A Review of the Energy Industry Regulation in Nigeria and some Implications for Shell
1. The Warwick MBA
Submitted by: OS Adio
Module Title: Business Policy & Regulation in Global Energy Industry
Date: June 2014
Word Count: 2637 (Excluding headings, tables, figures, labels, references & appendices)
Number of Pages: 16
Question: Assessment of Overall Energy Regulation in Nigeria, with
a focus on the National Domestic Gas Supply & Pricing Regulation
coupled with projection of future direction and the impact on Shell
Plc.
“This is to certify that the work I am submitting is my own. All external
references and sources are clearly acknowledged and identified within the
contents. I am aware of the University of Warwick regulation concerning
plagiarism and collusion.
No substantial part(s) of the work submitted here has also been submitted by
me in other assessments for accredited courses of study, and I acknowledge that
if this has been done an appropriate reduction in the mark I might otherwise
have received will be made.”
2. Contents
Assignment Cover Sheet .................................................Error! Bookmark not defined.
1.0 Introduction - Nigeria and Shell.....................................................................3
2.0 Nigeria Energy Regulatory Regime ...............................................................4
2.1 Regulatory Bodies.............................................................................................5
2.2 Regulatory Objectives.......................................................................................6
3.0 National Domestic Gas Supply & Pricing Regulation..................................7
3.1 Domestic Gas Supply Obligation (DGSO) .......................................................7
3.2 Gas Pricing Framework ...................................................................................8
3.3 Implementation, Enforcement & Penalties.......................................................9
4.0 The NDGSPR – Five Years Later.................................................................10
5.0 Future of the NDGSPR and Energy Regulation in Nigeria.......................11
6.0 Shell and Nigeria Regulatory Environment ................................................12
7.0 Evaluation & Conclusion ..............................................................................13
References...................................................................................................................14
Appendix 1 Gas Pricing Framework ...................................................................16
3. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 1 June 2014
List of Figures Page
1 Total Primary Energy Consumption in Nigeria 3
2 Domestic Gas Supply Obligation of Operators (2008 - 2013) 7
3 Illustration of The Gas Pricing Framework 8
4 Nigeria Natural Gas Production, Consumption & Export 10
5 Shell Proven Oil & Natural Gas Reserves 12
4. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 2 June 2014
Acronyms
AGRA Associated Gas Reinjection Act
BPR Business, Policy & Regulation
CNL Chevron Nigeria Limited
DGSO Domestic Gas Supply Obligations
DoG Department of Gas
DPR Department of Petroleum Resources
EIA Energy Information Administration
EIAA Environmental Impact Assessment Act
ERA Electricity Reform Act
GACN Gas Aggregation Company of Nigeria
GDP Gross Domestic Product
JV Joint Venture
IRR Internal Rate of Return
LNG Liquefied Natural Gas
MMBtu Million British Thermal Units
MMtpa Million Tonnes Per Annum
MPN Mobil Producing Nigeria
MScf Thousand Standard Cubic Feet
NAOC Nigeria Agip Oil Company
NDDC Niger Delta Development Commission
NDGSPR National Domestic Gas Supply & Pricing Regulation
NERC National Electricity Regulatory Commission
NHT Nigerian Hydrocarbon Tax
NLNG Nigeria Liquefied Natural Gas
NNPC Nigerian National Petroleum Corporation
NOGICD Nigeria Oil & Gas Industry Content Development
PA Petroleum Act
PIB Petroleum Industry Bill
PLAC Policy Legal and Advocacy Centre
PPPRA Petroleum Products Pricing Regulatory Agency
PPTA Petroleum Profits Tax Act
PSC Production Sharing Contract
SNEPCo Shell Nigeria Exploration and Production Company
SPDC Shell Petroleum Development Company
TScf Trillion Standard Cubic Feet
5. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 3 June 2014
1.0 Introduction - Nigeria and Shell
Nigeria is the largest oil producer in Africa and was the world’s fourth leading exporter of
LNG in 2012. Despite the relatively large volumes it produces, Nigeria’s oil production is
hampered by instability and supply disruptions, while the natural gas sector is restricted by
the lack of infrastructure to monetize gas that is currently flared (EIA, 2013a).
Nigeria’s energy consumption is largely defined by oil, gas and traditional biomass (see
figure-1).
