Potential Impact of the CBN Intervention Fund on the Growth of Gas Market

Potential Impact of the CBN Intervention Fund on the Growth of Gas Market

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Potential Impact of the CBN Intervention Fund on the Growth of Gas Market

The Oil and gas sector includes upstream, midstream and downstream. Upstream operations include searching and drilling of natural gas reserves or crude oil fields underwater and underground. Midstream operations includes oil and gas transportation, storage, and refining while downstream operations involve refining during the upstream process and the marketing and commercial distribution of natural gas, diesel oil, ethanol, petrol, lubricants, petroleum, jet fuel, asphalt, heating oil, liquefied petroleum gas (LPG) and a host of other types of petrochemicals. Nigeria is Africa's largest producer of oil. It holds the largest reserves of natural gas on the continent and was the world's fifth largest exporter of liquefied natural gas (LNG) in 2018. According to the Department of Petroleum Resources, Nigeria had an estimated of 203.16 trillion cubic feet (Tcf) of proven natural gas reserves by the end of 2020.
The Federal Government of Nigeria (FGN) has, since year 2020 declared LPG as the cleanest cooking energy for homes and businesses. Following the declaration, the FGN has continued to make concerted efforts through the Ministry of Petroleum Resources (MoPR), Ministry of Finance and the CBN to improve its commitment towards significant flared gas reduction and driving gas utilization for domestic and industrial usage. With the proven Nigeria gas reserve of 203.16 trillion cubic feet (Tcf) in 2020 from 202tcf in 2019 (figure 1) according to the Department of Petroleum Resources (DPR), plan is in place to achieve a proven reserves target of 210tcf by 2025 and 220tcf by 2030. In line with this target, the government and agencies involved plan to harness this endowed resource to develop the country’s economy and ensured that households are better served with the cleanest energy to reduce not only the hazardous effect of traditional energy but also to save more money and the environment from devastating climate change.
Figure 1: Nigeria Proven Gas (2019-2020)

Source: Department of Petroleum Resources, 2021
In achieving this, the Central Bank of Nigeria initiated a funding programme to help stimulate the production and distribution of gas to the end-users in the country. It is acknowledged that in the absence of a clearly established structure, the challenges faced by the domestic gas subsector have continued to constrain investment in the subsector, resulting in a low level of gas output and utilization as a clean alternative source of domestic energy in Nigeria. The FGN therefore introduced and subsequently inaugurated the National Gas Expansion Programme (NGEP) committee in January 2020 in an attempt to control the gas subsector for optimum output and improved use of Nigeria's vast gas resources. To further promote investment in the gas value chain and to contribute its quota, the apex bank implemented a N250 billion intervention facility. The Power and Airlines Investment Fund (PAIF) will finance large-scale intervention projects in line with existing PAIF guidelines, while small-scale operators and retail distributors will be funded by the NIRSAL Microfinance Bank (NMFB) and/or any other Participating Financial Institution (PFI) under the Agribusiness/Small and Medium and Medium Enterprises Investment Scheme (AgSMEIS). This article therefore examines the potential impact of the CBN N250 billion intervention fund on the growth of gas market.
Potential Impact of the CBN Intervention Fund on the Growth of Gas Market
Finance is the private sector’s lifeblood. Without adequate funding, private investments in gas sector, new gas businesses cannot get started, existing gas businesses struggle to expand and growth in gas market suffers. Yet access to finance remains problematic in gas sector, particularly for MSMEs in the sector, which ensure the gas gets to the final consumers. The Central bank of Nigeria rolled out initiative and guidelines for the Large-scale projects and Small and Medium and Medium Enterprises Investment Scheme (SMEIS) with the objectives of improving and stimulating the sector for the growth of gas market. Below are the expected potential impacts of the CBN intervention fund on the Growth of Gas Market.

  1. One of the potential impacts of the CBN intervention fund on the growth of the gas market is that, it will improve access to finance for private sector investments in the domestic gas value chain. In this regard, the investor’s time horizon should be sufficiently long to finance long duration assets, say 10 to 20 years. The investor should also be able to hold a position through economic cycles and downside events. In other words, long-term investors should have such capacity. Going by this, the CBN intervention will  fast-track the adoption of CNG as the fuel of choice for transportation and power generation, as well as LPG as the fuel of choice for domestic cooking, transportation and captive power
  2. Another impact is that it will stimulate investments in the development of infrastructure to optimize the domestic gas resources for economic development. Investment in gas infrastructure is of paramount to the gas investors, because of its low risk and stable real return profile, which also matches gas investors ‘real’ liabilities. Sustainable intervention fund for investment in the gas infrastructure will facilitate the distribution of gas from the distributors to the final user. This will also fact-track the development of gas-based industries particularly petrochemical (fertilizer, methanol, etc) to support large industries, such as agriculture, textile, and related industries

However, CBN placed a 5.0% p.a. rate of interest on the intervention fund up to 28th February 2021, thereafter; interest on the facility shall revert to 9% p.a. effective from 1st March 2021. To create a positive impact of the intervention loan on the growth of gas market, the rate of interest should be minimal and reasonable. Interest rates and gas market profitability are connected, with gas market benefiting from lower interest rates. When interest rates are higher, gas market make less profit, from the difference between the total revenue gas entrepreneur makes and actual revenue earned. This makes the relationship between the interest rate and gas market profitability to be negative.
that the concessional interest rate is a prominent factor behind profitability and the growth of gas market. Some other factors also exists that affect the profit level and the growth of the gas market but focus is on the relationship of the CBN Intervention Fund on the Growth of Gas Market upon which interest rate spread and bank profitability as it is a prominent factor among factors of bank profitability. The government, gas investors and the lending institutions must work together to jump- start manufacturing output in order to generate a corresponding increase in economic growth. This can be achieved through the provision of conducive macro-economic environment and appropriate investment incentives, as well as encouraging investment-friendly lending and borrowing by the Central Bank of Nigeria. The gas investors could reciprocate the gesture through commitment to the use of the funds and promptly honoring loan obligations.
KiakiaGas Limited is a leading Gas business in Lagos,Nigeria with expertise in LPG retailing, New Gas Market development, Building of Gas Plants and Gas strategy advisory. If you need a partner with a global perspective and local expertise in the Nigerian and African space, kindly book for a free session with our team of experts to help you http://www.kiakiagas.com/book-session or write us an email at advisory@kiakiagas.com or Whatsapp: +2348085269328

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