The Cause of Rising LPG Prices in Nigeria (January 2021 – October 2021)
The availability and affordability of Liquified Petroleum Gas (LPG) as a form of energy is vital for the wellbeing of every economy. This energy is what we use to generate heat for cooking and in some cases electricity which can be used for transportation, lighting, entertainment, commercial and industrial activities.
LPG is primarily used as an input for other activities, which means the higher the cost of LPG the higher the unit cost of the activity it is used for. This makes the price of LPG one of the most monitored indices.
The price of LPG is volatile, as several factors influence the price of LPG such as the dip in global energy demand caused by COVID-19 in early 2020 and a surge in global energy demand which started from March 2021 (see chart 1).
Chart 1: Price of Different Natural Gas
In India (Jacob, 2021), rising prices of LPG have been attributed to the rise of the international price of natural gas such as Henry Hub, and LNG Asia. President Joe Biden has attributed the gas price rises to pandemic profiteers, low global production, and supply disruptions in the US (The White House, 2021). In Europe, it has been attributed to a combination of issues including supply issues, low European refining rates capping supply and this is compounded by Algerian supply disruption and ongoing steady reductions from Russia (Wilton, 2021).
The United Kingdom relies on wind power for their electricity demand (In 2020, the UK’s wind energy share was 25% of their total energy mix and as of September 2021, it fell to 7%). The reduction of wind in the North sea means that the energy loss would be provided by alternate energy sources. This energy deficit has led to an increased demand for gas which is putting pressure on the available Gas supply (Wilton, 2021).
Bringing it home to Nigeria, the price increase in LPG have been attributed to several factors such as increasing international gas prices, inadequate domestic production, poor LPG infrastructure, re-imposition of VAT on imported LPG, sales of domestic produced LPG in dollars (Esiedesa & Ejoh, 2021), devaluation of the Naira and the inability of LPG marketers to get dollars at CBN rates (Ejoh, 2021).
Inadequate Domestic Production:
In 2020, the domestic consumption for LPG in Nigeria was about 1.2 million metric tonnes. Nigeria LNG (NLNG) supplies about 35 – 40% (Esiedesa & Ejoh, 2021), less than 4 – 5% by other domestic producers (Jeremiah, 2021), while the remaining 56 – 60% is imported (Esiedesa & Ejoh, 2021). This, to an extent, means that the retail price of LPG in Nigeria would be influenced by variations in international prices.
Poor LPG infrastructure:
There are seven out of eight active jetties in Lagos which are used by vessels to discharge petroleum products (Nigerian Ports Authority, n.d.). Three jetties are owned by The Nigerian National Petroleum Corporation (NNPC) and they constitute the Apapa Jetty – Petroleum Wharf Apapa (PWA), Bulk Oil Port (BOP), and New Oil Jetty (NOJ).
Only NOJ has the facilities to discharge LPG and is thus used to discharge LPG and other petroleum products. Hence, whenever an LPG vessel is brought to Lagos and another vessel is discharging PMS at NOJ, the LPG vessel will either wait and incur huge demurrage or go to a privately owned jetty called NAVGAS LPG terminal, the only alternative jetty for discharging LPG in Lagos.
Domestic Transport and Logistic cost:
Most of the LPG consumed in Nigeria comes from three Inland Bulk Terminals which are located in Lagos (Uwandu, 2021). This means that there are 35 other states plus the Federal capital territory that all get their domestic supply from Lagos using Bridger and Bobtail Trucks. The distance from Lagos and fees charged by these terminals for each truck type affect the final retail price of LPG in different locations of Nigeria.
According to NBS (see chart 2 for August 2021), the transport cost of LPG differs from state to state as well as the geopolitical zone of the country. In Nigeria, the 5KG LPG for the Southwestern region was most affordable on average while the Northeastern region was the most expensive. The variation in the price of these regions shows the transport cost of moving LPG from the coastal region to the non-coastal region.
Chart 2: Average LPG Price for 5KG in Different Nigerian Geopolitical Zones
As we can see from the infographic (see chart 3 from NBS for August 2021), Akwa Ibom is the state where the price of 5KG LPG is most expensive while Ondo State is the most affordable.
Chart 3: Average LPG Price for 5KG in the Different Nigerian States
Estimating the effects of all these factors on LPG Prices in Nigeria:
In this article, the domestic price of LPG was analyzed using the dataset obtained from Kiakia Gas. The data collected classified LPG prices in Nigeria into three.
The international benchmark for the cost of Nigerian LPG is the Nigerian Liquefied Natural Gas Contract Price, also commonly called the NLNG CP. The NLNG CP changes on a monthly basis, forcing price reviews at least once to three times per month (Uwandu, 2021).
This is the average selling price of LPG at the depot. This can also be seen as the wholesale price of LPG at the bulk inland terminals in Lagos.
This is the average price of LPG sold to the final consumer.
The retail price of LPG per kg in Nigeria is usually NGN 200 more than the international price of LPG. This retail price can be sometimes as high as 2.5x of the international price of LPG (on April 19, 2021, the international price of LPG was NGN 158.88 while the retail price was NGN 400).