Figure 1 – Total Primary Energy Consumption in Nigeria, 2011 (EIA, 2013a)
Traditional
Biomass &
Waste
83%
Oil
11%
Natural Gas
5%
Hydro
1%
TOTAL PRIMARY ENERGY CONSUMPTION
Shell operates in Nigeria through the Shell Petroleum Development Company of Nigeria
Limited (SPDC) and the Shell Nigeria Exploration and Production Company Limited
(SNEPCo). SPDC has a JV with NNPC that is made up of NNPC (55%), Shell (30%), Total
Exploration and Production Nigeria Limited (10%), and Nigerian Agip Oil Company Limited
(Eni) (5%). SPDC's operations include a network of pipelines, eight gas plants, and two oil
export terminals (EIA, 2013a).
Shell's offshore activities are carried out by SNEPCo, which was formed in 1993 to develop
Nigeria's deepwater offshore oil and gas resources. Under a PSC with NNPC, SNEPCo owns
shares in three deep-water blocks one of which is Shell-operated (EIA, 2013a).
Shell, through its subsidiary Shell Gas B.V., holds a 25.6% interest in Nigeria LNG Limited
(NLNG). NLNG operates six liquefaction trains at the Bonny facility with a total capacity of
22 MMtpa (EIA, 2013a).
6. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 4 June 2014
2.0 Nigeria Energy Regulatory Regime
Due to the limited scope of the energy industry (see figure-1), regulation is largely centred on
oil and gas laws. However, the recently completed privatisation of the power sector has also
brought electricity regulation to the fore more than ever before.
The key legislations used to regulate the oil, gas and power sectors are listed in table-1.
Table 1 - List of Key Energy Industry Acts in Nigeria (PLAC, 2012; GACN, 2014a)
Law/Regulation/Policy Focus
Nigerian Oil & Gas Industry Content
Development Act 2010 (NOGICD)
An Act to provide for the development of
Nigerian content in the Nigeria oil & gas
industry.
National Domestic Gas Supply and Pricing
Regulation 2008 – (NDGSPR)
To impose a requirement on all gas producers to
set aside a pre-defined portion of their gas
production for domestic use. Also to establish a
pricing framework for identified strategic
domestic gas consumer sectors.
The Environmental Impact Assessment Act 1992
(EIAA)
An Act to set out the general principles,
procedure and methods to enable the prior
consideration of environmental impact
assessment on certain public or private projects
Associated Gas Reinjection Act 1979 (AGRA)
An Act to compel every company producing oil
and gas in Nigeria to submit preliminary
programmes for gas re-injection and detailed
plans for implementation of gas re-injection
Petroleum Act 1969 (PA)
An Act to provide for the exploration of
petroleum from the territorial waters and the
continental shelf of Nigeria and to vest the
ownership of all revenues from petroleum
resources derivable therefrom in the Federal
Government
Petroleum Profits Tax Act 1958 (PPTA)
An act to impose a tax upon profits from the
wining of Petroleum in Nigeria to provide for the
assessment and collection thereof and for the
purposes connected therewith
Electricity Reform Act 2005 (ERA)
An act to provide for the formation of companies
to take over the functions, assets, liabilities and
staff of the National Electric Power Authority.
To develop competitive markets and regulation of
generation, transmission, distribution and supply
of electricity. To enforce performance standards,
consumer rights and to provide for the
determination of tariffs.
The above regulations cover the key activities in the oil & gas sector. The electricity reform
act was used to privatise and subsequently being used to regulate the power sector.
7. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 5 June 2014
2.1 Regulatory Bodies
Regulatory power in the Nigerian oil and gas industry is conferred on agencies of the Ministry
of Petroleum. The Ministry and its agencies are mandated as outline in table-2;
Table 2 – Nigeria Oil and Gas Regulatory Agencies
Regulatory Agency Responsibility
The Ministry of Petroleum
Has primary supervisory oversight over the oil and gas
industry and a mandate to initiate policies and supervise
the implementation of approved policies (MPR, 2014)
The Department of Petroleum
Resources (DPR)
Has statutory responsibility of ensuring compliance to
petroleum laws, regulations and guidelines in the Industry
(DPR, 2014).
