20 January 2015, Lagos – Despite the 50 per cent crash in the prices of crude oil and liquefied natural gas, importers and marketers of liquefied petroleum gas or cooking gas, have continued to sell the deregulated product at exorbitant costs in Nigeria on account of the existing monopoly and problems of logistics.
The price of crude oil at the international market dropped from $115 per barrel in June 2014 to less than $50 at the weekend, representing over 50 per cent slump and with the interconnectivity of the energy market, the plummeting crude oil price also affected the price of Liquefied Natural gas (LNG) and Natural Gas Liquids (NGLs).
With the interconnectivity of the energy market, the drop in the price of crude oil led to a sharp drop in the spot price of Liquefied Natural Gas (LNG) as it crashed from a peak of over $20 per million British Thermal Unit (mmbtu) in February 2014 to less than $10 per mmbtu in December 2014.
Speaking to journalists at the end of the recent 16th ministerial meeting of the Gas Exporting Countries Forum (GECF), in Doha, Qatar, the Minister of Energy and Industry of Qatar, Dr. Mohammed Bin Saleh Al-Sada, acknowledged the direct link between the price of crude oil and gas at the international market and admitted that the drop in the price of oil has equally led to a drop in the price of gas.
GECF accounts for 67 per cent of the world’s proven natural gas reserves.
“Well, as you know, the energy market is interconnected and we can see the effect of oil price drop affecting the gas, too. We can see also a strong degree of convergence of gas export prices between different regions,” Al-sada said.
“Some economies in the world prefer the linkage of gas supply to oil, since oil is much more liquid in the stock market worldwide being traded round the clock. The mutual agreement between companies of what kind of decision suits both parties is usually the relevant of parties such as sellers and buyers. So, suppliers also consider different markets and the importance of sometimes, linkage of gas price to a formula of oil and sometimes even oil and products. Some markets link itself to gas-to-gas supply and demand in a particular point,” he explained.
Before October 12, 1964 when ‘Methane Princess’ delivered the first liquefied gas cargo to UK’s Canvey Island regasification terminal, natural gas was more or less regarded as a waste product from extraction of crude oil.
But since then, natural gas is being liquefied as LNG and shipped to other countries where it is re-gasified for power generation and other domestic uses , a business that has since expanded from a single trade between Algeria and the UK to over 400 trade routes, involving 45 countries.
Nigeria has earned billions of dollars of revenue from natural gas since October 1999 when the country exported its first cargo through the Bonny Island plant of the Nigeria LNG Limited.
The company has since shipped over 3,000 cargoes to its customers in Europe, America and Asia, converting over four trillion Cubic Feet (tcf) of associated gas to LNG and Natural Gas Liquids (NGLs) for both export and domestic uses.
The LNG produced from NLNG’s six trains had accounted for about 10 per cent of the global LNG market and this growth between 1996 and 2008 earned NLNG the record fastest-growing LNG project in the world.
To strengthen her global market share and possibly occupy the second –largest LNG exporter after Qatar, the country had targeted to build Olokola LNG and Brass LNG projects, as well as additional Train 7 in NLNG to utilise associated and non-associated gas for exports.
However, rather than pushing ahead with these projects, uncertainty of the operating environment made investors to put these projects on hold.
Nigeria’s lost opportunities went elsewhere as LNG from other countries, especially in Europe’s North Sea, Indonesia, Malaysia, Qatar and Algeria, got to the global market and weakened Nigeria’s market share, reducing it from 10 per cent to seven per cent.
However, as the price of crude oil dropped in recent months, Wood Mackenzie said in its recent annual review that lower demand from Asia also led to the crash in LNG spot prices by about 50 per cent.
While 30 mmtpa of new production capacity took Final Investment Decision (FID) in 2014, Asian spot LNG prices peaked at over $20 per mmbtu but fell to under $10 per mmbtu
South Korea also imported nine per cent less LNG in 2014 than 2013, while Papua New Guinea (PNG) exported 3.7 million tonnes in first seven months of operation, operating at close to 90 per cent of nameplate capacity.
Also in 2014, 67 new LNG ships were ordered, topping the previous peak of 52 ordered in 2011.
