N1.7trn LPG revenue by 2018: Dynamics of a kero to LPG programme

Indonesian government's kerosene to LPG conversion programme.

Indonesian government’s kerosene to LPG conversion programme.

Chijioke K. Mama

04 January 2015, Sweetcrude, Lagos – A nation’s unique political-economy is a valid determinant of its overall policy direction. Never in the life of a nation has good policy formulation – alone – driven a nation to economic prosperity. In Nigeria; an economy that has become a topic of discussion in boardrooms throughout the world, good policies are stalled by multiple hurdles. In spite of continued economic growth and GDP values, which has made Nigerian the largest economy in Africa; inclusive growth and poverty alleviation continues to be elusive. A recent McKinsey report (Nigeria’s Renewal, 2014) has highlighted the enormous potential of the Nigerian economy by 2050 if the identified elements of growth are harnessed.

Liquefied Petroleum Gas (LP Gas) has a research-proven role in poverty reduction. It is a demonstrable means to achieving sustainable development. The Nigerian government is currently exploring a program for the massive conversion of kerosene to LP Gas as a primary source of household energy. The program hopes to utilities the Indonesian model as a benchmark for replication in Nigeria and to create economic opportunities. In the aftermath of the huge success recorded by the Indonesian program, many nations have strived to understand the model. The World Bank and the UN has enabled crucial partnerships and initiatives to encourage nations around the world, towards this fuel-type conversion. But this is where the major challenge lies for nations like Nigeria. A World Bank report (Masami, 2011) has identified household-related and market related considerations that affect LP Gas usage. Consequently, adapting a model for such a national program where the source-nation has significant areas of differences (economic, political, social and cultural) is a big challenge.

Kerosene to LP Gas
“Cooking for life” is a joint initiative between the World LP Gas Association (WLPGA) and the UN, meant to promote conversion from traditional sources of energy (wood, coal, charcoal, animal dung and kerosene) in about 2 billion households in the world to cleaner energy (projected to be 2.7 billion households by 2050). There is a strong global economic case for conversion. These traditional means of cooking has serious adverse effects for health, the environment and economic development. Health – about 1.3 million people (mostly women and children) die prematurely every year because of exposure to indoor pollution from biomass. Economic – a reasonable amount of time is lost to fuel collections instead of education and other income generating endeavors. Environment – land degradation and regional air pollution. LP Gas reduces emissions of greenhouse-related pollutants compared to solid fuels, such as biomass and coal in traditional stoves. Thus the broad benefits include user cost, cleanliness, convenience, environment and (for most nations) subsidy savings

What Indonesia Did?
In 2003, Indonesia started a five year program to convert 50 million households from kerosene to LP Gas. The sheer size of the Indonesian initiative and the ultimate successful implementation has made it a celebrated case globally. Other nations like Brazil, Malaysia, Thailand and India had similar initiatives. While the ultimate goal is considered the same in most nations, the pathway to success is rarely the same. Notable features of the Indonesian project are. a) The primary focus of the Indonesian model was to withdraw kerosene and replace with LP Gas; the motivation was the astronomical amount of money spent on kerosene subsidy (9 to 18 percent of total state expenditure) b) Kerosene has been subsidized for decades by the government but rising population (about 234 Million: 2008) and oil prices led to emergent questions. Kerosene has been for many years, a huge burden on the state budget. c) Although they had a strong case to remove subsidy due to product diversion and export abroad among other rampant corrupt practices; removing subsidy would have led to serious social upheavals. d) It was estimated that 2.17 billion USD in subsidy saving was possible following the success of the program because the end-use calorific value of both fuels in the Indonesian model showed that I liter of kerosene equals 0.57kg of LP Gas. This is a strong case supporting the initiative from both macro and micro economic perspectives. e) From 2008 to 2012, 8.2 Million kiloliters of kerosene had been withdrawn and replaced with 3.2 Million MT of LP Gas in many households f) Preparatory analytical works, targeted market surveys/test and models where built that included the financial, technical and institutional dimensions of the program. g) A very clear task division model was used that produced an unambiguous role designation process and helped reduce bureaucracy to the barest minimal.

