Local supply is weak link in Nigeria’s LPG adoption

Within the last ten years, the demand for Liquefied Petroleum Gas (LPG) in Nigeria has surged over 850,000 Metric Tonnes (MT) from a mere 70,000 MT on the back of government tax exemption that charted a path for private sector investment but local supply has failed to keep up.

The main drivers for LPG growth is the removal of Value Added Tax (VAT) on in-country sales and waivers on tariffs for LPG infrastructure by the Muhammed Buhari-led government at the end of 2018.

Stakeholders including government agencies and private operators have ramped up advocacy to replace dirty fuels such as kerosene and firewood with LPG in line with Nigeria’s Paris Climate Accord goals of cutting carbon emissions by 65 percent.

The trouble is how Nigeria can meet demand growth continue to soar. According to Timipre Sylva, minister of state for Petroleum Resources, Nigeria has Africa’s lowest LPG consumption yet has the continent’s largest population but less than 10 percent of Nigerians use LPG.

Currently, 80 percent of LPG consumed in Nigeria is for cooking gas which leaves out LPG for transport, manufacturing, processing and power supply through generators.

The biggest local supplier is the Nigeria Liquefied Natural Gas (NLNG) Limited which supplied 275,000MT of LPG to the domestic market in 2019. This represents about 32 percent of supply.

Data from the National Bureau of Statistics indicate that 526,059MT was imported into the country last year accounting for 62 percent of total supply.

This means that the NLNG and the NNPC Refineries and some local producers all accounted for 38 percent of supply. Yet operators project that demand could reach over 2million MT next year.

“If we are going to advocate for adoption of LPG, in country production has to be ramped up from field producers to more LNG producers, to more refineries facilities to bridge this gap, otherwise in a short time, we will have issues with supply,” said Nuhu Yakubu at a virtual conference organised by OTL.

Operators often cite Brazil as a model for increasing LPG adoption in Nigeria. The facts indicate Nigeria should tweak its approach. LPG was first introduced in Brazil in 1937 and became widely used because of their government subsidy for half a century.

By the year 2000, the government was spending around US$100 million annually to subsidize LPG in Brazil. The data is not out on how much operators have saved due to VAT exemption but an increasingly cash-strapped government scrounging for funds could soon pull the plugs.

A study on the lessons and challenges of LPG in Brazil by Oswaldo Lucon, Suani Teixeira Coelho and José Goldemberg from the São Paulo State Environmental Secretariat found that around one-third of the LPG consumed in Brazil is imported and the rest is produced in domestic refineries or natural gas-processing units.

Retail prices in Brazil doubled after January 2002 when the government removed subsidies and some in rural areas reverted to fuelwood. Demand slowed but many continue to use LPG and now in modern cities, the government has built infrastructure to pipe LNG directly into homes.

The risk for Nigeria is that if a wholesale adoption of LPG especially in rural areas succeeds, it could find itself importing over 90percent of its needs. This will bring added challenges including foreign exchange cost and higher transportation cost to move products from ports in Lagos to other parts of the country.

At the moment, the use of LPG in rural and semi urban areas is hampered by poor road access, cultural biases which leads to preference for traditional modes of energy, and low purchasing power leaving many without means to buy cooking gas according to Joy Shaiyem, coordinator Women in LPG at the virtual conference.

“This presents a challenge for private investors as consumption level in some areas too low, so uptake is low and returns don’t add up,” said Shaiyem.

Transportation of LPG in Nigeria is through sketchy roads and industrial application of LPG or even for energy needs is still very low providing a lead time to ramp up in-country production. This is why operators are calling for deeper commitment from government to unleash supply.

Brazil’s production is led by Petrobras, its National Oil Company, its Nigerian counterpart, the Nigerian National Petroleum Corporation has set a target of ramping production to 40 percent of domestic consumption but it is yet to meet it.

The Nigerian Gas Flare Commercialization Programme, an arrangement to allow third party investors buy gas previously flared in fields while producers were searching for oil has invited bidders but the process is yet to conclude.

Nigeria’s petroleum sector regulator the Department of Petroleum Resources in a bid to encourage rural dwellers switch to LPG, tried to eliminate high upfront cost of buying gas cylinders by trying to abolish sale of canisters requiring operators to merely exchange it and only sell the gas.

Operators say the plan is fraught with risks as some customers may not return the bottle and replacement costs could be prohibitive for them.

However, providing infrastructure to move LPG produced through the NGFCP, providing concessionary loans and easing their path to market offers the government fundamental ways to deepen LPG adoption and raising local supply.