Abuja turns to new gas promotion measures to ease the pain of removing unaffordable gasoline subsidies
“Gas is Nigeria’s new petrol,” petroleum minister Timipre Sylva said of the oil-dependent nation’s attempt to diversify and overcome the crude oil price volatility that perennially afflicts its economic growth.
He said it way back in June 2017, when the Federal Executive Council had just approved the National Gas Policy. But measures announced in September mean this vision could at last become reality for the country’s nearly 200mn people.
The consumption of refined products in Africa’s largest economy has declined more rapidly than in many other countries in the wake of the pandemic, and this trend appears set to continue. The total volume of refined products consumed in the country declined by 23.9pc in July compared with June, falling from 1.34bn litres to 1.02bn litres, according to NOC the Nigerian National Petroleum Corporation (NNPC). Shutdowns mean nearly all refined products are imported.
Consumption of refined products, particularly gasoline—known locally as premium motor spirit (PMS)—and aviation turbine kerosene, will decline from 28.1bn litres in 2019 to 27.2bn litres in 2020, according to credit ratings and research company Agusto & Co. This equates to revenue falling from NGN4.7tn ($12.3bn) to NGN4.3tn.
“The best the central bank can hope for is that making additional funds available accelerates investments in Nigeria’s gas value chain” Famoroti, Stears
Plummeting crude oil prices were exacerbated by the coronavirus, as they were everywhere else. This “led Nigeria to lose about 60pc of its earnings”, says Samuel Segun, a Johannesburg-based Africa analyst at consultancy SBM Intelligence. “The country could no longer finance the subsidy it placed on petroleum products, which led it to completely deregulate the sector. The immediate effect has been a spike in fuel prices.”
The government announced in September that it would no longer fix a price band for PMS/gasoline, leaving marketers to set the retail price. Prices increased from NGN145/litre to at least NGN160/litre, while electricity tariffs doubled from N30.23/kWh to as much as NGN62.33/kWh.
Trade union group the Nigerian Labour Congress threatened a nationwide strike from 28 September to protest against the price hikes, despite a court injunction barring the action. President Muhammadu Buhari insisted the country could no longer afford subsidy payments. Nonetheless, on the day of planned action, the government agreed to push the electricity price hike back two weeks and the union duly postponed the strike for the same period.
The petroleum minister is hoping the price hike and support for gas-based alternatives will push Nigerians to start converting their petrol vehicles to run on LPG—also known as autogas—and natural gas from October.
“To give [deregulation] a human face, we are introducing an alternative fuel… Gas will now become fuel for our cars. This programme will be rolled out within the next month. So, if you go to a filling station and you convert your car to dual capability or dual fuel, then [when] you drive into a typical filling station you will find LPG, you find CNG [compressed natural gas] and LNG being sold,” the minister says.
At least 9,000 filling stations, c.27pc of the country’s total, have been ordered to begin installing facilities for gas products, and select stations will start dispensing autogas by the end of September. The government says it has at least 1mn autogas conversion kits readily available.
Gas investment
To help push the National Gas Expansion Programme, the Nigerian central bank in September offered a NGN250bn ‘intervention facility’ to provides loan to companies willing to invest in the gas value chain. These loans will have a maximum tenor of 10 years and an interest rate capped at 5pc until the end of February next year, after which it will jump to 9pc.
The central bank states the package will “improve access to finance for private sector investments in the domestic gas value chain, stimulate investments in the development of infrastructure to optimise the domestic gas resources for economic development, [and] fast-track the adoption of CNG as the fuel of choice for transportation and power generation, as well as LPG as the fuel of choice for domestic cooking, transportation and captive power”, among other uses.
Nigeria, which has proven gas reserves of 188tn ft³ (5.3bn m³), according to the central bank, produces c.8bn ft³/d, but most of this is exported as LNG. The country has been aggressively courting investment into its gas sector, which it hopes will drive up output by nearly 30pc, at the very least, by 2023.
Its single biggest gas pipeline project, the 614km Ajaokuta-Kaduna-Kano (AKK) connection, is being developed by NNPC and is scheduled for completion by 2023. NNPC expects it to add c.2.2bn ft³/d of gas to the domestic market, support the addition of 3,600MW of power to the national grid and revitalise textile industries, which could provide more than 3mn jobs.
But any plans to boost domestic consumption of gas will still have to compete with potentially much more lucrative LNG export opportunities, both from the existing NLNG trains and a long-awaiting expansion project. The good news is that Nigeria has the ninth-largest gas reserves in the world, so the resource is available to do both. Indeed increasing exports could help bring in more hard currency to support an expanded domestic market.
NLNG’s Train 7 project consists of the construction of one complete LNG train and capacity for one additional liquefaction unit, plus other associated utilities and infrastructure. NLNG, 49pc owned by NNPC, signed the engineering, procurement and construction contracts for Train 7 in May, with the project scheduled for completion by 2025. It is expected to boost output by 7.6mn t/yr, bringing total production to nearly 30mn t/yr, according to the government.
The project, which the government expects will generate the state net revenue of $20bn, “supports the renewed commitment of the government to continue to reduce gas flaring in the country’s upstream oil and gas industry,” says Kayode Oluwadare, CEO of local energy company and consultancy Green Fort.
23.9pc – Drop in refined product consumption in July
The petroleum minister says he hopes the various gas promotion policies under the National Gas Expansion Programme will also spur the use of gas in transport and power for homes and offices.
“So, if you look at the price of PMS [gasoline] versus the price of gas… gas is cheaper… of course, it is going to be cheaper. Gas will even be cheaper than PMS as it is today [with subsidy]. So you see that we are also giving an alternative to ordinary Nigerians,’’ said Sylva at an Abuja briefing.
Driving growth
Many experts see natural gas as driving growth in post-Covid-19 Nigeria, even if the new policy does not yield immediate gains.
“The desire to pivot from PMS to an effective alternative in CNG, as announced by the vice president of Nigeria, is a smart one since CNG is priced significantly less than PMS, with a lower cost of production and storage,” says SBM Intelligence’s Segun.
The new policy also opens up opportunities for increased investment and will allow greater participation of the private sector, according to Sola Lawson, joint managing director at private equity house African Infrastructure Investment Managers in Lagos. Lawson sees his company’s recent 20pc stakes in local players Savannah Uquo Gas and Accugas, finalised in November 2019, as positioning it to invest in an integrated gas midstream business.
However, the policy is unlikely to have any material effect in the short-run. “The best the central bank can hope for is that making additional funds available accelerates investments in Nigeria’s gas value chain,” Michael Famoroti, chief economist at Lagos-based business publishing house Stears tells Petroleum Economist. “Even if this is achieved, it would take a while for ordinary Nigerians to experience any tangible gains.”
One clear limitation of the policy is Nigeria’s reliance on petrol vehicles. “That is unlikely to change given that most of the cars driven in Nigeria are imported, so we have less control over the choice of fuel,” he says.
“Policymakers may be better served targeting industrial-scale producers to substitute towards gas [from coal etc.]. And, of course, credit facilities alone may not be enough to encourage investors to make a play in the gas value chain. Nigeria’s energy sector in general would benefit from the clarity that would come from passing through the [Petroleum Industry Bill] legislation sitting in the National Assembly.”
– Petroleum Economist