Nigeria’s Expanding LPG Market The Need for Government Regulation and Investment

Nigeria may be one of the fastest growing LPG markets in the world, but impactful growth will require addressing issues such as under-regulation in domestic LPG markets and a shortage of LPG facilities.

On 29 March 2021, the Nigerian government announced the ‘Decade of Gas’, an initiative designed to ensure that Nigeria can take advantage of the global energy transition. National stakeholders seemingly renewed their resolve to optimize Nigeria’s gas resources throughout the new decade. This resolve was accompanied by a call to boost the widespread utilization of all forms of gas products, from compressed natural gas (CNG) to liquefied petroleum gas (LPG), in Nigeria. Nigeria’s gas sector is still largely underdeveloped with gas products struggling to gain domestic market acceptance, but LPG seems to stand out of the pack, with increasing domestic adoption.

LPG: NIGERIAN HOUSEHOLDS’ PRIZED GAS PRODUCT

LPG has a wide variety of uses, ranging from automotive fuel to chemical feedstock. Despite this, its primary use in Nigeria has been domestic. LPG currently constitutes about five per cent of Nigeria’s household energy mix, and this figure continues to increase rapidly.

Nigeria’s domestic consumption of LPG increased from 250,000 metric tonnes in 2013 to over one million metric tonnes in 2020—an increase of over 300 per cent within seven years. This rapid increase in LPG adoption is a major indicator of Nigeria’s position as one of the fastest-growing LPG markets in the world.

While the growing LPG adoption rate undoubtedly holds huge promise for Nigeria’s clean energy agenda (due to LPG’s low carbon intensity), Nigeria does not appear to be ready for large-scale LPG adoption in its domestic market. This unreadiness is due to a number of bottlenecks including a low level of regulation of the LPG retail market, shortage of LPG facilities, and an unresolved cylinder crisis in the country.

AN UNDER-REGULATED RETAIL MARKET

Nigeria’s LPG retail market is largely unregulated. This is primarily because during the enactment of the 1969 Petroleum Act, Nigeria’s primary oil and gas regulatory law, gas resources were not paid sufficient attention and, consequently, the Petroleum Act has been largely oil-focused. The government is attempting to rectify this issue with the Petroleum Industry Bill, which has been in the legislative pipeline for over a decade, and was just passed by the Senate last week. The absence of adequate regulation has resulted in the widespread presence of unregistered and illegal LPG operators, with dire consequences.

For instance, although LPG decanting has been shown to increase the risk of explosions, the practice of LPG decanting continues to be widespread, with unregistered roadside gas refilling shops littered all over the country decanting LPG to consumers. The prevalence of illegal LPG operators has not only culminated in immense losses for gas investors; it has also endangered the lives of Nigerians. A case in point is the infamous 2014 Ondo gas explosion, which occurred due to the operations of an unregistered gas refilling plant. The explosion led to the destruction of over 42 shops and houses, and over eight people were critically injured.

As the LPG market continues to grow, illegal operators will continue to act, posing an increasing risk to public safety. The Nigerian government urgently needs to intensify efforts towards clamping down on illegal LPG operators. Such efforts could include the adoption of a whistle-blowing channel for communities to report suspected illegal LPG operators. These whistle-blowing channels could be made effective by the adequate sensitization of community members to the dangers of illegal LPG operations.

THE SHORTAGE OF LPG FACILITIES

Nigeria has a dearth of LPG facilities. The LPG transportation network is weak, with the absence of a rail or pipeline distribution network. This is coupled with the problem of inadequate storage facilities and bottling plants. Nigeria’s current LPG storage capacity stands at 69,968 metric tonnes—a figure far below South Africa’s capacity of over 200,000 metric tonnes. Similarly, there are only about 200 registered LPG bottling plants across Nigeria, the majority of which are situated in urban and semi-urban areas. To put these figures into context, Nigeria essentially has only one registered LPG bottling plant for every one million Nigerians. This is in sharp contrast with South Africa, which currently has 4,452 refilling plants with a population of approximately 58.5 million people, as opposed to Nigeria’s 200 million.