Wood Mackenzie’s Principal Analyst, Mr. Giles Farrer, said global LNG production was up five million metric tonnes per annum (mmtpa) to 246 mmtpa and overall trade was boosted by higher levels of re-exports.
“But the big surprise was that Asian LNG demand was much lower than expected. Demand in emerging markets, like China, failed to grow to the extent anticipated and demand in the established South Korean market fell considerably,” he said.
“Prices dropped in the summer as new supply from PNG LNG and reduced Asian demand left the Pacific basin long supply. Then fell further – as Brent oil tumbled from $110 per barrel in August to below $60 per barrel in December,” he added
As Wood Mackenzie’s report shows, 2014 was the year in which the long awaited wave of new Pacific supply started to arrive.
The report noted that PNG LNG, a $19 billion liquefied natural gas project by ExxonMobil in Papua New Guinea (PNG) began production in May, and had a phenomenal year, reaching full capacity from both trains in five months.
Nigeria’s LPG market
Liquefied Petroleum Gas (LPG), otherwise called cooking gas, is a product of natural gas.
With her enormous natural gas reserves, Nigeria is rated the largest producer of cooking gas in sub-saharan African, largely from the NLNG and the refineries.
As a deregulated product in Nigeria, the price of LPG is supposed to be controlled by the market forces of supply and demand and not the whims and caprices of the suppliers.
Therefore, the drop in the international market price of gas should have equally led to a crash in the LPG price in Nigeria.
But despite the huge drop in the price of gas at the international market, marketers and importers of cooking gas in Nigeria have continued to sell the product at a very high price because of monopolistic tendencies of suppliers, weakness of regulators and logistics challenges.
Ironically, the country is the lowest consumer of the product as monopoly and challenges of logistics have forced the price above the capacity of the ordinary people.
Rather than use the safer, cleaner but more expensive LPG as domestic fuel, most Nigerians utilise firewood, coal and kerosene, resulting in indoor pollution, which accounts for over four million deaths globally every year, according to a World Health Organisation (WHO) report.
Latest WHO report indicates that of the three billion people worldwide that cook and heat their homes using open fires, coal and simple stoves burning biomass – wood, animal dung and crop waste, 4.3 million people die prematurely from illness attributable to the household air pollution from cooking with solid fuels.
“More than 50 per cent of premature deaths among children under five are due to pneumonia caused by particulate matter (soot) inhaled from household air pollution; 3.8 million premature deaths annually from non-communicable diseases including stroke, ischaemic heart disease, Chronic Obstructive Pulmonary Disease (COPD) and lung cancer are attributed to exposure to household air pollution,” said WHO report.
Of the 4.3million that die yearly due to domestic pollution, according to the frightening data by WHO, 12per cent deaths are due to pneumonia; 34per cent from stroke; 26per cent from ischaemic heart disease; 22per cent from chronic obstructive pulmonary disease (COPD), and six per cent from lung cancer.
Despite local and global interventions to address the problem of Nigeria’s local under-utilisation of LPG as domestic fuel, the country has remained one of the lowest consumers of the product in sub-saharan Africa.
Apparently worried by the low consumption of LPG in Nigeria, the World Bank and the World LP Gas Association (WLPGA) had in 2003 developed a strategic roadmap for the country.
But these efforts did little to promote the growth of LPG market to the extent that by 2007, the product was virtually disappearing from the Nigerian market, following the collapse of the refineries, the country’s main supplier.
This prompted the administration of former President Olusegun Obasanjo to direct the Nigeria LNG Limited to set aside a certain volume of its production for the local market.
This intervention, which was government’s greatest intervention in the history of the LPG sector in Nigeria, successfully resolved the short-term supply challenges as NLNG set aside 150,000mt yearly for the local market, even when domestic demand was still below 60,000metric tonnes yearly.
However, no deliberate efforts were made to implement the earlier roadmap developed by the World Bank.
In 2008 a Presidential LPG Steering Committee was inaugurated during the administration of the late President Musa Yar’Adua, followed by the World LP Gas Association summit held in Lagos in 2009 and the LPG summit hosted in 2011 by the Senate Committee on Gas.
