COMPRESSED NATURAL GAS AS THE SOOTHING BALM-ALLEVIATING THE IMPACT OF PMS SUBSIDY REMOVAL By Felix Awonaiya

 The appointment of a Minister of State, Gas, and Petroleum Resources shows that this is a focused and well-prepared government intent on taking the country to the next level of development. Iran satisfies around 22% of its basket of energy needs from Compressed Natural Gas (CNG). There were about 2,500 CNG dispensing stations in 2021 for a population of about 90m, and their government is making concerted efforts to increase the use of CNG further even as they suffer from periodic gas shortages. Our population, though the last election returns may undermine this as a mirage is estimated at 220m. We would be fortunate to reach 100 CNG stations by the end of 2024 if we go with the current pace, and that is even if fortune smiles on us. Nothing but a drop in the ocean, if it can even be called that. Concerted measures such as those enumerated below are needed to shift the mix of CNG in our fuel basket to double-digit figures in the life of this administration. It can and should be done. 

 

We need to understand the different components of the gas market to have a good idea of where Compressed Natural Gas (CNG) sits. The gas from the oil or gas well is known as wet gas. It consists not only of methane but the heavier hydrocarbon gases and liquids like ethane, propane, butanes, pentanes; water and other impurities such as carbon dioxide, hydrogen sulphide, nitrogen, helium, mercury and hydrogen amongst others.  

 

Dry gas is obtained from processing wet gas to at least 85% methane by removing the associated hydrocarbons, water and other impurities. This gas is piped into homes or compressed to give CNG to be used as fuel for various purposes.

 

Liquefied Natural Gas (LNG) is natural gas that has been processed, cooled and liquefied at temperatures of under -162 C. It is stored in special tanks and transported by special vehicles, taking up about 1/600th of the volume of gas in a non-pressurized environment. It is then regasified at the end point of use and typically supplied to end users through pipelines. It consists mainly of methane with some ethane.  

 

Liquid Petroleum Gas (LPG) consist mainly of propane and/or butane/isobutane and is obtained from crude oil, natural gas or as a by-product of refining crude oil. It is our cooking gas and is used for a variety of purposes, including powering automobiles. 

 

This article focuses on CNG in light of the country’s current economic realities. This is because CNG provides the cheapest energy source of all possible sources. It can be repurposed for local consumption so that it is not subject to foreign exchange fluctuations. So far, whilst there is an encouraging use of natural gas in industrial clusters, its use in transportation is very limited, and it may well be the magic wand the government needs to alleviate the impact of the fuel price deregulation on the vulnerable and not so vulnerable segments of the populace.

 

The use of CNG for vehicular transport is a major antidote to fuel price increases, at least to a certain extent. It is a supply-side solution to the pains the populace has had to bear since the abrogation of the petrol subsidy. The concept is not new; it has been on the drawing board since the era of the military, but somehow, the imperative has not been as stark as now for various reasons, part of which is the customary lack of vision in governance. If we had done the right thing, removing the subsidy would have been a stroll, but as it is, we now have the risk of social upheaval either way we turn. If the Obasanjo regime has any shortcomings in terms of foresight, none can be more obviousthan its failure to popularize or at least set in motion the process of popularizing the use of CNG as a means of vehicular transport in Nigeria as the removal of fuel subsidy started creeping into our national consciousness during his regime. It is disheartening that not much has been done since then. Fortunately, we now have a man with the vision and courage to develop this sector to benefit the country, saving us valuable foreign exchange and contributing to reducing harmful environmental effects by using a cleaner energy source. If anybody can do it, Tinubu is the man, especially given his intimate knowledge of the sector.

 

The use of LPG is a parallel option, and the two are not mutually exclusive; as such, this is also discussed below, though this write-up focuses mainly on CNG.

 

We need the infrastructure and the accompanying policy changes. We need parent stations along our pipelines located all over and retailing stations served by vehicular transport from the parent stations. Until the completion of the AKK pipeline, the north would have to be served by vehicular and rail transport of CNG, making it more urgent to develop the Kolmani Oil Fields and other high-potential areas in the Benue/Gongola basins. 

 

It will be a massive capital-intensive operation, requiring deep policy changes, which will be discussed further and jettisoning of naive patriotic and predatory instincts to bring in investors with the deep pockets and expertise to roll out parent stations and service stations. The huge multiplier effect as vehicles are converted into dual CNG/PMS use and foreign exchange conserved can best be imagined. 

 

Those policy changes required are best understood by carrying out a detailed study of those countries, like Iran, Pakistan, Argentina, Brazil and China, particularly the first and the last, as they have extensive usage of CNG for vehicular transport and then marry this with the need to increase the use of natural gas in domestic environments. As it is not economically viable to bottle CNG for domestic usage due to the enormous pressure required at room temperature, delivering natural gas by pipelines remain the only viable option for domestic use, so policy options must seek to be comprehensive enough to encompass domestic and vehicular use. The bottles required for domestic use would simply be too heavy and too expensive to be viable compared to LPG. 

