“People don dey reduce how much dem dey buy normally” said a gas retail shop operator in Lagos when asked about how the market had fared in recent times. He reported that this was due to the rising cost of LPG in the country. During the period between mid-2020 and October 2020, a 12.5 kg cylinder of Liquefied Petroleum Gas (LPG) could be refilled for 3,000 naira in some parts of Lagos. By December of 2020, that price had increased by 1,000 naira. According to the 2018 National Demographic and Health Survey(NDHS), the average Nigerian household size is 4.7 persons, which we would round up to 5 for the purpose of ease(since it’s not possible to have 0.7 person). Let us assume this family of 5 (2 parents and 3 children) uses only 12.5kg of gas in a month and earn a household income of 50,000 naira. This increase in LPG price would require that household to spend 8% of its income on LPG alone. Considering the fact that the average Nigerian household spends 56% of its income on food, we can say 64% of such a family’s income would be spent on food and its complementary cooking fuel, leaving just 36% (i.e. 18,000 naira) for other activities. This illustration shows why the hike in LPG price is undesirable for the average low income Nigerian household using LPG.

 

Why Does the Nigerian LPG Price have wings?

 

Taking a look at the Kiakia Gas Insider Report, one would see that cost of LPG at the depots in Nigeria grew from 3.7 million naira for 20 Metric Tons (MT) in September 2020 to over 5.35 million naira per 20 MT of the product in January 2021. There was a net rise between September 2020 and November 2020, but from November 2020, the price of LPG at the depot rose rapidly. In the space of three months, the cost of LPG from the depot increased by 1.5 times. And this cost is passed on to consumers such that a kilogram of LPG which cost 280 naira in November, and cost 350 naira  in January, 2021. This is an experience common to LPG users due to the deregulation of the LPG industry i.e. the government does not fix the price of LPG, leaving it to rise and fall based on market forces.

In understanding why the price of LPG rose, we need to understand some factors that determine the cost of LPG in Nigeria. Firstly, we shall look at the source of LPG in Nigeria. Nigeria is a country blessed with oil and gas resources. There has been the recent realization that Nigeria is a “gas country”, which means we have considerably more natural gas reserves than crude oil reserves in Nigeria. Nigeria has the 8th largest natural gas reserves globally – but we should note that we do not produce much from our gas field. Most of the natural gas in Nigeria is derived from Associated Gas (i.e. Gas derived alongside crude oil during crude oil extraction from oil wells). To this end, Nigeria is not yet living up to her potential as a gas country.

LPG is a mixture of propane and butane, and these two gases are extracted when drilling for oil or natural gas. Therefore, LPG is a by-product of crude oil separation and distillation, as well as a product of natural gas processing. In Nigeria, most gas products – including LPG, from the upstream operations are channeled to the Nigeria Liquefied Natural Gas Limited (NLNG), which then sells the gas to its customers. The NLNG exports LPG and supplies local market operators. Here comes a challenge: the NLNG planned to allocate 350,000 MT of LPG to Nigeria in 2020, but Nigeria consumed over 1 million MT of LPG in 2020. This amount dwarves in comparison to what the country needs, hence Nigeria depends on foreign partners to supply her LPG. Simply put, although we produce LPG in Nigeria, most of the LPG used in Nigeria is imported.

 

The figure above shows the source of LPG supplied to Nigeria in 2019. In 2019, 300,000 MT out of the 800,000 MT of LPG locally consumed was supplied locally (NLNG), while the rest was imported from various countries. This means that over 60% of the LPG used in Nigeria in 2019 was imported, placing our price dependence on our foreign suppliers. It should be noted that, from data available, just a little over 50% of LPG consumed in Nigeria in 2020 was supplied by foreign suppliers; thus showing a gradual reversal in our dependence on foreign suppliers for LPG.[O1]  From this, we can deduce that the LPG price at the depots in Nigeria is still heavily influenced by the foreign markets. LPG in Nigeria is actually priced using the Mont Belvieu (Texas) LPG spot price. Mont Belvieu is a town in Texas, hosting the major LPG hub in North America.

It should be noted that in 2019, the United States of America supplied 70% of Nigeria’s imported LPG, giving credence to why our LPG prices are hinged to the Mont Belvieu price. Generally, being a hydrocarbon product, global LPG prices also follow the trend of global oil prices such that when the price of crude oil fell in March 2020 due to the lockdowns induced by the Covid-19 pandemic, the price of LPG also experienced decline. Considering this, one might have thought that as the price of crude oil was returning to its pre-covid value, the same would occur to the price increase of LPG. One might also consider the naira lost value against the dollar over the past few months, thereby increasing the naira value of pre-covid LPG price, but that was not the case. This line of thought proves false as the price of LPG quickly recovered from the decrease in March. Also, the value of the naira has been relatively steady in the past couple of months as well. This shows the cause of the high price increase would be found elsewhere.

 

An examination of the journey of the Mont Belvieu LPG price shows that it has been steadily rising since through most of 2020, and was priced at $0.88/gallon on the third week of January. This translates to a value of 172 naira per kilogram of LPG. 4 months ago, it was 138 naira. This rise in price has translated to the spike in LPG prices which has been observed in Nigeria. It is clear that this spike in LPG price is from the source, not from local suppliers.

