The Nigerian gas market is in dire need of market-reflective pricing as operators lose sleep over their loss of an average 18 percent of their investment to overregulation in the sector, according to Dada Thomas, managing director of Frontier Oil Limited and serving the president of the Nigeria Gas Association (NGA).
In an exclusive interview with business a.m. in Lagos, Thomas noted that apart from contending with delayed and oftentimes non-payment by government-owned plants, operators suffer losses due to pegged prices and foreign exchange risks.
He said their investments are quoted in dollars but government stipulates that payment on their receivables are done in naira with the CBN exchange rate and have to convert to dollar via the parallel market. “Our gas contracts are actually in U.S. dollars; the invoices are issued in U.S. dollars but we are being paid in naira.
That wouldn’t have been bad if we are not being paid at the CBN rate, which is now N305. But when we want to buy dollars to repay our loans we have to go to the market and the market rate is N365. So we end up losing N65 for every dollar of gas we sell,” he said, adding that in 2016 operators lost up to N200 for every dollar of gas sold.
“Remember the market went to N510 and CBN was N305, I was going crazy then because I was losing 40 percent of my income, essentially.
Today we are losing 18 percent of our income, which is not a fair thing,” he lamented. He pointed out that the foreign exchange risk exposure that the gas suppliers are bearing on behalf of the gas-to-power sector is not fair. “Why should we invest dollars and be paid in naira and suffer an 18 percent value erosion.
The fair thing would be that the government would allow us to access dollars at the same exchange rate at which we are paid or make an exemption and pay us in dollars,” he queried. Thomas noted that operators are only suing for equity in their transactions.
“Why don’t you just pay us at the market rate rather than CBN rate. So if I’m paid at N360, I will also go and buy dollar at N360, so I am not suffering any exposure. We are just saying that we need equity in our transactions.”
The NGA president said another major challenge for the domestic gas market is the fact that 80 percent of Nigeria’s domestic gas is used by the power sector, which has been privatized in theory without proper implementation, since the Discos who are the people that all consumers interface with are not getting enough electricity to sell, adding that the price at which they are selling electricity is not market-reflective.
“I don’t like the word, cost-reflective. I prefer market-reflective because if you say cost reflective, that means I can build up my cost anyhow, and then say my cost is this and you have to pay. But market-reflective means you go for efficiency, so there would be 5 to 10 players and you go with the most efficient,” he noted.
He pointed out that the Discos are not selling enough power and they are not collecting efficiently, which, according to him is their fault.
He equally noted that collection efficiency has dropped drastically in Nigeria from 60 percent in the days of NEPA to under 30 percent presently.
According to him, the Discos are not collecting enough money to remit to the transmission company, to pay the generating companies, to settle the transportation companies that transport the gas, and to pay the gas suppliers, “the poor guy who is the foundation of everything.”
“So the sector is completely uneconomic and illiquid right now,” he said, an outcome of which is the more than N250 billion debt in the power market.
“As we speak, the debt is growing and is killing us. He noted the federal government intervention last year when it initiated what is called the payment assurance guarantee scheme whereby NBET via the CBN will pay power generating companies and the gas suppliers their due gas invoices starting January 2017 and ending December 2018.
He, however, doubted the initiative efficiency, querying what happens after the scheme ends in December 2018. What would happen in January 2019?
Would the power sector issues have been resolved such that electricity tariff is market-reflective? Would collection efficiency have increased?
Would the DisCos have rolled out metering so that they are actually improving and they know what to bill the consumer? Would they remit enough revenue to the transmission company, generating companies, gas transportation companies and gas suppliers?
Would they send enough money to sustain the entire sector? He asked. “So there is great doubt,” he said, adding: “As we sit, that payment assurance guaranty scheme by NBET and CBN has only paid up to August 2017, so there are 7 months of unpaid invoices, while interest is piling up.
I can’t pay my debt, it is not a sustainable model, what should happen is that they should be up to date, they should have paid up to February invoices.”
He added: “If I sell you goods, you have a shop and I have a factory, and I give you 30 days credit, you come and collect my goods, and go and sell it, in 30 days, you sell and put money in my account, you are not doing me a favour by putting money in my account, you are meeting your contractual obligations, which allows me to continue to supply you with goods.
That is not what is happening in our sector therefore it is very challenging for people to continue to invest in the Nigerian domestic gas market.