The Nigeria LPG sector no doubt has a rich history of hosting local and global summits with robust communiqué but these have not translated to any tangible growth in the domestic LPG market.
However, by the end of 2013, consumption of LPG in Nigeria had exceeded 180,000 metric tonnes per year (MMTPA), more than doubling the 2008 demand figure of 60,000mt.
To meet the increasing demand the NLNG on July 27, 2013, announced an increase in the quantity of LPG made available to the Nigerian Market from 150,000 metric tonnes to 250,000 metric tonnes.
“This 67per cent increase will enable ample stock of the alternate fuel and promote the use of cooking gas – necessary for its salutary effects on the environment, including its role in controlling deforestation”, the NLNG said.
But this is not cheerful news for a country with over 160million population, which is supposed to consume over one million metric tonnes yearly, in order to be at par with other countries with similar population.
Nigeria’s current per capita consumption of about one kilogramme actually compares poorly with Ghana’s 3kg, Cameroon’s 1.9kg, South Africa’s 5.5kg and Morocco’s 44kg.
Though it is estimated that the country consumed 310,000 metric tonnes in 2014, this domestic consumption is no doubt still far below government’s short-term aspiration of per capita consumption of 3.75kg, which will translate to a domestic consumption of about 600,000 metric tonnes yearly.
Despite being a local product that is harnessed from Nigeria’s abundant gas resources, the cooking gas sold in Nigeria is priced internationally in the same way crude oil is priced at the international market.
In other words, the price of cooking gas at the international market is the same price it is sold in Nigeria despite the fact that it is a Nigerian product.
If the price at the international market was $100 four days; $90 three days ago; $130 two days ago and $100 a day ago; the price today is the average price for the four-day period.
THISDAY gathered that this is how the price of LPG is determined in Nigeria, even though supply to the domestic market comes largely from the country’s NLNG and the refineries.
This has made the price to remain high at all times because the same price which countries that do not have natural gas resources are buying the product is the same price that Nigeria, which is more of a gas nation than an oil nation, is buying the product.
Even with the drop in the price of gas at the international market, importers and marketers in Nigeria are still selling the price at a very high price, with 20 Metric Tonne Tanker going for N3.3 million, while 12.5kg cylinder is sold at N3,000.
In Dubai for instance, the price of 12.5kg cylinder is equivalent of N150 because they produce LPG locally like Nigeria.
The 20 metric tonnes that is sold at N3.3million today in Nigeria was sold at about N70, 000 as at 1994, when the refineries were working and the product was sourced from the refineries.
In 1998, it was N150, 000 but in 2004/2005, it went up to N1.2million.
It was in late 2007 that it increased to over 2million, yet it is a natural resources produced locally.
A major problem militating against the domestic supply of LPG in Nigeria is the challenge of logistics due to absence of reception facilities and jetties for both imported and NLNG’s LPG vessels.
THISDAY gathered that North Oil Jetty (NOJ), which belongs to the Pipeline Products and Marketing Company (PPMC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC), is the only jetty dedicated for LPG vessels in Lagos.
It was learnt that most times, when LPG vessels come to Lagos to discharge, the NOJ will be occupied by another vessel carrying other petroleum products, thus delaying the discharge of LPG cargo and creating artificial scarcity and its attendant price hike.
For instance, since the beginning of 2015, NLNG, which accounts for over 80 per cent of domestic supply, has not been able to supply product to Lagos because its vessel, MT GAZ DE PROVIDENCE, which brought in 10,000metric tonnes of cooking gas into Lagos from the Bonny Island plant could not find space at the jetty to discharge.
Investigation revealed that NOJ is occupied by another vessel carrying petroleum product, which has been at the jetty for weeks.
The vessel has not been allowed to discharge because the product owner allegedly has some issues, which is preventing the vessel from discharging its product.
With the vessel still occupying NOJ, the cooking gas vessel cannot berth and discharge for NIPCO Plc and the six other companies, referred to as Club of Offtakers, which distribute NLNG product to the domestic market.