The Petroleum Products Pricing and
Regulatory Agency (PPPRA)
Has statutory responsibility for fixing the benchmark
prices of petroleum products and regulating and
monitoring the transportation and distribution of petroleum
products (MPR, 2014).
The Nigerian Content Development
and Monitoring Board
Has statutory responsibility to regulate and monitor the
implementation of Nigerian content in all activities of the
petroleum industry (MPR, 2014).
The Department of Gas Resources
Has the responsibility to regulate the gas sector in
accordance with the NDGSPR.
Part of the DPR’s remit based on the stipulations of the petroleum act is to issue Oil
Exploration License, Oil Prospecting License and Oil Mining Lease to operators as well as
execute production agreements, including Production Sharing Contracts and Service
Contracts.
Although not a regulatory body, the Nigerian National Petroleum Corporation (NNPC) is the
commercial arm of the Ministry of Petroleum with which the Federal Government holds a
stake in oil and gas assets involving IOC’s. This government interest is a key part of the
current regulatory framework. However, this position of the NNPC within the regulatory
system could undermine the fairness of regulatory policies.
The National Electricity Regulatory Commission, which is independent of the ministry of
petroleum was established by the ERA of 2005 to undertake technical and economic
regulation of the electricity supply industry (NERC, 2013a).
8. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 6 June 2014
2.2 Regulatory Objectives
The energy sector regulation in Nigeria is influenced by a range of factors, including;
Public Interest – Through their provisions for mandatory government interest in oil and gas
production assets and the imposition of profit tax and royalties, the PA and PPTA ensure
public interest is protected in the exploitation of the state’s natural resources. The regulatory
regime also requires all producers in the Niger-Delta area to contribute 3% of their total
annual budget to the Niger-Delta Development Commission Fund (NDDC Fund) (Lovells,
2012). Contribution to the NDDC Fund is a regulatory measure to “force” operators typically
seen as shareholder-centric to give something back to their host community.
Economic Prosperity – One of the key objectives of the NDGSPR is to stimulate the
multiplier effect of gas by increasing gas utilisation to drive increase in power generation as
well as boost the industrial and commercial sector.
Although Shell publicly states it as strategic divestments, political pressures along with other
types of pressures, such as asset vandalism, has forced the company to divest a series of
onshore assets to indigenous companies. To foster more acceptable means of local
participation, the NOGICD was passed to ensure increased participation and development of
indigenous labour force and businesses in the sector.
Consumer Protection – The PPPRA in collaboration with the ministry sets subsidised price
for refined petroleum products due to lack of affordability of international market-led prices
by majority of consumers.
In the electricity sector, through its regulatory Multi-Year Tariff Order (NERC, 2013b),
NERC ensures that electricity prices charged by licensees are fair to customers and sufficient
to allow the licensees to finance their activities and to allow for reasonable earnings for
efficient operation.
Security of Supply – One of the objectives of the NDGSPR is to put an obligation on
operators to reserve a mandatory amount of their produced gas for the domestic market rather
than sell it into the lucrative export market in the form of LNG.
Environmental protection – Some of the key objectives of the EIAA and the AGRA is to
make provisions for tackling gas flaring.
9. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 7 June 2014
3.0 National Domestic Gas Supply & Pricing Regulation
It is estimated that Nigeria holds up to 180Tscf of proven natural gas reserves (BP, 2014).
However, domestic gas utilisation is low due to lack of infrastructures such as domestic gas
distribution network and gas power generation capacity. With Nigeria having an average GDP
per capita of $2722 from 2009-2013 (World Bank, 2014a), consumer affordability is also a
concern. These factors contribute to the low percentage of natural gas in the energy mix
(figure-1). Consequently, operators such as Shell channel their gas production to the export
market.
To tackle the low domestic gas utilisation problem, the government introduced the NDGSPR.
This regulatory measure had two key facets in its framework
Domestic Gas Supply Obligation
Gas Pricing Framework
3.1 Domestic Gas Supply Obligation (DGSO)
In an effort to divert more gas into the domestic market, the DGSO requires all gas producers
to dedicate a specific proportion of their gas reserves and production for supply to the
domestic market (Figure-2).
