Gas shortage puts pressure on firms’ cost as FG moves to boost supply

President Goodluck Jonathan is scrambling to boost gas supply in the country as shortage of the fuel used to power most manufacturing plants hit companies’ costs amid crisis in the sector arising from government policies that seek to control prices.

Dangote Cement plc, Nigeria’s largest company and Africa’s biggest producer of the building material, said on Friday that first-half profit declined 11 percent as operating costs increased on gas supply challenges resulting in use of heavy oil for its plants.

“We appeal to the government to do something about the problems of gas and LPFO supply,” said Edwin Devakumar, group managing director, Dangote Cement.

“If we don’t have power and fuel, businesses cannot survive. If not resolved urgently, the situation will compound the problem of unemployment and insecurity in the country. It will impact on companies’ profitability. We have already lost about 10 percent of our capacity and that means less cement in the market,” he said.

The cumulative cost of sales for four major cement firms (Lafarge WAPCO, Dangote Cement, CCNN, and Ashaka Cement) increased 8 percent in half-year 2014 to N120.17 billion, from N111.73 billion in the 2013 period.

Nigeria holds Africa’s largest gas reserves of more than 187 trillion cubic feet, but flares, or burns, most of the gas it produces along with oil because it lacks the infrastructure to process it. At least $3 billion in revenue is lost annually due to flaring, according to the Ministry of Petroleum Resources.

The prospects of building more gas infrastructure – pipelines, gathering plants – had been stymied by government’s control of the gas pricing environment, which made investors less willing to participate in the sector in the past.

The government recently started to get serious about tackling the issue of gas supply, after years of wavering on the issue.

Diezani Alison-Madueke, minister of petroleum resources, recently announced an upward review of gas price from $1.50 per million cubic feet (mcf) to $2.50 per mcf, and an additional $0.80 fee as transport costs for new capacity. Gas prices are to be reviewed periodically based on US inflation data.

The government hopes that an increase in gas supply from 750 mscf to 1,120 mscf per day will boost production from its current 2,600/3,600 MW levels to 5,000MW by the end of 2014.

Companies, meanwhile, are dealing with shortages as the gap between demand and supply continues to grow.

Oando, the indigenous exploration and production company, has a number of companies waiting to be connected to gas by it, according to Bolaji Osusanya, managing director/ CEO, Oando Gas Power.

“The available gas supply to Lagos from the Nigerian Gas Company (NGC) through Oando’s pipelines can only do about 75 MW,” said Osusanya at the Lagos State investment summit (Ehingbeti) in April.

The Escravos-Lagos (EL) pipeline can move up to 1.1 billion standard cubic feet of gas a day. However, all of that supply has been exhausted by industrial demand in the Lagos and Ogun axis.

NGC is planning to double the E-L pipeline by building another parallel to it with the same capacity called E-L 2. That is about 75 percent complete, but will not come on stream until at least late 2015.

Lagos, the commercial capital of Nigeria and its manufacturing hub, is estimated to need about 10,000 megawatts (MW) of power but gets only about 1,000 MW from the grid.

The National Electricity Regulatory Commission (NERC) last week announced plans, together with the Ministry of Petroleum Resources, to get each gas producer to sign up to a specific gas supply commitment.

The Federal Government last week Monday also resolved to commit $1 billion to gas infrastructure in the country in its bid to improve power generation and supply. This fund is to be deducted from the proceeds of the ongoing privatisation of the NIPPs.

According to analysts, cement manufacturers and other manufacturing companies whose reliance on gas has increased in recent years will be the major beneficiaries if gas and power supply were to improve.

SMEs, which are the engine of growth but have been held moribund by inadequate power supply, will also begin to see some relief.