Apart from NIPCO, some other members of the club include Hyson, a subsidiary of NNPC; Le Global Oil & Gas Limited; Line Train Gas; Simeons; Hernik Gas and Greenfield International Energy.
Challenge of monopoly
With NLNG’s inability to discharge in Lagos in the past couple of weeks, ALGASCO LPG Services Limited has emerged the sole supplier of imported LPG to other companies from the Apapa gas terminal of Navgas.
Apart from smaller companies that engage in inland importation from Niger Republic and other neighbouring countries, NAVGAS Limited, a joint venture between Nidogas and Vitol SA of Switzerland is the only coastal importer of LPG in Nigeria that has its own private jetty for discharge of imported cargoes.
ALGASCO markets LPG at its Creek Road terminal in Apapa, Lagos, which is operated by Navgas.
This is not the first time the LPG market has experienced this type of monopoly as the marketers and other companies that sourced products from ALGASCO had on several occasions in the past protested what they called the sudden increase of LPG price by the company.
With the current drop in the price of gas at the international market, THISDAY gathered that the Mont Belvieu LPG price, which is the international pricing model used by NLNG Limited to sell gas to the domestic market has also dropped.
LPG is a deregulated product and the price of crude oil, which is also one of the parameters used by NLNG to determine the domestic price of gas, has fallen.
Some of the marketers alleged that instead of decreasing the price in line with the dictates of the international market, ALGASCO has continued to sell 20 metric tonne (one LPG of truck) at high cost.
However, some of the marketers told THISDAY that without the LPG imported by the company, Nigeria would have experienced acute scarcity of LPG as NLNG could not discharge, while the refineries are not working.
About 10 years ago, the only source of supply of LPG in this country was through the refineries. But when the refineries collapsed in 2007, NLNG intervened and the issue of supply was resolved.
About the same time, the only LPG terminal in Lagos was the one built by PPMC, a subsidiary of NNPC. But other investors have since built more terminals – NIPCO Plc has 4,500metric tonne-capacity terminal in Lagos.
Techno Oil Limited, Navgas, Forte Oil and other private investors have also built LPG terminals and invested heavily to grow the domestic market, thus effectively resolving the supply challenges. Techno Oil for instance, has distributed 20,000 units of gas stoves at discounted prices in the last two years. Though LPG is available in Nigeria today, access to cylinders and accessories has continued to hinder the growth of domestic consumption. The cheapest standard 12.5kg cylinder in the market is sold at N8, 500. When Nigerian companies were manufacturing cylinders within the country, the cost of cylinder was below N2, 000. But the two companies that manufactured cylinders locally have collapsed due to inadequate supply of electricity. The cost of importing cylinders and accessories is very high due to the high tariff and this has hindered LPG development.
Though LPG is cleaner, cheaper, safer and more environmental-friendly than kerosene, the Federal Government has continued to make deliberate efforts to boost the use of kerosene as domestic fuel, at the detriment of LPG. Also unlike kerosene, which is accessed with very cheap plastic bottles and containers, the use of LPG requires costly cylinders, thereby having relative disadvantage over the use of kerosene.
The cost of kerosene is also heavily subsidised by the Federal Government, while access to LPG cylinders and accessories is increasingly beyond the reach of the low income earners.
For instance, the NNPC incurred total subsidy claims of over $3.5billion or N543.8billion on kerosene in 19 months, from January 2012 to July 2013.
During the same period, the NNPC imported over 3.9billion litres of kerosene from the international market at a cost of over $5.2billion, or N811.4billion, while 1.16billion litres were produced locally from the refineries.
Based on its claims that the kerosene was sold at subsidised price of N50 per litre instead of the average market price of N160.30 per litre, the NNPC said it realised N267, 584,156,729.12, an equivalent of $1,727,798,519.59.
Though the NNPC is supposed to sell kerosene to marketers at N40.90 per litre so that the private marketers will retail it at N50 per litre in filling stations, no retail outlets sell kerosene below N130 per litre in Nigeria, except, perhaps, the NNPC filling stations.
But huge subsidy on kerosene has encouraged the use of the product as domestic source of energy at the detriment of the cleaner, cheaper and more environmental-friendly LPG.
– Ejiofor Alike, This Day