Figure 2 – Strategic Domestic Gas Supply Obligation for Operators (GACN, 2014b)
2008 2009 2010 2011 2012 2013
OTHERS 396 604 673 721 775 842
NAOC 279.8 362.8 449.8 513.8 578.8 642.8
MPN 399 517 640 732 823 915
CNL 350.6 455 563.6 643.6 724.6 804.6
SPDC 849.4 1100 1363 1558 1753 1948
0
1000
2000
3000
4000
5000
6000
GasVolume(MMSCF)
Domestic Gas Supply Obligation (2008-2013)
As shown, the DGSO was targeting increasing strategic domestic gas utilisation up to 5Bcf in
2013.
10. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 8 June 2014
3.2 Gas Pricing Framework
To tackle the disparity in gas price affordability across different sectors, the NDGSPR
introduced a pricing framework (figure-3) to target the identified;
Strategic Domestic Sector
Strategic Industrial Sector
Strategic Commercial Sector
Figure 3 – Illustration of the Gas Pricing Framework (Adapted from GACN, 2014c)
The pricing regime sets a floor price for each sector, with the actual price paid based on
indexation and negotiation between buyer and seller. This transitional pricing approach
ensures each sector can be supplied with gas at a price aligned with its purchasing power.
(See Appendix-1 for full details).
11. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 9 June 2014
3.3 Implementation, Enforcement & Penalties
A Department of Gas (DoG) and Strategic Gas Aggregator were established for the
implementation and management of the NDGSPR.
As noted by GACN (2014a) the key activities for these organisations are
DoG to determine and publish the annual domestic demand requirement
DoG to allocate a DGSO to each producer at the beginning of every year
DoG to Establish an aggregate price to be used by the GACN as a basis of gas supply
DoG to determine the domestic and export saturation points
GACN to implement a Gas Management Model through which the demand and
supply for domestic utilisation shall be monitored
GACN to act as an intermediary between suppliers and purchases of gas in the
domestic market, within the approved pricing framework
DoG to arbitrate on all issues of conflict between purchasers, suppliers and GACN
The NDGSPR adopted “command and control” approach (BPR, 2014a) to enforcement via
two punishments for non-compliance. As noted by GACN (2014c) non-compliant operators
shall
Pay for volumes not supplied, either on the take or pay provisions of the executed
Gas Supply Agreement or at a price of $3.50/MScf, whichever is higher
Not supply gas to any export project until its DGSO is being met
12. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 10 June 2014
4.0 The NDGSPR – Five Years Later
Whilst there has been no official confirmation of the success or otherwise of the NDGSPR by
the regulators, figure-4 below provides some insight to the current status.
Figure 4 – Nigeria Natural Gas Production, Consumption & Export (Adapted from EIA, 2013b)
2005 2006 2007 2008 2009 2010 2011 2012
Production 791 1006 1148 1159 912 1024 1107 1190
Consumption 366 386 374 433 348 178 191 244
Net Export(+)/Import(-) 425 621 773 726 564 846 917 946
0
200
400
600
800
1000
1200
1400
GasVolume(Billioncubicfeet)
Nigeria Gas Production, Consumption & Export
Figure-4 shows that as recently as 2012 an increase in overall domestic (domestic, industrial
& commercial) consumption has failed to materialise (compared to 2008 levels) and that
increase in production is still export-led both prior to and after the global economic crisis of
2008/9. This set of data shows that the regulatory measure has made no improvement to the
industry compared to when it was driven by market forces.
Despite this failure to achieve increased utilisation, there is no publicly available information
on non-compliance penalties being applied to any operator.
13. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 11 June 2014
5.0 Future of the NDGSPR and Energy Regulation in Nigeria
The NDGSPR has so far failed to increase domestic gas utilisation above the consumption
levels of 2008 when the regulation was passed. With 2015 presidential elections on the
horizon, it is conceivable that nothing significant will change in the next 12 months to alter
the efficacy of the NDGSPR and other regulatory measures. However, the recent completion
of privatisation of the power sector resulting in 5 generation companies, 10 distributions
companies and a transmission company (Mordi, 2013) could see increased activity between
the power sector and gas producers to increase power generation through gas power plants.
This could result in short term incremental gains for gas utilisation, up to saturation of current
infrastructure capacity.