Chart 4: Average LPG Prices in Nigeria
From the Chart (see Chart 4, March 1 – May 1, 2021), we can also observe that a reduction in international prices of LPG usually does not lead to a reduction in the retail price of LPG. Therefore, we can argue that the rise in retail prices of LPG in Nigeria is driven by other factors aside from the international price.
Other factors that could influence the retail price of LPG in Nigeria which was considered in this paper were the unstable exchange rate window and poor infrastructure, the re-imposition of VAT on imported LPG as suggested by NALPGAM’s Executive Secretary, Bassey Essien (Esiedesa & Ejoh, 2021), and Domestic transportation cost.
To estimate the impact of these factors three measures were used
Exchange rate and Lack of Infrastructure effect (Exc Rate):
This was derived by subtracting the difference of international price from the depot price. The major assumption was that the effect of not having enough LPG infrastructure and the inability of the LPG marketers to obtain USD at a stable exchange window would still lead to higher domestic LPG prices regardless of the gains realized by falling international prices (Esiedesa & Ejoh, 2021) of LPG.
VAT Effect (VAT Rate):
This was derived by increasing the depot price by 7.5%. The assumption is based on the applicable VAT rate from the 2021 finance act.
Domestic Transport and Operating Profit Margin Effect (T & M Rate):
This was derived by subtracting the depot price with VAT from the retail price of LPG. The Major assumption is that what is left after deducting the VAT and Depot Price from the retail price of LPG in Nigeria would be the logistic cost and operating profit margin left for the entrepreneur.
The re-imposition of VAT on LPG prices accounts for less than 6% of the total retail cost of LPG in Nigeria. The removal of this cost would only reduce Oct 08, 2021, retail price per kg of NGN 600 by NGN 36.
Exchange rate and Lack of LPG infrastructure effect (which includes the cost of not getting dollars at CBN rates and any additional freight cost, and demurrages the LPG vessel would incur for not berthing on time) accounts for approximately 24% of the total retail cost of LPG in Nigeria while Transport and Operating Profit Margin effect account for about 20%. These two costs account for most of the price variations in the retail price of LPG in Nigeria.
Chart 5: Composition of LPG Retail Price of 1KG in Nigeria
Conclusion and Recommendation:
From the analysis above, about 44% of the current cost of the average retail LPG price in Nigeria can be reduced by improving domestic LPG infrastructure and Minimizing Export shocks.
Improving Domestic LPG infrastructure:
There are several LPG infrastructures in Nigeria that require additional investment to improve the current capacity of what is available. Increasing the number of investments in inland bulk terminals and domestic storage facilities in other states of Nigeria as well as constructing gas pipelines to distribute this gas to other regions will help reduce the transportation and terminal cost of retail LPG.
Minimizing Export Shocks:
Having a stable Exchange rate regime for LPG Imported in the short term while increasing the value of LPG produced locally would assist in reducing exposures that come from unstable exchange rate regimes, and relying on one major domestic supplier. Also, creating multiple LPG jetties in different coastal regions of Nigeria such as Cross Rivers, Bayelsa, Delta, Ondo, Ogun, Rivers, Akwa Ibom, and Edo would reduce the infrastructure burden and additional costs that are accrued to the delays of a vessel at the Apapa Port, Lagos.
Ejoh, E. (2021, August 17). Hard time for consumers as LPG price rises 33%. Vanguard. https://www.vanguardngr.com/2021/08/hard-time-for-consumers-as-lpg-price-rises-33/
Esiedesa, O., & Ejoh, E. (2021, September 21). LPG supply rises by 9.6% to 740,675MT. Vanguard. https://www.vanguardngr.com/2021/09/lpg-supply-rises-9-6-to-740675mt/
Jacob, S. (2021, March 03). Explained | Why LPG prices are rising. Money Control. https://www.moneycontrol.com/news/business/economy/explained-why-lpg-prices-are-rising-6597001.html
Jeremiah, K. (2021, September 17). ‘Nigeria is dependent on cooking gas imports from the U.S, Algeria, Equatorial Guinea’. Guardian. https://guardian.ng/business-services/nigeria-dependent-on-cooking-gas-imports-from-u-s-algeria-equatorial-guinea/
Mellor, S. (2021, September 16). The U.K. went all-in on wind power. Here’s what happens when it stops blowing. Retrieved October 22, 2021, from https://fortune.com/2021/09/16/the-u-k-went-all-in-on-wind-power-never-imaging-it-would-one-day-stop-blowing/
Nigerian Ports Authority. (n.d.). Jetties & Tank Farms. Nigerian Ports Authority. Retrieved October 22, 2021, from https://nigerianports.gov.ng/lagos-port/jetties-tank-farms/
Uwandu, I. (2021, July 4). RETAIL LPG PRICING IN NIGERIA. Kiakiagas. Retrieved October 22, 2021, from https://kiakiagas.com/blog/retail-lpg-pricing-nigeria
The White House. (2021, September 16). Remarks by President Biden on the Economy. The White House. Retrieved October 22, 2021, from https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/09/16/remarks-by-president-biden-on-the-economy-4/
Wilton, P. (2021, September 28). ‘Almost’ perfect storm hits LPG prices. Argus Media. Retrieved October 22, 2021, from https://www.argusmedia.com/en/news/2258344-almost-perfect-storm-hits-lpg-prices