A Review of the Nigerian Energy Industry

Hindering growth of Nigeria’s LPG market with kerosene subsidy

Gas27 August 2013, Lagos – The Federal Government’s continued subsidisation of domestic kerosene has been a major hindrance to the growth of liquefied petroleum gas, LPG, market in the country, writes Chineme Okafor.

Nigeria is said to be more of a gas country with an estimated reserves of about 182 trillion cubic feet (tcf) as recently disclosed by the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke. However, the Nigerian LPG industry has over the years grown slowly even with the intervention of the Nigeria Liquefied Natural Gas (NLNG) in terms of regular supply of domestic LPG.

At a recent forum organised by the Nigeria Liquefied Natural Gas, NLNG, on the developmental strides of the country’s gas sector, oil and gas industry experts had expressed dismay at the low level of gas-based market growth in the industry especially domestic the LPG.

Despite obvious advantages of LPG over other domestic fuel, only five per cent of Nigeria’s household use LPG. Investigations revealed that more than 80 percent of households in Nigeria still use conventional firewood and kerosene, which have been identified as major sources of emission.

Thus, the development of Nigeria’s domestic LPG market, without doubt has continued to be affected in great measures due to choice of firewood and kerosene as energy sources for cooking. The situation is further exacerbated by various policies of the government in the sector.

Facts emerged from the LNG forum that the Nigerian LPG industry has over the years grown slowly notwithstanding the intervention of NLNG in terms of regular supply of domestic LPG. The consumption growth rate between 2005 and 2012 was placed at only about 39 percent whereas the about 157 million Nigerians could consume as much as 3.5 million metric tons per year (mmts/pa) if LPG was the major fuel for cooking in Nigeria.

But the reality today is that these Nigerian households consumed just only about 150,000 metric tons of LPG in 2012, leaving a huge gap from the expected annual consumption ratio of which experts believe is not the best way to grow the domestic LPG market of a country endowed with huge natural gas reserves.

Challenges of Nigeria’s LPG market
Most of the unhealthy developmental strides in domestic LPG market have been directly linked to the reaction of the Nigerian government to the sector through policies that have been counterproductive on the sector.

Listing some of government’s policies that deter the growth of domestic LPG market and encouragement of cleaner energy source in the country, President of Nigeria Liquefied Petroleum Gas Association, NLPGA, Mr. Ayo Adeshina, in his presentation at the gas forum explained the value added tax (VAT) on domestic LPG, extant statutory duties/tariffs on LPG equipment and most importantly government’s hefty subsidisation of domestic kerosene for years now have not helped in the promotion of wide usage of domestic LPG in Nigeria, thus, the slow-paced growth of LPG market in the country.

Adeshina also spoke of the huge shortfall in LPG equipment such as cylinders, hoses, regulators and stoves for the end users as another persistent challenge of the sector, pointing out a number of organisations operating in the country’s LPG sector did not have strategic inland storage terminals and standard truck facilities amongst others to conveniently take advantage of the huge potentials ever-presented in domestic LPG market.

According to him, access to long-term funds for LPG projects had remained cumbersome in the country while rampant and unchecked unprofessional conducts in the LPG value chain like LPG decanting, use of old and substandard cylinders and equipment pose as threats to the sector.

For instance, he said there are less than 1.5 million LPG cylinders in Nigeria presently, out of which about 30 percent should have been scrapped from the market. According to him, the average cost of a startup pack, cylinder, stove, hoses and regulator for LPG to a potential user is 83 per cent higher than starting with kerosene stove for cooking.

Similarly, there are few basic distribution facilities; inland storage terminals and trucks that could help in the equalisation of LPG cost per kilogramme to end users in various regions of the country. Fabrication of LPG equipment in Nigeria is also very expensive due to the lack of stable power and high cost of raw material, labour and generating power for production.

On the other hand, the duties and tariffs on imported equipment are very high at 20-35 percent and there is no feasible scheme to manage the cylinders in circulation.

In comparison of annual per capital LPG consumption in West Africa which is pegged at 3.4 kilogramme (kg), Adeshina noted Senegal averaged about 13 kilogrammes as against Nigeria’s 0.9kilogrammes.

He said: “To buttress this unwholesome development, there is VAT on the domestic LPG supplied to the market while imported LPG enjoys zero VAT; this usually creates additional cost on the domestic LPG.”

“No preference is given on LPG equipment imported for reduction in duties and tariffs, rather, duties were increased on LPG equipment thereby discouraging the provision of LPG facilities by willing organisations in the sector. This has created a situation whereby the 150,000MT/annum LPG allocated by government through NLNG to the domestic market does not fit the quantity of LPG equipment that would facilitate the usage of the allocated LPG, hence the slow growth in the Industry”, he added.

The major product affecting LPG, Adeshina further noted was kerosene, currently being subsidised by the federal government. “Preference is given to kerosene at all levels of the value chain, at discharge points in the jetties, subsidised and well distributed to marketers over LPG which is cleaner, more efficient and also cheaper, we expect that government should implement the Indonesian project on LPG,” Adeshina noted.

He frowned on the non-existence of a major government policy to encourage “green projects” like auto gas and LPG-fired power generation, stating the sector had remained under-utilised.

Kerosene Subsidy
There is no doubt that the Nigerian government accords high priority to subsidisation of kerosene over LPG, partly for political reasons. However, it is pertinent to note the bulk of kerosene that is subsidised do not eventually get distributed to the intended locations and end-users who are majorly low income households. Sadly, these end-users eventually pay more for the little quantity of kerosene available at the market rate outside of government subsidy, amidst long and tiring queues at most retail filling stations operated by the Nigerian National Petroleum Corporation (NNPC), sells the product at the official subsidised N50 per litre.

In comparison, Adeshina explained that end-users spend between N150 and N200 per litre on kerosene at the market rate as against the fully deregulated refilling price of N128 and N137 per litre of LPG, a cleaner and better alternative to kerosene.

Also, doubting the economic sense in government’s continued subsidy of kerosene, the Chief Executive Officer, CEO, of NLNG, Babs Omotowa, in his remarks asked for government’s gradual withdrawal of kerosene for domestic use as well as a drastic reduction on subsidy of kerosene.

Omotowa also suggested that government should instead allocate and distribute unsubsidised kerosene to profitable use such as the aviation industry and encourage use of domestic LPG considering the possibilities of Nigeria gaining as much as N810.38 billion per annum across the LPG value chain if she achieves a 50 percent switch to domestic LPG usage.
He noted Indonesia had saved over $6.9 billion from subsidisation of kerosene and gained over 529 new investments in domestic LPG market, achieved over 42 per cent reduction in energy cost to end users per month and saved over 46.6 million trees from extinction while increasing domestic LPG consumption per day from 5000mt/d to 14,000mt/d within the six years government inspired “pertamina project”, which aims at growing the domestic LPG market.

– This Day

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