Evidently, Nigeria’s LPG sector has an infrastructure problem. In order to resolve this challenge, Nigeria needs to drive more investment towards LPG. While recent investments like the Ajaokuta-Kaduna-Kano gas pipeline project are undoubtedly notable, they are insufficient to solve Nigeria’s shortage of facilities in the retail market. As such, Nigeria needs to intensify efforts directed at encouraging private sector investment in the downstream gas sector through the creation of a comprehensive investment scheme tailored to the expansion of LPG access. Such an investment scheme would involve the disbursement of funds for the construction of storage and bottling facilities, as well as the provision of funding to prospective downstream LPG investors.

UNRESOLVED CYLINDER MARKET INEFFICIENCIES

Nigeria’s LPG cylinder value chain has been largely disorganized, and this has posed a major threat to safety and quality compliance. Nigeria currently operates a customer-controlled cylinder distribution model, which involves the full purchase and ownership of cylinders by consumers. Under this model, consumers only have to buy cylinders and refill them at intervals. However, the operation of this distribution model has been severely hampered by the lack of adequate monitoring of the quality of the cylinders circulating the Nigerian market.

Nigerian consumers often purchase unbranded and sub-standard LPG cylinders from roadside sellers—a culture which has led to the widespread infiltration of sub-standard gas cylinders in the domestic market. The infiltration of these sub-standard cylinders is so prevalent that about 90 per cent of all the LPG cylinders currently in circulation are expired. These expired cylinders are imported into the country, and often evade quality checks by the Standards Organization of Nigeria (SON).

The overwhelming prevalence of sub-standard LPG cylinders has had fatal effects, as cylinder explosions have rocked several Nigerian households. Realizing the severity of the situation, in January 2020, the Nigerian government announced the transition of the domestic LPG market from a customer-controlled distribution model to a marketer-controlled model. This marketer-controlled model involves a system where marketers retain ownership of the cylinders and assume full responsibility for cylinder testing. Essentially, under this distribution model, consumers will have to make a deposit in order to obtain branded cylinders from marketers. When such cylinders are empty, they are returned to the marketer, in exchange for a filled cylinder. During this process, the marketer retains ownership at all times. The consumer only obtains a filled cylinder, makes use of it, and exchanges the empty cylinder for a filled one. Cylinders can only be returned to the same marketer; as such cylinders are often branded. Responsibilities of testing and quality assurance are solely on the marketer.

However, the transition plan has had little impact. The operation of a marketer-controlled distribution model is barely feasible in Nigeria, primarily because the implementation of this model is highly capital-intensive. In addition, as previously mentioned, Nigeria does not have enough large-scale refilling plants located in close proximity to consumers to cater for the domestic demands of Nigeria’s large population.

Instead of a marketer-controlled distribution model, Nigeria needs a model that takes the peculiarity of the Nigerian LPG market into consideration. An option could be maintaining the current customer-controlled model, but with the provision of LPG testing facilities across all the states in the federation. Under this system, consumers would be encouraged to regularly take their cylinders to testing centres for the verification of the cylinders’ standards. Through this model, the government would be able to exercise considerable control over quality compliance, while also ridding the market of sub-standard cylinders.

The major concern with the adoption of this strategy is the continued indifference of market participants to periodically testing their cylinders. To ensure that consumers comply with the proposed model, the government has to embark on rigorous sensitization about the need for LPG testing. Subsequently, the government may provide incentives such as discounts on new cylinders to consumers who have sub-standard cylinders. The funding of these discounts can be covered through a partnership between the government and local cylinder manufacturing companies. Australia has adopted a similar strategy by providing a host of accredited LPG testing centres for LPG consumers in its domestic market.

Coupled with this, efforts could also be intensified to reduce the importation of LPG cylinders by encouraging investment in domestic cylinder manufacturing plants. Fiscal policies such as tax holidays will help to incentivize such investment. Consequently, the government will have a significant share of the domestic LPG market, and would be able to ensure standardization along the cylinder value chain.

THE JOURNEY TO FULL LPG TRANSITION

Nigeria being able to fully transition its household energy mix to LPG will undoubtedly accelerate Nigeria’s carbon emission efforts. At the same time, this transition will also provide consumers with a cheaper and more effective alternative energy source. The journey towards this full transition is already happening, with the steady increase in LPG adoption numbers in the domestic market. However, full transition within Nigeria’s fast-expanding market cannot be achieved without the adoption of strategic policies to quell regulatory bottlenecks and the infiltration of illegal market operators

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