd.

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

Proshare Nigeria Pvt. Ltd.

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

Proshare Nigeria Pvt. Ltd.

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.