Oil and Gas Industry in Nigeria

A Hot Tip about Energy in Nigeria

Last updated: 13 Mar 2011


Nigeria has huge gas reserves, currently estimated at 187 trillion standard cubic feet and projected to last 109 years. At present, about 75% of associated gas produced as a consequence of oil production activities is flared; 19.79% of total gas flared worldwide and the highest flare rate of all Organization of Petroleum Exporting Countries (OPEC) member states.


The key driving factors for developments in the LPG sector are the Nigerian government’s commitment to phase out gas flaring in 2008 through gas monetizing projects; the plan to increase Nigeria’s domestic LPG consumption level to one million metric tons in 2010 and at least meet the West African average of 3.7 kg person per annum. The government also plans to increase Nigeria’s LPG consumption to about 6.5kg per capita by 2010, which translates to a 20% increase in the current domestic LPG consumption rate, a figure that is still low by global standards. Nonetheless, this proposal will be a critical factor driving developments in the sector, including imports of equipment and services.


Nigeria’s recent deregulation of the downstream oil and gas sector and its commitment to phase out gas flares by 2008 has opened up Nigeria’s oil and gas industry to investors, especially for investment in product supply and the industry’s distribution chain. As part of the Nigerian government’s reforms of the downstream sector of the oil and gas industry and its energy development goals, it identified various opportunities in liquefied petroleum gas (LPG), a derivative of natural gas that is currently flared at oil extraction sites, as an efficient, environmentally clean and economically viable energy source. The government has initiated several programs aimed at encouraging domestic development and utilization of LPG, with a policy to grow local consumption from its current 60,000 metric tons to about 450,000 metric tons by 2008 and 1,000,000 million metric tons by 2010.


The LPG industry is totally separate from the gas industry and requires different expertise in its operations. In Nigeria, it is a $292 million (37 billion Naira) per annum industry that has a 50% rate of return on investment and a cost ratio of above one. The sector offers opportunities in the provision of various aspects of LPG equipment and services, including infrastructure development. The government also plans to promote the local manufacture of 5 million cylinders between 2007 and 2015, an investment that will require an estimated U.S. $50 million to U.S. $100 million. Nigeria is estimated to require 2 million new cylinders annually.


The market for LPG is vast, offering tremendous investment opportunities, especially as the supply and services sector of Nigeria’s oil and gas industry is continually expanding, even as the country’s oil and gas industry expands into new terrain, including the deep offshore. Nigeria’s oil and gas industry has an annual average budget of over U.S. $10 billion, offering tremendous potential for investments and consequently it’s the main area for increasing local content input in the industry.


Market Demand

It is estimated that Nigeria’s annual consumption of liquefied petroleum gas is roughly 60,000 metric tons (MT), which, according to industry observers, is a far cry from where it ought to be when compared to West African countries such as Ghana, Cote d’Ivoire, Cameroon and Senegal, which had an average LPG consumption growth of 9.5% annually from 1990 to 1999. Of the total volume of LPG consumed in Nigeria, 24,000 MT are imported through neighboring Benin, while 48,000 MT are imported through coastal depots. Nigeria’s domestic consumption rate for LPG in the 1980s was between 100,000 metric tons and about 120,000 metric tons; however, due to unstable supply and price instability, this figure steadily decreased to between 48,000 metric tons and 54,000 metric tons in 2004, the latest year for which figures are available, and by all accounts, the lowest in Sub Saharan Africa. Nigeria’s 2004 LPG consumption rate translates to about 0.4kg/per person per year, a far cry from West Africa’s 3.7 kg/ per person/ per annum.


According to a World Bank/Energy Sector Management Assistance Program report, Nigeria’s domestic LPG consumption is estimated to have dropped from a 1990 level of 110,000 MT to 36,000 MT in 2005. Nigeria’s 2007 annual consumption rate is estimated at about 60,000 MT. Increased domestic LPG consumption will automatically drive investment in infrastructure and equipment, which will enhance Nigeria’s economic development growth while resolving some of the environmental problems caused by gas flares.


With a rapidly increasing population estimated at 143 million, oil reserves of about 36.24 billion barrels (including 4 billion barrels of condensates), and gas reserves estimated at 187 trillion standard cubic feet, Nigeria is well endowed with the resources to enable it to produce LPG, crude oil and natural gas. When Nigeria’s refineries are functioning, they have an installed capacity to produce about 400,000 metric tons of LPG. In fact, Nigeria is the largest producer of LPG in West Africa, with exports in 2004, of over 2 million metric tons of LPG; about 3 million metric tons in 2005 and slightly above 2 million metric tons in 2006 from its Bonny and Escravos export terminals. These volumes were produced from three natural gas liquids (NGL) facilities, located at ExxonMobil’s OSO NGL plant in Bonny; the Nigerian Liquefied Natural Gas (NLNG) plant; and the Escravos NGL plant. A number of other LPG producers, namely Addax Petroleum, Brass LNG, Olokola LNG, as well as smaller ones (Global Gas Refinery, which produces 60,000 MT per year) have, over time, steadily increased Nigeria’s LPG production volumes.


LPG Infrastructure:

Nigeria is able to produce and supply LPG domestically from its refineries, gas processing plants and importation, where it is transferred to the primary distribution locations at the refinery and coastal depots. The country has an extensive distribution infrastructure, which is largely underutilized.