The single most important event that could impact the Nigeria energy industry in the next 3-5
years is the passing of the Petroleum Industry Bill (PIB) into law. Some of the key changes
expected in the PIB as noted by Lovells (2012) include
Presidential power to grant license & leases without competitive bidding
Repeal of existing PPTA and introduce a Nigerian Hydrocarbon Tax (NHT) resulting
in 5% higher profit tax for deep offshore operations
Upstream producers to remit 10% of net profits to the Petroleum Host Community
Fund (PHC Fund)
De-regulation of petroleum pricing in the downstream sector to ensure market pricing
Unbundling the NNPC, with a focus to separate such commercial institution from the
regulatory institutions
The PIB will thus lead to a change in the fiscal regime for operators and possibly result in a
more market-led sector with regards to downstream commodity. Also, the new presidential
power will cast a doubt over transparency and fairness of licensing.
14. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 12 June 2014
6.0 Shell and Nigeria Regulatory Environment
At the end of 2013, approximately 5% and 14% of Shell’s 42.47Tscf and 4.47Bbbls of proven
Gas and Oil respectively, were in Africa (figure-5).
Figure 5 – Shell Proven Oil & Natural Gas Reserves, 2013 (Shell, 2014a & 2014b)
Nwachukwu (2013) quoting a Shell spokesman stated that “Nigeria remains a significant part
of Shell’s portfolio”. Based on the above reserves, Africa and Nigeria represents a significant
portion of the market value of the company in absolute terms.
Shell (through SPDC & SNEPCo) holds the largest proven gas reserve in Nigeria and is
consequently the largest producer of natural gas. Through Shell Nigeria Gas Company, the
company supplies gas to industrial customers (Shell, 2014c). By virtue of its leading position
in the Nigerian gas sector, SPDC is mandated with the highest DGSO in the country (see
figure-2). Despite the observation that the NDGSPR has not led to increase in gas utilisation
(figure-4), the need to comply with such obligations going forward, for a fixed gas production
rate in the short term, will result in reduced revenue and profits. Furthermore, to continue
honouring its existing long term LNG or Gas export supply agreements and comply with its
DGSO, the company will have to invest in bringing on-stream some of its non-producing gas
assets as soon as possible.
An alleged consequence of the NDGSPR is that the planned expansion at NLNG where Shell
has a significant interest has been put on hold since 2007 due to political and public
discontent about additional significant gas quantities being committed to the export market.
This project delay is despite the fact that NLNG has already signed supply agreement with
buyers (Oketola, 2014). There are other indications that the uncertainty around the final
content of the PIB is leading to reluctance by the project partners (including Shell) to invest in
such a capital intensive project and subsequently be hit by terms that erodes the IRR of their
investment.
The passing of the PIB on the current known terms is expected to result in a tougher fiscal
regime for operators such as Shell. However, with a country population of 177m and a 3-year
average GDP growth of 6.7% (World Bank, 2014b), other aspects such as de-regulation of the
downstream sector will open up a new competitive space that has the potential to be a multi-
billion dollar market. However, due to the NOGICD (see table-1), which is not expected to
be repealed, Shell as a foreign company may have to enter this sector in JV with an
indigenous partner. Nonetheless, a privatised competitive refining sector that is bound to
have few players, due to the capital intensiveness, is bound to represent a good business
opportunity for Shell, if the company decides to enter the market.
15. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 13 June 2014
7.0 Evaluation & Conclusion
Until recently, the energy regulatory structure focused on government tax take and consumer
protection through the PA, PPTA and the efforts of the PPPRA. However an increasingly
poor record of economic development has led to emergence of regulation to drive local
capacity building through the NOGICD in 2010, security of supply and economic growth
through the NDGSPR in 2008 and the recent privatisation of the power sector.
Whilst the effort of the government was commendable in its intention to increase gas
utilisation through the NDGSPR, it is evident that there were flaws in the approach that was
taken. Whilst demand destruction during the 2008/9 recession could have impacted gas
utilisation, not addressing the infrastructure deficit around the country; such as gas transfer
pipelines to domestic and industrial (including power) sector, meant gas utilisation cannot
grow at the rate forecasted in figure-2 regardless of the supply obligations and pricing
framework. In essence the regulation focused on the result, which is driving up demand
through gas supply at the right price, whilst overlooking the fact that most of the means,
which are gas distribution, power generation and electricity distribution infrastructure, were
severely lacking. Furthermore, it is believed that the NDGSPR terms and conditions were
unilaterally reached by the regulator without consultation with the operators. Consequently
this could have led to acceptance problems. Baldwin et al (2012, pg. 237), citing the work of
the Dutch Ministry of Justice notes acceptance of policy by the target group as a key
compliance dimension that could impact success.
