“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

 

The Nigerian LPG market has been experiencing steady increase for over a decade. Between 2007 and 2018, the Nigerian LPG market capacity was reported to have increased from 70,000 MT per annum to 600,000 MT per annum. The growth recorded was made possible through government policies, such as the deregulation of the market, and partnerships with the private sector. 

 

The Nigerian Liquefied Petroleum Gas Association (NLPGA) has set a new growth trajectory to increase the annual Nigerian LPG demand from 600,000 MT to 5,000,000 MT by 2029. This growth in demand must be met by an equal growth in supply. This begs the question of where the supply will originate from.

 

Figure 1. Source of LPG in Nigerian LPG Market

Source: PPPRA Energy Report, 2019.

Nigeria is a net exporter of LPG, with local LPG demand equalling about 23% of local LPG production.  Although Nigeria produces more than it consumes, it is dependent on foreign LPG. If this trend persists, then the growth in the Nigerian LPG market will be driven by imported LPG. It is therefore important to examine the effects of the current situation and determine whether it is sustainable based on 2019 events.

Figure 2. Top Three Suppliers of LPG into Nigeria

Source: PPPRA Energy Report, 2019

Nigeria’s Main Supplier Countries 

Out of the 500,000 MT of LPG that was imported into Nigeria in 2019, 300,000 MT came from the United States of America making 72% of total LPG imports. Equatorial Guinea came in second place, supplying 60,000 MT, which was 12% of total LPG imports. 

1. The United States of America: the USA supplied 77% of the LPG consumed in Nigeria in 2019, making it Nigeria’s foremost gas supplier by an unmistakable margin. Globally, the US is the topmost producer of natural gas and 4th highest exporter of the same. The US has a bi-lateral trade relationship with Nigeria, which is a factor in trade volumes.

Currently, the US stands as the highest exporter of LPG, with an on-going infrastructural expansion to meet the growing global demand. The United States became a net exporter of LPG in 2012 due to the increase in the production of natural gas, and the shale oil and gas boom. Exports to Nigeria makes up a negligible 0.4% of the total amount of LPG exported from the USA. This falls back to the market size of the Nigerian LPG market. Nigeria is 10 times more populated than Netherlands, yet the Netherlands imported 1.7 million tonnes of LPG from the United States in 2019, which is more than two times the total consumption of LPG in Nigeria for the same year. 

Although the United States is the topmost exporter of LPG, it still imports LPG from a number of countries. This is probably because the quality (i.e. ratio of propane and butane) of LPG differs based in application, and a particular quality needed in the USA might not be produced in the USA. Most USA exports go to Japan while most of its imports come from Canada.

Although expansion plans have been paused due to the COVID-19 pandemic, plans will continue once the economy returns to normal, thereby increasing the US capacity to supply. Also, the trade war with China cause China to reduce LPG imports from US, and receive LPG from Saudi Arabia. These means, as the Nigerian LPG market demand increases, the United States will be able to meet the demand.

Figure 3. History of U.S. Exports of Liquefied Petroleum Gas

   

2. Equatorial Guinea: Equatorial Guinea began producing LPG in 1997, using gas which would have been previously flared. By 2005, their LPG processing plant became modernized and increased in capacity (the storage capacity is now 85,000MT). The country has a population of 1.3 million people, limiting the demand capacity of the country. The local demand is low, and the government plans to increase the amount of LPG exported, using the revenue to develop their local LPG market infrastructure. 

Like Nigeria, Equatorial Guinea produces more LPG than it can consume, hence it is a net exporter of LPG. Equatorial Guinea exports to Cameroon, Ivory Coast, as well as the USA. While much information is not available on Equatorial Guinea’s LPG industry, it is clear that they have a plan to increase production to generate revenue. This will make LPG from Equatorial Guinea available to meet Nigeria’s growing demand.

 

3. Argentina: Argentina is the 20th largest gas producer in the world. Argentina has the second largest shale gas reserves in the world and is investing in the oil and gas industry to increase production. This growth creates an expectation for more Argentinean gas available for supply. 

 

 

Local Production of LPG

In 2019, Nigeria consumed about 800,000 MT of LPG, of which only 300,000 MT was locally sourced. The details show that for every 10 kg of LPG sold in Nigeria, 6 kg was imported. The dependence on foreign oil might seem to be due to lack of LPG availability on Nigeria’s/NLNG’s part, but that is not the case for the following reasons:

1. in 2019, Nigeria produced 3 million MT per annum of LPG which far exceeds the current LPG consumption in Nigeria as stated above;

2. Local supply from February to April 2019 exceeded supply from imports by 35,000 MT. Local supply was consecutively higher than foreign supply for each month.

The challenge with local supply is firstly infrastructural as the NLNG has only one ship used to meet local LPG demand. Due to the NLNG’s stunted capacity to meet demand, marketers need to import LPG from foreign suppliers. It should also be noted that the NLNG has signed a Sales and Purchase Agreement (SPA) with 15 local off-takers to sell 350,000 MT of LPG per annum to them. This agreement allocates only 350,000 MT of locally produced LPG to the local market, leaving 450,000 MT to be imported. This allocation leaves Nigeria import dependent.

Taking cognisance of the risks attached with dependence on foreign LPG, action steps are needed to develop local production and supply capacity. The National Gas Policy revealed that only 5% of households in Nigeria used it by 2017, showing a large growth potential. Fire wood and kerosene are the most used cooking fuels in Nigeria, and while firewood is really inexpensive, kerosene has been made quite unattractive by the removal of the kerosene subsidy in 2016. About 90% of Nigerian households use the cheapest forms of cooking fuels available, It is therefore necessary to ensure LPG is affordable enough for these households.

Nigeria has the 8th largest natural gas reserves in the world, with 5.47 trillion MT of natural gas available. Local production and processing capacity can be increased comfortably to cater for local LPG demand, as well as provide revenue from the sale of other natural gas derivatives. There will also need to be investment in the maritime sector to increase the number of ships that transport LPG within Nigeria, in accordance with all necessary maritime regulations.

Figure 4. Nigerian Household Energy Mix

Source: National Gas Policy, 2017

Effect of Dependence on Foreign LPG Suppliers

 The import of LPG increases the cost burden on the end-user. There exists a large price disparity between the cost of 1 kg of LPG in the international market (Mont Belvieu) and the cost of LPG at the Nigerian depot. This can be attributed to freight costs, and other levies. During the month of March, 2020, the average price difference between the local and international cost of 1 kg of LPG was 117 naira. The average retail price for March was 260 naira per kg, showing almost half of the cost of 1 kg of LPG will be removed if the LPG used in Nigeria was locally sourced. With 80 million Nigerians below the poverty line (measured by earning at most $2 a day), LPG will remain too expensive if it this price disparity lingers.

 

Figure 5. Price Disparity between Local and International LPG Market for 1kg of LPG

Source: KiakiaGas Index, 2020

The market is also dependent on the naira exchange rate against the US dollar. It is likely that the naira will continue to fall, thereby making products purchased in dollars more expensive. The naira was devalued in March but the effect was negligible on the Nigerian LPG market because of the global plummet of petroleum prices. All things being equal, a drop in the value of the naira will reduce the purchasing power of the Nigerian populace with regards to foreign sourced products. 

     

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