Why Nigeria’s LPG industry is an underrated investment opportunity

With a compound annual growth rate of 27% between 2018 and 2020, Nigeria’s liquefied petroleum gas (LPG) supply is amongst the fastest growing in Africa. Last year, the country absorbed its first million metric tonnes of LPG, up from 840,000 MT in 2019 and 635,650 MT in 2018. And the forecast for further growth is very positive.

In a study released in July 2021 for the Clean Cooking Alliance, Fraym estimates that only 15% of Nigeria’s 49m households use LPG as clean cooking fuel. The rest relies on wood, especially in rural areas, or kerosene.

The 9m Nigerian households that use clean cooking fuels are obviously concentrated in urban areas, especially in major cities such as Lagos, Ibadan, Benin City, Abuja, Kaduna, Kano and Port Harcourt. They also represent the major consumers of LPG in the country, given that industry and power have remained small LPG off-takers so far.  

With 40m households yet to have access to clean cooking fuels, the potential is enormous to grow the country’s LPG supply and infrastructure. While most Nigerian households cannot afford LPG, the same study by Fraym also estimates that at least 6m households are urban early-adopters and likely to afford clean cookstoves in urban areas. This is a significat market that most marketers and distributors are currently targeting, and which could potentially afford to spend the annual average of NGN 2,800 per month per household for LPG consumption. The rest of Nigerian households are likely to continue relying on wood (NGN 1,100/month) and kerosene (NGN 1,200/month), at least for the time being.

But the opportunity is not only in reaching out to the under-served. Nigeria still imports about half of its LPG supply, and while the growth of imports has been slowing down, it is still growing. Research by Hawilti shows that LPG imports, mostly from the USA and Equatorial Guinea, represented 52.3% of total Nigerian LPG supply in H1 2021 compared with an average of 53% in 2020.

Source: PPPRA

Nigerian domestic LPG suppliers remain limited, with Nigeria LNG representing 75% of all domestic LPG supply in H1 2021. New domestic suppliers have emerged this year, including in Kwale, Oredo, Egbaoma and Rumuji. But their production capacities remain small compared to market needs.

Put simply, LPG is a tremendous import substitution business in Nigeria. Whoever produces will find a market, providing it is ready to sell domestically instead of seeking foreign exchange on the global export market.

Meanwhile, infrastructure is being expanded. Three new LPG terminals are currently under-development: Ardova’s 20,000MT facility and Gas Terminalling’s 5,000 MT facility in Lagos and Chimons Gas’ 5,500 MT facility in Warri (Delta State). They are all expecting commissioning before the end of 2022.

Ardova’s 20,000 MT storage facility in Lagos will notably act as an import and blending terminal and will be blending propane and butane once commissioned, a company executive confirmed Hawilti. It will also be able to receive LPG cargoes, be them imported or from Nigeria LNG.

Meanwhile, Banner Energy continues to progress towards financial close for its own $65m, 13,000 MT LPG terminal in Akwa Ibom. It would be Southeast Nigeria’s biggest facility, and Banner Energy has appointed a financial advisor to progress to financial close.

LPG will remain a hot commodity in Nigeria for years to come. Supply disruptions are currently sending prices up, further supporting market activity with several new private sector players eye trading opportunities in the short and medium-term. But the real challenge for the industry’s growth will remain that of affordability and finding out the right business models that work out for Nigeria’s 40m households in need of healthy and clean cooking fuels.

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President Buhari has signed Nigeria’s Petroleum Industry Bill into law

It took almost two decades, two historic crashes in commodity prices and two recessions for Nigeria to finally adopt its new Petroleum Industry Bill. Following its passing at both chambers of Parliament in July, the bill was officially signed into law by President Buhari today. The bill is expected to provide much-needed regulatory certainty for investors seeking to do business in Africa’s most populous nation. Nigeria has the world’s eight largest proven gas reserves and is Africa’s largest crude oil producer. However, years of under-investment have left production on a declining trend: in June of this year, Nigeria was producing only about 1.4m bopd and has not been producing over the 2m bopd threshold since 2012. A major factor to judge the efficiency and impact of the PIB will now be its ability to revive deep-water projects that have remained on the shelves for years. IOCs in Nigeria have discovered billions of barrels of oil equivalent offshore which have remained undeveloped because of market conditions and lack of a supportive regulatory framework. The passing of Nigeria’s Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act in late 2019 had only further jeopardized the economics of most of these discoveries by removing the water depth-based royalty and replacing it with a flat 10% royalty on all deep-water PSC. It had also introduced a price-based royalty adding 0 to 10% depending on the oil price. Will the PIB be able to revive the investment appetite of IOCs for those deep-water projects? Time will tell but time is also of the essence. Only the development of these discoveries has the power to significantly increase Nigeria’s output. Another crucial aspect to take into consideration is the security situation in the Niger Delta. Insecurity and vandalism there are one of the main reasons for investors shying away from Nigeria and for the exit of IOCs out of their onshore and shallow water licenses in the country. It remains until today a major factor preventing Nigeria’s hydrocarbons sector to realize its investment potential. Because host communities will not be receiving the share they asked for (2.5-3% instead of 10%), an appeasement in the Niger Delta is not certain.  For the same reason, the PIB is not expected to slow down the pace of divestments by IOCs in the Niger Delta, although the same move will benefit indigenous players with cash at hand.

Which African economies will perform in 2022?

Africa will once again be home to some of the world’s fastest-growing economies next year according to the International Monetary Fund (IMF). A total of 11 countries can expect GDP growth levels of 6% or more, including eight in West Africa. Diversified Economies Most performing African markets have in common a relatively diversified economy, at the exception of South Sudan. Non-resource-intensive countries, such as Côte d’Ivoire, and economies with a strong mining sector such as Ghana or Mali, are expected to see robust growth in 2022, driven by a rebound in private consumption and investment as confidence strengthens and exports increase. The fastest-growing African economies also share in common a growing and important agriculture industry. Strong agricultural growth and a faster-than expected recovery in commodity prices has in fact helped many African economies weather the economic storm induced by the COVID-19 pandemic. Infrastructure Spending Infrastructure spending will continue to support growth across the continent, especially in markets with big infrastructure projects such as Niger or Rwanda. Elsewhere like in Ghana and Côte d’Ivoire, economic recovery will translate into growth for the construction industry, especially as governments seek to expand basic infrastructure. Social infrastructure is especially expected to receive a boost following the issuance of historic Eurobonds by Côte d’Ivoire and Benin in 2021, with a specific aim of investing into social and public infrastructure while financing budget deficits. A Strong Potential for Trade Several of the fastest-growing economies on the continent have leveraged on their geographical positions to create strong regional and intraregional trading networks. These are proving extremely useful as Africa rolls out its free-trade area and the bottlenecks created by the Covid19 pandemic ease. Côte d’Ivoire, Ghana and Benin have all positioned themselves as gateway to the rest of West Africa and significantly invested into their ports infrastructure for instance. Efficient value-chains are notably helping to keep inflation down, with Niger, Benin, Senegal and Côte d’Ivoire recording inflation levels of only about 2%. Overall, economic recovery hinges on countries deepening reforms that create jobs, encourage investment, and enhance competitiveness. The resurgence of the pandemic in 2021 and limited additional fiscal support will keep posing an uphill battle for policy makers as they continue to work toward stronger growth and improved livelihoods for their people.