Introduction
About a week ago, it was reported that cooking gas prices in Nigeria were up by as much as 100% as the Federal Government (FG) began the implementation of a 7.5 per cent Value Added Tax (VAT) on Liquified Petroleum Gas (LPG) imports. It was reported that Nigerians may be forced as a consequence of the skyrocketing LPG prices also known as cooking gas to resort to alternative sources of fuel including firewood.
This news hit me hard because in all my over 25 years working in the oil and gas industry mostly for international oil companies, I was oblivious that Nigeria imports LPG! Perhaps I never thought this was a possibility given that the country produces and flares gas! How can a country turn around and import a commodity it produces it bountiful and sets fire on? This is the question that agitated my mind since the news broke of the VAT levy on LPG imports. It is common knowledge that Nigeria has been exporting crude oil and importing refined products which is bad business but to flare gas and turn around to import same is insane! If I may use an analogy, when we sell crude and import refined products, it is like a farmer who after harvesting yams, sells the raw yams and then uses the money made to go buy pounded yam for the family at restaurants. Even as bad as this is, we can excuse the farmer because he is making money selling yams before using it to buy pounded yam! But to flare gas and then turn around to import it is akin to a farmer who after harvesting yams, sets fire to the yams and burns them to zero value. This same farmer then looks for money elsewhere to go and buy pounded yam for the family! No matter how this is analysed, this farmer will be condemned as a mental case! No rational human being will set the harvest on fire and then go to another producer to buy the same commodities! But this is exactly the situation of Nigeria. Not only is the country losing value in flaring her produced gas and then going to buy it at high prices, but there is also huge environmental damage to both humans and the environment resultant from the perpetual flares dotted all over the Niger Delta! That more trees will now be felled to provide firewood for cooking exacerbates the environmental damage.
The World Bank projected in 2017 that almost 8 billion cubic meters of gas was flared annually in Nigeria according to satellite data. Nigeria’s oil Minister Chief Timipre Sylva is reported to more recently to have said about 3 billion cubic meters of natural gas was lost to gas flaring in the first five months of 2020. The loss was valued at $230 million. This is even more puzzling why a nation will decide to set fire on about a quarter of a billion dollars’ worth of a commodity annually and then turn around to import same commodity from other countries at high prices!
According to a Survey, despite the presence of the Nigeria Liquefied Natural Gas company (NLNG), which largely produces natural gas and Liquefied gas, Nigeria imports around 70 per cent of LPG for domestic use, with the balance of about 30 per cent sourced locally by dealers.
Global Finance Digest said the price of 12.5 kg cooking gas which sold at around N3,500 eight months ago is now going for N6,500 in Lagos and Ogun states after the FG began implementation of the 7.5 per cent VAT on LPG imports. The Executive Secretary, Nigerian Association of Liquefied Petroleum Gas Marketers, Bassey Essien, said the cost of 12.5kg gas could hit N10,000 in December if the government do not take time to address this surge.
To even think that the FG was levying VAT on locally produced LPG and allowed the imported LPG to be sold VAT-free is inexplicable. One would have expected the FG to levy duty and VAT on the imported LPG instead so that it will create a competitive advantage for local producers over the imported products. This is a big thumps-down on the economic management acumen of the FG to have allowed this situation to happen!
The National Chairman, Liquefied Petroleum Gas Retailers Association of Nigeria, Michael Umudu, said there were three factors that caused the surge in price of LPG:
- About 70 per cent of the gas we consume in Nigeria is imported and importers have to contend with the high cost of foreign exchange.
2. There is a rise in the price of petroleum products in the international market and because of that, the cost of LPG has equally gone up. So importers now pay more on imports.
3. The government added VAT on imported LPG which has exacerbated the price hike of cooking gas.
In his own reaction to the development, the spokesperson of the Nigerian National Petroleum Corporation (NNPC), Garba-Deen Muhammad, is reported to have said the Minister of State for Petroleum Resources, Chief Timipre Sylva, had said the commodity (LPG) was deregulated. Mr Sylva himself is reported to have said a media briefing that “We are not in position to determine gas pricing because gas is not a regulated product. But, of course, we are also very concerned that prices are rising and so I am actually doing something about it in the interest of the ordinary Nigerian.”
But the question that is left to be answered is why the FG is not regulating LPG? If the FG has been regulating the prices of petrol with trillions of Naira paid in subsidies annually, then why leave LPG unregulated?
Recommendations
- In the short term, the FG must take immediate measures including requesting the NLNG to increase supply to the LPG market. This will ensure more supply to market with consequent fall in prices.
2. In the medium term, the FG must read the riot act to the upstream oil companies in Nigeria to harness and utilise produced gas. Once gas is produced, it must be used. This will make more gas available to the Nigerian economy for cooking, electricity generation, fuel for vehicles etc.
3. In the long term, the FG must have a zero gas flares policy and impose punitive duties on imported LPG to make it uneconomical to import. This make Nigeria self sufficient in gas supply thus taking off the pressure on the forex market by importers who source the dollar to import gas into Nigeria.
4. The FG must regulate the LPG market. With the Petroluem Industry Act (PIA) setting up a regulator – Nigerian Midstream and Downstream Petroleum Regulatory Authority – LPG must come under a regulator to create an enabling environment for local producers to thrive.
Conclusion
Nigeria is blessed with a huge abundance of human and natural resources. Governments at all levels must work assiduously to unlock value from these resources. A situation where Nigeria is flaring a vital and valuable resource – Gas – and then importing it from other countries is an embarrassment that must not be allowed to fester into the New Year 2022!
References:
i). Cooking gas price up 100% as VAT on LPG import begins (sunnewsonline.com)
ii). FG Implements 7.5% Tax On Cooking Gas Imports – Nigeria Business Information (naijabusiness.com.ng)
iii). https://www.worldbank.org/en/news/feature/2017/03/10/nigerias-flaring-reduction-target-2020
iv). https://guardian.ng/business-services/fg-begins-gas-flare-reduction-with-award-of-45-licences-in-june/