In this model the following structures existed;
1) Ministry of Energy and Mineral Resources (MEMR): Coordinator of program implementation.
2) Pertamina (National Oil and Gas Company): Procurement of 3 kg LP Gas cylinders and supply of LP Gas.
3) Ministry of Industry: Procurement of gas stoves, hoses, and regulators.
4) Ministry of Women’s Empowerment: Socialization of the conversion Program.
5) Ministry of Small and Medium Enterprises: Distributor of LP Gas packages.

LP Gas in Brazil
Brazil has walked the part Nigeria is exploring. LPG use is very rampant in Brazil. Brazil’s case is also a lesson on how to start. It offers insights on the impacts of domestic refining capacity, LP Gas Import dynamics, price stability and subsidy issues. After almost five decades of subsidizing LP Gas, Brazil withdrew subsidy in 2001 and price soared. This caused a shift in the traditional means of cooking in some urban areas (and market contraction from 12.5 Mm3 reached in 1999 to 12.1M m3 in 2003). A market that had grown at rates of 3% or more since 1996. LP Gas is Present in more than 42 million households throughout the country and the supply infrastructure is already under the threat of obsolescence. It’s utilized by more than 150 million people and provides more than 350,000 direct jobs in 15,000 companies — including refineries, distributors, retailers and transporters. With a refining capacity of 250,000 t (1.86 million barrels) of petroleum per day (2.2 % of the world total) Brazil is still dependent on imported LPG.

What Nigeria May Do?
The Nigerian program when started holds a lot of investment opportunities for those who understand the situation and the impacts of the new policy on the status quo for current market players. This type of Initiative requires very strong leadership commitments that go beyond usual policy rhetoric. This is often absent in Nigeria, where project are personalized (rather than institutionalized) and as such die as soon as the owners lack the resources or will to push them. If driven through formal agencies, institutions, and varied stakeholders too, sustainability will be ensured over the duration of the program. Policy shock which will prove disastrous with consumers can, as well, be minimized.

a) LPG Delivery infrastructure requirements: LPG can reach a population not served by the natural Gas infrastructure master plan. The infrastructure requirement can be developed in a relatively small time scale without significant infrastructure investment. For an oil and gas rich nation such as Nigeria, the benefits of a robust and successful LPG use in households has a potential to be cascaded into other areas. Any LP Gas specific development could Leverage the growth potential of petrochemicals even in industrial sectors. This is true for products such as plastics, toys, home appliances and textiles.

b) Project Socialization Campaign: A major hurdle for initiatives like this is finding novel ways of confronting the natural resistance to change, expected from long time users of traditional household energy sources. Especially the uneducated. Even when glaring cases of beneficial elements in conversions have been made, huge social campaigns will be required to ensure its success. The wide adoption of technology platforms in Nigeria such as smart phones and the rampant nature of many other digital advertising platforms among semi-urban inhabitants, provide a channel for the easy implementation of the socialization campaigns that will precede the project execution. Exceptional socialization and PR campaigns will be required to challenge the status quo and should be designed by people who understand modern digital campaigns.

c) Delivering Through YOUWIN: YOUWIN is an entrepreneurship promoting initiative by the Nigerian Government. It has recorded some success. Benefactors receive grants capable of kick starting medium to small scale business with real growth potential. If Nigerian choses to implement the conversion program in five years, support can be provided for the ancillary services of LP Gas supply and usage (cylinder production, LP Gas filling stations, distribution and transport) through the YOUWIN Program. For example by allocating 30 to 40 percent of the grants to proposal bordering on the LP Gas program.
The regulatory challenge in such a program is also enormous. Ensuring that subsidized products meant for household use do not end up in industrial plants will also be a herculean task for a nation like Nigeria. Innovations in Equipment such as LPG stoves that wastes halve of energy produced, by heating the air and the stove parts rather than the food will also help improve on the Indonesian model. National Legislation for energy conservation and rational use will enhance program effectiveness. Efforts have to be made to Increase refining capacity to produce more LP Gas and minimize import burden.

*Chijoke K. Mama is a Senior Oil and Gas analyst based in Lagos. Chijioke.mama@yahoo.com |070-6101-3333.

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