 

The inherent opportunities in developing the use of natural gas or compressed natural gas as an energy source are limitless. However, a new thinking is required. That new thought process has got to be found in a comprehensive review of our existing gas policy, privatization and other supply-side measures that will make gas readily available. Archaic regulations, for example, that give the Nigeria Gas Company (NGC) the sole right to own gas pipelines should be thrown overboard at any rate, this would not be tenable with privatization. NGC is probably one of the easiest subsidiaries of NNPC Limited to privatize, and its privatization should not be controversial. It’s a low-hanging fruit that can only benefit the generality of the populace besides earning the government tons of money and deepening the market.

 

In terms of deepening the market, the privatization should go hand in hand with granting concessions to proven utility companies that have the deep pockets to run last-mile distribution pipelines to homes in major urban centres like Lagos, Ibadan, Portharcourt, Onitsha, Kano, Kaduna etc., targeting middle-class areas and avoiding densely packed areas given the inherent risks and our cavalier approach to safety. They can also use strategically positioned storage tanks at critical nodes of their distribution hubs. The government can only be the winner in this situation as it stands to make money from the concessions, a novel way to fund the government from this sector. This new money can further deepen the gas market, particularly CNG, for automotive purposes. In doing this, we must learn a lesson from the privatization of the electricity sector, in particular, the case of the Discos and only such companies as have the money and technical expertise should be considered.

 

 

The mistakes made during the privatization of the electricity sector must not be made during the privatization and concessioning of the gas sector. It is a matter of fact that of the three major issues besetting the domestic availability of gas one of them, liquidity, is caused by the illiquidity of the power sector. With high Aggregate Technical, Commercial and Collection Loses(ATT&C), over 50% for some of the Discos, (though Ikeja Electric reported an encouraging 18.43% for quarter 4 of 2023), with much of the problem caused by lack of investments, decrepit equipment, poor metering and the failure to achieve the necessary culture shift from the public to the private sector especially amongst the lower echelons of staff who are still steeped in bad habits. Thus Discos are unable to promptly settle obligations to Gencos who are then unable to meet their obligations to NGC, transferring the illiquidity in the electricity sector to the gas sector. It may be necessary, so that the problem is not carried over to a privatized NGC for the Federal Government to assume the role of the obligor to the gas company(ies) pending the time the issues in the electricity sector are resolved. The two sectors are intertwined as most of our power supply comes from gas and it is better to have a problem in one sector, rather than the two in a post privatization scenario. The second issue with the domestic gas sector is chronic under-investment, suboptimal assets, including in some cases pipelines not being in the appropriate places, with the third being pipeline insecurity, a matter for the government. The privatization and concessioning must be to serious companies with the technical know-how and deep pockets to lay pipelines to where they are needed and capable of achieving a rapid roll out. NGC would have to be unbundled, the successor companies and the utility companies for distributing gas to households must be given strict post privatization targets. The latter are being given a vast market on a platter of gold and have to pay for it, an almost completely new but extremely lucrative market. We simply cannot afford a friends and family privatization as in the power sector. The stakes and the urgency is just too high! Fortunately, the government is on a liberalization path, and this with appropriate fiscal incentives can attract the kind of serious, well resourced (both financially and technically) international/domestic investors we want in our gas sector.  

 

The current plan to have 56 new CNG stations by the end of 2024 through a joint venture between NNPC and NIPCO is not far-reaching enough. Something needs to be done in the short term, but 56 stations across the country plus existing ones and the measures to encourage conversion to CNG are not extensive enough and are nothing but the proverbial drop in the ocean, though we have to start from somewhere at least. At some point in this debate, IPMAN appeared to suggest that its members were ready to incorporate CNG into their operations, but a cursory review of Petrol Stations would quickly indicate that this is indeed not the case and the supporting additional infrastructure is not in place for most stations. The transaction between NNPC and NIPCO smells everything like a sweetheart deal. The government should have (and should still do so) invited bids from local and international operators to provide a certain number of parent stations and service stations, say 200 service stations per bidder at the minimum. It then grants fiscal incentives, such as Investment Allowances, say at 50%, in addition to Capital Allowances, further tax rebates and low-interest concessionary loans in single digits to fund working capital and capital costs. This should attract more local and international companies into this sector. Whatever the government loses through taxes and implicit subsidy, it would more than make up for, preponderantly at that, by the multiplier effect on the economy.