In the 1990s, the government, in a bid to enhance domestic LPG distribution, mandated the establishment of nine inland depots at Lagos, Calabar, Ibadan, Kano, Gombe, Makurdi, Enugu, Ilorin and Gusau with a combined storage capacity of 12,000 MT. This initiative failed due to lack of supply from refineries and infrastructure challenges such as lack of access by rail or interconnecting pipelines to the primary supply sources or the coastal depots. The inland depots deteriorated and are now unable to provide the expected infrastructure efficiencies for the national distribution system.


Nigeria has only two LPG coastal depots, one at Apapa with 4,000 MT storage capacity; the other at Calabar, with 1,000 MT capacity. The Calabar depot has been concessioned to private operators. Given that the government plans to increase domestic LPG production to 450,000 MT and distribute it nationwide, there is an urgent need for the production of an additional 228,000 MT, the construction of additional storage depots - particularly coastal depots, - and the modification of loading facilities/jetties, since the available jetty at Bonny River Terminal, built specifically for use by large export tanker vessels, cannot accommodate smaller vessels.


Already, three new storage depots are under construction: the Ascon Terminal at Kirikiri in Apapa; the NNPC depot at Apapa Port - each of which will hold about 4,000 MT; and the Nigerian Independent Petroleum Company (NIPCO) depot at Apapa, expected to hold about 4,200 MT. It is also expected that the inland depots, which have 1,000 MT capacity each, will be expanded to increase their storage capacities. At present, Nigeria has 200 gas distribution terminals, 60% located in the coastal areas. On average they have 65-ton tankage capacity, although they were each built as a 13,000-ton capacity terminal. The supply shortfall at the terminals has adversely impacted domestic distribution.


In addition, Nigeria does not have an efficient transport system. In order to distribute LPG, the product is typically transported via trucks. However, due to the dilapidated state of transport infrastructure in Nigeria about 225 additional trucks will be needed on a weekly basis to meet domestic demand to augment the estimated 131 trucks already in operation. As a result, 20- to 30-ton capacity trucks are used to transport LPG from the depots to the plants, where it is loaded into cylinders of various sizes, ranging from 50 kg and 25 kg to 12.5 kg, 6kg and 3 kg, and then sold to consumers. The potential demand for cylinders is over U.S. $5 million, given that there are about 500,000 cylinders nationwide, which are mostly defective while the country is estimated to require 2 million new cylinders annually. Industry operators believe that about $50 million to $100 million is required to produce up to 6 million cylinders by 2015.


Nigeria has other LPG infrastructure, which, due to either poor management or lack of use, is crumbling and includes an estimated 250 LPG bottling plants that are registered with the Pipelines and Products Marketing Company (PPMC). According to the World Bank, Nigeria’s LPG bottling plants have a combined storage capacity of 15,245 MT excluding PPMC’s 7,000 MT storage capacity. However, only 50 plants (about 10% of total plants) are currently operational and are operated by seven companies: Oando Plc 9, Nidogas 2, Le Global 2, City Gas 2, Vinee Gas 2, Total Gas 8, and African Petroleum 2. Of these, 80% of the plants are located in the southern part of Nigeria. Only 50% of them are functional; less than 10% of the plants are located in the Middle Belt and the North, and are barely operational, while some are shut down for lack of supply. This highlights the significant untapped potential for investors to build new plants or buy and refurbish existing ones. This will thus fill the projected gap of 180 bottling plants the country projects it requires to meet supply. Typically, Nigeria’s LPG bottling plants depend on trucks for LPG supply, a process that is both expensive and hazardous.


In recognition of the importance of appropriate legal framework to encourage investment in the LPG sector, the Nigerian government has tried various policy initiatives to enhance domestic development:

The butanization program of 1985/1992 aimed at ensuring domestic LPG availability and an efficient and integrated supply and distribution network, setting a 5-year consumption target of 400,000 metric tons and the development of primary and secondary depots;

The LP gas deregulation of 1998 to curtail persistent shortages;

The LP gas supply diversity policy 2004;

The establishment of the presidential steering committee on LP gas in 2004.


These initiatives have not yielded the needed benefits to the industry. It is expected, however, that the government’s current plan to increase LPG consumption up to 1 million metric tons by 2010 and promote local manufacture of about 5 million cylinders between 2007 and 2015 will provide the requisite push to action.


Regrettably, Nigeria has no clear policy on LPG supply and distribution, standardization of valves or regulators or an agency charged with this responsibility, resulting in supply fluctuations and price uncertainties. Nigeria does have a well-codified policy that regulates the activities of the LPG market, although it is not enforced. This situation worsened in 1999 with the withdrawal of PPMC from LPG importation, its supply and distribution management, which caused the industry to experience cycles of supply source substitution – sourcing for LPG from alternative sources when PPMC is unable to supply the product and back to PPMC when products are available. However, PPMC is being unbundled into two companies: a petroleum products marketing company, which will be privatized; and a pipelines transport company, which will set pipeline tariffs and be managed as a regulatory agency. The new agency will also establish and manage open access and common facilities usage of the products pipelines and depots networks to provide an opportunity for all operators in the downstream sector to move their products to any part of the country using the facility. This process is expected to solve nationwide LPG distribution challenges, which have been a major deterrent to LPG usage and growth.



By Benedicta N. Nkwoh

Read the full market research report


Posted: 28 April 2010, last updated 13 March 2011

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