Comparative Analysis of Commercial Natural Gas Pipeline Economics under the Extant and Calculated Tariff Systems

This paper presents a comparative analysis of economics of a commercial gas pipeline using the extant fixed tariff and a calculated tariff based on the Rate of Return Regulation framework. While the extant tariff is fixed at 0.8$/Mscf irrespective of throughput and location, the calculated tariff adjusts tariff levels to cost profiles and aligns it with the operators cost of capital. The arbitrarily fixed gas pipeline tariff has resulted in poor response by international investors to an otherwise lucrative sector of the gas industry while increasing the burden of a pipeline development on government in the face of limited resources. Using the proposed 48" x 127-Kilometer Obiafu-Obrikom-Oben Pipeline (OB3) as a case study, the discounted cashflow and stochastic analysis methodology are adopted to estimate economic indicators. Results show that the payback period is very attractive at less than 6.5 years for the calculated tariff while the payback period is in excess of 7.7 years for the extant tariff. NPV of the calculated tariff indicate a less likely than not chance of project failure while analysis with the extant tariff indicates a 23 percent likelihood of project failure. The paper provides additive information needed for would-be investors and the Nigerian government towards ensuring a workable framework to engender the envisaged infrastructure for gas pipeline.