Gas Market Deregulation: The Nuts and Bolts

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Monday, March 08 2021   /05:20 AM / By Proshare Research/ Header Image Credit: EcoGraphics


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The Nigerian gas market is broadly deregulated meaning that the price of the commodity is determined by the market or at least should be. The determination of the price of LPG, for example, is expected to be the result of an alchemy of product cost pricing plus a margin and the economist favourite market construct of demand and supply. To muddy the pool a bit the market operator would add the cost of logistics and storage. A lot would also depend on what the end-user would be willing to pay at prevailing retail prices as demand falls as retail prices rise and rises the lower the minimum price the sellers are prepared to sell.

 

A problem of market distortion emerges when regulatory bodies decide to muscle in on the price determination mechanism by introducing charges, fees, and levies. This would push up the marginal cost of the product and pass higher costs to the users of gas, by how much? This would depend on how important the gas is to the consumer, if consumers find LPG gas the preferred source of cooking, then demand would be said to be 'inelasti'' meaning that most of the additional cost (such as the PPPRA's N1.23) would be passed to the consumer, but if a cost price results in a shift to near substitute products such as kerosene, wood, and coal, then demand becomes more elastic and most of the incidence (weight) of the PPRA charge would fall on gas retailers. The current total industry cost of the PPPRA administrative charge comes to roughly N2.5b (US$5m) annually which is passed on to the consumer as is part of the industry's 'deadweight' loss (see Chart 2 below).

 

Chart 2: PPPRA Revenue Drive and The Cost Monster

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The cluttered nature of charges in the O&G business is the consequence of a delay in the passing of the PIB and its signing into law. The signing of the Bill into law would allow for the unbundling of the Nigerian National Petroleum Corporation (NNPC) which is one of the world's most amorphous and incandescent corporations bundling regulatory and market competing functions in the same entity. Nigeria's petroleum Godzilla needs to be cut to size and allowed to run in ways consistent with a future-facing structure that tears regulatory and operating functions apart from provisions for annual audits by independent auditors.

 

The various new companies created out of the NNPC should be listed on the trading floor of the Nigerian Stock Exchange (NSE) and a likely dual listing on either the New York Stock Exchange (NYSE) or London Stock Exchange (LSE) in five years. The SBU structure of the NNPC should be broken with the different divisions hived-off as independent companies along the oil and gas value chain. The government should sell- off 45% of its holdings in the companies to the general public while it retains 55% with 4% held in trust for the local communities from which the oil and gas resources are mined (see Illustration 7 below). 

 

 Illustration  7: The Many Faces of NNPC's Hydrocarbon Business

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Nigeria's LPG Market and The State of Play

Supply of LPG

From recent data released by the Petroleum Products Pricing Regulatory Agency (PPPRA), one benefit of the COVID-19 lockdowns and restrictions has been the reduction in the country's reliance on Liquified Petroleum Gas (LPG) imports. In 2019 the composition of import: local supply ratio was 72:28, however, in 2020 data reveals the ratio reduced to 56:44. Various factors are responsible for the increase in the local supply of LPG, an increase in the production of LPG in the local market, deregulation of the gas market. In 2020, the imported supply of LPG accounted for 56% of the total supply of the product while 44% was sourced locally. This was a significant improvement against the 2019 figures. In 2019, 71.67% of LPG was imported majorly from the USA, while local supply accounted for 28.33%. 

 

In 2020, the total LPG supplied was 1.17m MT (Metric Tonnes) which was a +13.44% increase from 1.03m MT recorded in 2019. No data was released in March and April 2020 (see Chart 3).

 

Chart 3: Total Supply of LPG 2019 - 2020 (000)

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Source: PPPRA, Proshare Research

 

Import Supply of LPG

A further breakdown of the supply of LPG for 2020 showed that 71.98% supplied was reserved in shore tanks. In 2020, 653,560.00 MT of LPG was imported against 773,710.00 MT imported in 2019 which represented a -15.53% year-on-year (Y-o-Y) decline in LPG imports. The product origin was majorly from the USA, followed by Chile and then Argentina.

 

Data was unavailable for March and April 2020 at the peak of the COVID-19--induced lockdowns and restrictions. August 2020 recorded the highest import of the product with 88,157MT which led to a higher volume of shore tank volume. While June 2020 saw the lowest import at 28,879 MT (see Chart 4).

