Nigerian manufacturers groan as gas supply constraints threaten operations

Manufacturers are struggling to keep their plants running on account of acute shortage of gas supply arising from dip in production and rampant crude theft.

This situation, if not checked, could see many manufacturers shuttering their firms thereby worsening the unemployment situation in the country and depressing further the ailing economy.

“Gas supply to the commercial sector averages around 400 mmscf/d before the current supply challenges. Now supply is lower than 50 percent of previous capacity,” said Ogagbano Adejo-Ogiri, executive Secretary of the Association of Local Distributors of Gas Ltd (ALDG).

According to the Manufacturers Association of Nigeria (MAN), industries that were operating at 60 – 70 percent capacity utilisation are now operating at average 15 percent and energy is their biggest challenge.

“Manufacturing will literally die if nothing is done very fast,” Frank Onyebu, chairman, Apapa Branch of MAN, told BusinessDay.

Onyebu said the electricity supply has not improved despite all the promises, many manufacturers still get less than 10hours of electricity supply. Diesel is scarily expensive and gas which should have been the best option is unavailable.

“Volumes are contracted and if there is an outage, you have no other recourse to fall back to. Gas lines are not everywhere and you need some arrangements to move them with additional cost but it is way cheaper than diesel if supply certainty can be assured,” he said.

Nigeria’s manufacturing sector is at the centre of its diversification and economic growth agenda. According to the Nigerian Bureau of Statistics (NBS), Nigeria’s manufacturing sector’s contribution to the overall GDP in 2022 first quarter of 2022 was 10.20 percent and higher than other sectors such as Oil & Gas which contributed 6.63 percent.

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At the end of the first half of 2019, the Manufacturers Association of Nigeria (MAN), estimated that cumulatively, an estimated 1.64 million jobs had been created by the sector over time.

The sector has a track record and even greater potential to generate mass employment, and power the growth of small and medium enterprises (SMEs) but has often struggled on account of energy constraints.

At the heart of this sector is the Lagos-Ogun axis which hosts over 2,000 industries and accounts for over 70 percent of manufacturing employment. This industrial cluster powers the growth of the manufacturing sector and its contribution to economic growth.

However, in the last few months, this cluster and by extension the entire manufacturing sector has come under a very potent threat- the lack of access to gas to power operations and maintain production output.

Gas supply in Nigeria is primarily routed to three sectors. The commercial sector (which the manufacturing sector is a constituent), the power sector, and gas-based industries.

In recent times, the attacks on oil & gas pipeline infrastructure and crude oil theft have impacted gas production and supply. Associated gas production which is linked to oil production is no longer available anytime our critical oil evacuation pipelines are tampered with. This gas production becomes constrained and as a result, there have been gas supply shortages accompanied by rationing of available gas supply.

Gas producers are not investing to ramp up supply, a situation the Nigerian Gas Association says the absence of a liberal gas pricing regime has created.

Worse still gas supply to the power and gas-based industry sectors is being prioritised over the commercial sector according to industry operators. Some also say the application of the provisions of the Network Code across board by the Nigerian Gas Company (NGC), the operator of the gas transmission pipeline system is not transparent.

With over 203 Trillion Cubic Feet of gas, the world’s ninth biggest reserves, industries should never have to contend with limited gas supply. The reality is that a creaking grid and inability to grow the power market see energy costs accounting for about 40 percent of their cost.

The commercial and manufacturing sectors are therefore bearing a disproportionate burden of these gas supply cuts, meaning that industries that depend primarily on natural gas to run their business are left stranded.

Forced to look for alternatives to gas, manufacturers are turning to dirty, expensive fuels such as diesel. For manufacturers who are unable to procure alternative fuel sources, they come to a painful but inevitable conclusion – to shut down.

This could lead to disastrous consequences including worsening unemployment, inflation, and a spike in crime.

Analysts say ignoring a significant and strategic cluster of industries that collectively drive a significant portion of the national GDP holds real consequences, The ability of Nigerians to purchase commodities, their jobs, and indeed the country’s national security is tied to improving access to gas for the industrial cluster that powers our economy.

The challenging gas situation faced by manufacturers adds to their list of woes.

“Most if not all of them will shut down if the situation persists as it will be unprofitable to keep running factories at such low capacity utilisation. And the alternative of using diesel at N800/l is not a viable option,” said Adejo-Ogiri.

At a MAN meeting in Lagos last month, the association said the country’s tough operating environment characterized by overregulation, high production cost, FX shortage, unfriendly policies, infrastructure deficit, among others are forcing firms to shut down.