Going forward, ongoing uncertainty caused by the long awaited PIB is making it difficult for
operators such as Shell to make Financial Investment Decision and definitive forward plans
on capital projects. Furthermore, the 2015 presidential election is believed to be contributing
to the reluctance to invest, especially since any new government, through the ministry of
petroleum, could change some of the expected terms of the PIB prior to its implementation.
In conclusion, due to the closeness of the NNPC and the regulators, it can be suggested that
the regulatory system is not entirely transparent. The regulatory body needs to be separated
from the government commercial actor in the sector. Also in passing regulations there needs
to be more consultation. As noted by Baldwin (2005), consultation helps to inform regulators
and balance opposing interests, identify unintended effects and practical problems. Also
given that 37% of the country’s GDP comes from the oil and gas sector (BPR, 2014b), the
government and regulators must carefully balance the need to increase government take and
mandatory contribution to host communities (such as PHC Fund) with the need to encourage
private equity investment in the sector. As such, regulatory measures must remain
consultative, fair and transparent to keep private equity on board.
Despite a potentially tougher fiscal regime ahead, the potential of the Nigeria energy sector
with onshore and offshore crude lifting cost of approximately $15 & $30 respectively
(Reuters, 2009) and a largely untapped sweet natural gas reserve, Nigeria still represents a
worthwhile market in Shell’s portfolio. To help minimise adverse effect of shifts in
regulatory framework, the company must also deploy a policy relations strategy as to how it
can capitalise on its position as a leading operator in the country and thus help shape the
industry regulations.
16. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 14 June 2014
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17. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 15 June 2014
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18. WBS Global Energy MBA Business, Policy and Regulation
Submitted by: OS Adio 16 June 2014
Appendix 1 Gas Pricing Framework
The pricing framework is a transitional pricing arrangement such that when the domestic
market is fully developed an alternative pricing structure will be introduced.
The three pricing regimes outlined by GACN (2014c) are as follows
The Regulated Pricing Regime (Cost of Supply Basis) applies specifically to the strategic
domestic sectors of power. The floor price in this category is obtained by establishing the
lowest cost of supply that allows a 15% rate of return.
The Pseudo-Regulated Pricing Regime (Netback Pricing) applies to strategic industrial
sector that use the gas as a feedstock. For this group the floor price is not based on cost of
supply, but on the netback of the product price. The product price used in determining the
floor price is the assumed long run price of the product. Hence the pricing of the gas will
reflect the ability of the sector to pay given the price of its product. However, since the
intention is not to support sectors that are unviable i.e. sectors whose netback price translates
to a gas price floor lower than the cost of supply of gas, the consideration of affordability will
not be at the expense of sustainability of gas supply.
The Market Led Regime (Alternative Fuel Basis) applies to all other sectors that use gas as
fuel or wholesale buyers buying for subsequent re-sale. For this category, the price of gas is
indexed to the price of alternative fuel such as Light Petroleum Fuel Oil. The indexation will
be established during negotiation.
For the pricing framework shown in Figure 3, it is assumed that the pricing for each demand
sector will transition to the next higher pricing band once a saturation level has been attained.
For example, for the strategic domestic sector, once the domestic requirement has been met
(domestic saturation point) and power is now being exported, the framework proposes that
export power is subjected to a relatively higher price, determined by the netback approach.
Similarly, once the strategic industry sector exceeds an export saturation limit (i.e. once
export capacity is for that sector e.g. fertilizer is assumed to have reached an acceptable
limit), any incremental capacity will attract a much higher price consistent with that of
commercial sector buyers.
Through this transitional mechanism, pricing can be aligned with required capacities within
the economy.
It is important to note the entire gas pricing framework simply specifies the floor price. The
actual prices will include an escalation for inflation and an indexation to real time product
price (which may be higher that the long run price used in determining the floor price) and/or
any indices considered appropriate by both buyer and seller of the gas. The indexation will be
determined through a process of negotiation.