 

Chart 4: Import Supply of LPG Jan -Dec 2020 (000)

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Source: PPPRA, Proshare Research

 

Local Supply of LPG

The local supply of LPG rose in 2020. The supply grew Y-o-Y by +77.48% from 293,060.00 MT recorded in 2019 to 520,130.00 MT in 2020. 78.12% was reserved while 21.88% of the total supply was distributed to different regions. The major suppliers of the product in 2020 were Nigeria Liquified Natural Gas (NLNG) and Bonny River Terminal, however, NLNG supplied the majority of the product.

 

September 2020 recorded the highest local supply of LPG with 79,381.34 MT while February 2020 recorded the lowest quantity of 26,108.14 MT supplied by local operators in the gas market (see Chart 5).

 

Chart 5: Local Supply of LPG Jan -Dec 2020 (000)

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Source: PPPRA, Proshare Research

 

State Distribution of LPG

Available data for state distribution of LPG released by NBS reveals that the total volume of LPG distributed to all states including FCT was 115,528.91 MT as of Q3 2019 against 89,868.70 MT distributed in Q2 2019, which is a +28.55% increase. For Q3 2019, Lagos state had the highest demand for the product at 13,982.25 MT truck out-volume, then Rivers and Delta followed next at 9,465.68 MT and 7,797.40 MT truck out-volume, respectively. There was no distribution of the product in Yobe state, while Taraba, Jigawa, and Zamfara recorded the lowest quantity distributed (see Chart 6).

 

Chart 6: State Distribution of Truck Out-Volume of LPG Q3 2019

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Source: NBS, Proshare Research

 

Zonal Distribution of LPG

The total zonal distribution of LPG as of Q1 2020 was 165,852 MT which is over a +100% increase from Q1 2019. For Q1 2020, the South-West recorded the largest volume of LPG of 55,334 MT while the North-East region received the lowest quantity of 3,154 MT of LPG.

 

South-east recorded the highest percentage growth of +316.31% Y-o-Y while North Central recorded the lowest percentage change of +84.67% Y-o-Y growth in the volume of LPG distributed.

 

Some states in the South-east, South-South, and North-East regions were not captured for Q1 2019 data, available data were used for this analysis (see Table 1).

 

Table 1: Zonal Distribution Of Truck Out Volume Of Lpg

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Average Price of 12kg Gas - 2020

The total average price of 12kg of gas across all states in 2020 declined by -1.54% from N4,204.03 in 2019 to N4,139.17 in 2020.

 

According to data made available by NBS, it shows that Akwa Ibom, Cross River, and Bayelsa had the highest average price for the period. With an average price of N4,614 for Akwa Ibom, N4,612, and N4,562 for Cross River and Bayelsa, respectively.

 

While Zamfara, Oyo, and Kano recorded the lowest average price of gas for the period. With Zamfara at N3,767 while Oyo and Kano had N3,743 and N3,706, respectively.


The top three states with the highest percentage increase in its average price for 12kg gas were Ekiti with a +1.25% Y-o-Y increase, Taraba and Gombe recorded +1.09% and +0.69% respectively.

 

The states with the highest percentage decline in the average price of 12kg gas were Jigawa, Imo, and Abia. Average prices declined Y-o-Y by -6.47% for Jigawa while Imo and Abia state declined by -7.24% and -8.24% respectively (see Chart 7).  

 

Chart 7: Average Price of Gas Per State in 2020 (12kg)

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Source: NBS, Proshare Research

 

Average Price of 5kg Gas - 2020

The total average price for 5kg of gas for 2020 was N1,972.33, total average price declined Y-o-Y by -2.32% from N2,019.13 in 2019. Bauchi, Borno, and Adamawa recorded the highest average prices for 2020 amongst all states, with average prices of 5kg gas at N2,489 for Bauchi, N2,396, and N2,392 for Borno and Adamawa, respectively. Ebonyi, Imo, and Enugu states recorded the lowest average price for the period. Their average prices for the states were N1,707, N1,693, and N1,664, respectively.

 

The states with the highest decline increase in their average prices for the period were Niger, Zamfara, and Benue. Average prices for 5kg of gas increased Y-o-Y by +6.05% for Niger while Zamfara and Benue increased by +2.11% and +1.86% respectively.

 

States with the highest percentage decline in its average prices for the period were Ekiti, Jigawa, and Imo. Average prices declined Y-o-Y by -7.47% for Ekiti while Jigawa and Imo state declined by -11.64% and -12.59% respectively (see Chart 8).

 

Chart 8: Average Price of Gas Per State in 2020 (5kg)

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Downloadable Version of Memo to the Market: PPPRA and the Nigerian Gas Market, Avoiding a Robinhood

1.   Full Report: Memo to the Market: PPPRA and the Nigerian Gas Market, Avoiding a Robinhood - Mar 02, 2021


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