 

The intended focus on public transportation currently is the right approach, given that it is much cheaper to run on CNG than Diesel or PMS. Though gas is sold in kilograms (kg), on conversion the cost per litre currently varies between 100 naira and 150 naira, with the president of IPMAN saying its members are able to deliver a price of 110 naira per litre at retail stations. LPG would cost around 435 naira per litre on conversion from kg. Thus CNG is less than 30% of the cost of PMS at the most expensive price of CNG and the least for PMS. However, the different fuels do not have the same energy per unit so in comparing, it is important to consider the Gasoline Gallon Equivalent (GGE). LPG has an equivalent of about 1.2459, meaning PMS is about 25% more efficient than LPG, CNG at standard conditions (and at an American pump) has a GGE 1.267. To put it in simpler terms, running your car on CNG takes you back to what your fuel costs were pre subsidy removal, even lower if indeed the IPMAN price holds. A huge incentive and substantial savings. It is fair to say that this incentive was practically non-existent pre PMS subsidy removal as the perceived safety issues outweighs the slight savings at the lower range and at the higher price range, CNG would have been slightly more expensive. Not so now, as savings would be well over 60% even at the highest current range of CNG prices. The safety concerns, while not misplaced is mitigated by the fact that CNG unlike LPG is lighter than air and as such leakages are more likely to be more easily noticed that even petrol that would start burning at ground level. Thus said, for now, until we master the technology in our clime, as enthusiastic as this report is, it would not be wise to take a CNG vehicle into uncharted territory because of the conditions of our roads due to the risk of burst pipes, though a risk petrol vehicles are also not exempt from.

 

Incentives also have to be given for people to convert their current vehicles to dual-use to have a far-reaching effect on the demand side. One way of doing this is to make the conversion cost a deductible allowance for Personal Income Tax purposes and as a tax credit for small business owners (where they pay tax). People cannot wait endlessly for the major vehicle assembly operations to carry out the conversion. There is a need to empower and train a cadre of SME operators capable of carrying out the conversion or working with state governments and a few foreign companies to set up conversion centres across the country. The Federal Government cannot and should not carry all the burden. It should be shared even as it takes the lead in implementing the necessary policy changes.

 

We can achieve much by reviewing our policy around the gas sector and our fiscal approach to encouraging investments as we move away from empowering and enriching bureaucrats to shifting more resources to the private sector by liberalization. Capital resources are limited, and competing needs and gas projects exist worldwide. We need to up the ante and address the entire gas value chain. NGC must be privatized. We must not be afraid of unleashing latent productive and investment forces for in not doing so, we are holding ourselves and our development hostage to the cynical and well-oiled agenda of bureaucrats and rentiers.

 

LPG is largely imported into the country. This should not be given that the one major reason why we import almost 60% of our 1.4m tons consumed in 2022 (according to the data of Nigeria Midstream Downstream Petroleum Regulatory Agency (NMDPRA)) is because of infrastructural constraints and also an attractive export market for the propane rich mix produced by processing plants run by ExxonMobil and Chevron. It is ironic that we exported 700,000 tonnes of LNG and imported 800,000 tonnes in the same period. Given our traditional familiarity with the use of LPG, though more expensive than NG/CNG, the deregulation of the sector entails that concerted efforts be made to resolve the constraints around the local production and supply of LPG to increase the domestic supply and further lessen the burden of the fuel price increase on the populace by bringing down the average cost of our fuel basket and improving our Balance of Payments position. LPG, for instance, can easily replace PMS in powering the ubiquitous small power generators. It can and should be done as the country can only benefit.

 

We do not need to recreate the wheel. As stated above, we can learn a lot from China and Iran, the first technology, the second from their rollout plan and also being an oil exporting country. We should not devise our policies in isolation and need to send out a dedicated team, preferably female-led (so that it does not become a boys’ club), to conduct a detailed study of the two countries. Iran’s daily consumption stands at about 25 million cubic metres, with almost 2,500 CNG stations supplying 22% of the country’s basket of fuel needs. They are solving many of the issues we will be confronting, and we would do well to study them intently. Aside from the technology from China, we can also learn how they have successfully used CNG in public transportation.  

 

We also need to ensure that the proposed 200-billion-naira fund,earmarked for developing the use of CNG is properly managed rather than dissipated moreso as it manifestly inadequate. A proper fund structure, with a fund manager, should be used for this purpose with performance targets and not staffed per civil service norms, so it should preferably be a private sector fund subject to the governance strictures of fund management. This has the advantage that such a fund can then also leverage its built-up expertise to attract concessionary funds from other sources than the government as time goes on, in particular International Development Finance Institutions.

 

In summary, we can get there, and to do so does not require a sea change of capacity or expertise but a willingness to do the right thing. The right thing is to revamp our gas policy, privatize NGC as a matter of urgency, concession out gas distribution pipeline to proven utility companies, introduce appropriate fiscal policies to deepen the sector and encourage the use of natural gas. The country can only gain from this, and the forex position can only be better. Growing the domestic use of natural gas and LPG is a win-win situation for Nigeria. 

This article was written by Mr Felix Awonaiya

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