The reason Mont Belvieu prices have gone high is due to the increase in gas demand during the winter season. This price hike can be traced back to increase in demand due to winter. LPG is used as a heating fuel in a few homes (less than 10% of the United States (U.S.) population in 2011).  This increase in demand has led to a price increase in the cost of LPG. While local U.S. demand has increased, export demand has increased as well, coupled with shipping challenges in the Panama Canal. Another aspect to consider is the relatively low LPG inventories in the United States. If the winter gets colder, then demand will increase, causing a further hike in the price. These factors explain why the cost of LPG has skyrocketed in this few months. It should also be noted that suppliers in the United States would supply local demand before meeting foreign demand, which is likely to cause intermittent lack of LPG at the Nigerian depots.

 

Going Forward

As mentioned at the beginning of this article, LPG operators and users have not been favorably disposed to the current rise in LPG prices and that has affected the quantity purchased by some households. We may not be able to control the trend of LPG spot prices at Mont Belvieu, but we can control the trend of LPG prices in Nigeria if we can get 100% of our LPG supply from local LPG suppliers e.g. NLNG, & Bonny River Terminal. This would require investment in oil and gas field with LPG supply as a major purpose, as well as investment in maritime/pipeline infrastructure to transport the necessary quantity to different locations within the country. The NLNG, for instance, would need to increase their supply allocation to Nigeria, as well as increase their delivery fleet (the NLNG currently has only one LPG cargo vessel). It is therefore pertinent that investments are directed to develop local upstream LPG infrastructure is developed to enable Nigerian households - most of which earn low-incomes, hence are price sensitive – use LPG without having to intermittently use dirty fuels because they can’t afford LPG in that period.

 

 
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 hands-on local expertise in the Nigerian Gas space or any of our bespoke solutions/services, write us at gaspreneur@kiakiagas.com or call/Whatsapp: +2348085269328

 

Prices are beginning to rise in the international market and has remained stable in the domestic market for LPG in the immediately preceding week

 

• Prices of LPG in the international market fell for the most part of the week under review. Prices only began to rise towards the of the week.

• Week-on-week differences in the price of LPG at the depot level have not changed much in the week under review.

• The difference between prices per kg of LPG at the depots in Nigeria and prices at the international market are becoming narrower compared to several weeks ago.

• Regional disparities in the retail prices of LPG within the country continue to persist.

  

  

  

   

   

  

  Regional disparity in the prices of LPG across the country has been a regular feature of the Nigerian LPG market. Though the South-south geopolitical zone hosts the great majority of depots in the country due to its proximity to the ocean, prices have been highest in the region.

   

   

  

   

   

  

   

  • The exchange value of the naira to the US. $ has remained stable at the new rate of N381 to US.$1 throughout the week. (Figure D). However, the Central Bank of Nigeria (CBN) is yet to formally reflect the new rate in their official website.

  • The foreign reserve recorded a slight rise away from the continuous drop it has witnessed in the previous week. The slight rise witnessed in the size of Nigeria's foreign reserve does not necessarily reflect a firming up of the naria against the US. dollar.

  • For the gas market, the Purchasing Managers Index(PMI) of the CBN report growing Business Activities, and New Orders but declining employment and inventory for the month of July 2020 compared to June. The growing Business Activities, and New Orders come from the recently relaxed lock-down due to the COVID-19 while declining inventory and New Employment seem to reflect a strategy to avoid risks.

  • The removal of the restriction on inter-state movement due to the COVID-19 is leading to an initial rise in prices for LPG at the depot level

  • Prices of crude oil in the international market in the week under review showed an unstable trend, after an initial rise (Figure E).

   

  

  • We expect a visible growth in the price of LPG within the domestic economy as the naira weakens against the US. Dollar.

  • We also expect a more than proportionate rise in LPG prices at the retails level compared to the depot/international prices in the coming weeks.

   

   

 

Prices are beginning to rise in the international market and has remained stable in the domestic market for LPG in the immediately preceding week

• International prices of LPG maintained a rise throughout the week under review.
• Compared to the previous week, the Mont Belvieu prices ended nearly at the same price. Depot prices have remained fairly consistent in the midst of these changes.
• Prices per kg of LPG at the depots in Nigeria are still over double the prices at the international market, similar to what we have seen in the previous weeks.
• Prices for LPG in the week under review and in the past few weeks have remained within the limited range have not been
• Regional disparities in the retail prices of LPG within the country continue to persist.


• 

 

Regional disparity in the prices of LPG across the country has been a regular feature of the Nigerian LPG market. Though the South-south geopolitical zone hosts the great majority of depots in the country due to its proximity to the ocean, prices have been highest in the region.

 

 

• The exchange value of the naira to the US. $ has remained at the pegged price of N380 to US.$1 throughout the week (Figure D).
• For the gas market, the Purchasing Managers Index(PMI) of the CBN report growing Business Activities, and New Orders but declining employment and inventory for the month of July 2020 compared to June. The growing Business Activities, and New Orders come from the recently relaxed lock-down due to the COVID-19 while declining inventory and New Employment seem to reflect a strategy to avoid risks.
• Inflation remains high. The persistent rise in inflation in the past nearly 11 months (in June at 12.6% from the 12.4% recorded in May 2020) has implications for the price of LPG across the country.
• The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) maintained its monetary policy rate at 12.50%. The apex regulatory body is adopting a "stand-aloof" approach so as to observe the array of liquidity facilities that have been deployed since the COVID-19 pandemic to cushion Covid-19’s shock.
• Prices of crude oil in the international market in the week under review showed an erratic pattern but ending on a lower note (Figure E).

 

We maintain our previous outlook expectation that demand may slightly drop as the lockdown progressively eases movement and allows people to spend more time at outside of the home. While the drop in household consumption might be offset by consumption by business entities, this may not be a perfect off-set.