Repurposing petrol subsidy payments for gas adoption in Nigeria’s transport

Oga Adejo-Ogiri is the Executive Secretary, Association of Local Distributors of Gas (ALDG), and Principal Consultant, Vappax Advisory. He contributed this piece from Abuja, Nigeria

In October 2021, the  Nigerian National Petroleum Corporation (NNPC) predicted that the subsidy would hit 3 trillion Naira yearly if current market realities persist. The news has prompted a re-evaluation of our priorities and the ultimate question; should Nigeria continue to subside the cost of petrol?

First, an examination of Nigeria’s subsidy situation is necessary. Premium Motor Spirit (PMS or Petrol as it’s called) is currently being sold at N165 per litre, but that doesn’t reflect its true cost. The government actively regulates the price by paying the difference between the cost as determined by market forces and the price it’s sold to Nigerians at the pump. This means that if the true cost of petrol is N300 per litre and it’s being sold for N165 per litre at petrol stations, then the Nigerian government through the NNPC is paying the N135 difference on every litre. These numbers add up and are a cause for concern with recurring payments, meaning funds that can be used for infrastructure, healthcare and education are being used to fund petrol subsidy payments.

Historically, the government’s argument for the continued sustenance of this subsidy is that it reduces the cost of transportation. Reduced transportation then positively impacts the cost of goods that rely on transportation. This helps to stabilize the price of food items and reduce economic hardship in the country.

A counter-argument is that petrol subsidy does not help cushion transportation costs or cost of living. The rationale for this is simple. The main fuel source for transportation of goods (trucks and lorries) is diesel, which is already deregulated with prices around N320 – 340/litre. As such, the argument for reducing the cost of transportation of goods and services becomes suspect due to the volume of trade that is carried out using diesel-powered vehicles.

So, who benefits from a petrol subsidy? The short answer is rich Nigerians who can afford to buy and run many petroleum guzzling cars at a reduced cost.

Luckily, Nigeria’s current administration agrees. Speaking to Channels TV in a recent interview, Zainab Ahmed, Nigeria’s minister of finance, announced that she expects the subsidy to be fully removed in July 2022. According to her, this decision is a result of a provision in the recently passed Petroleum Industry Act, which provides for the deregulation of all petroleum products. The finance minister opined that petrol subsidy is a significant financial pressure that can instead be channelled towards education, health and other critical infrastructure.

With petroleum subsidy such a polarizing issue with political and social implications, what are the alternatives? One idea which fortunately the government has also welcomed is introducing and championing the use of gas as an alternative fuel to petrol and diesel for vehicles.

This gas, also called Autogas, is simply gas that can power vehicles. Its common forms are Compressed Natural Gas (CNG) which is natural gas stored under high pressures, Liquified Natural Gas (LNG), which is natural gas cooled down to its liquid form and Liquified Petroleum Gas (LPG), which is gas extracted from crude oil during the process of refining or from the processing of natural gas.

Nigeria possesses the largest natural gas reserves in Africa with proven gas reserves of 206.53 trillion cubic feet (tcf), but an abundance of this resource is not the only reason driving the argument for the adoption of Autogas in Nigeria’s transport sector.

Autogas offers significant cost savings for the Nigerian transport sector. Vehicle owners who convert their vehicles to run on Autogas can gain a cost reduction of up to 50 percent compared to diesel, and about 10 percent compared to petrol even at the current subsidized prices.

Autogas also reduces Nigeria’s foreign exchange burden incurred from importing petrol and diesel to fill the country’s shortfall in supply since it is available in the country. According to the Petroleum Products Pricing and Regulatory Agency (PPPRA), 19 billion litres of petroleum products were imported in 2019, equivalent to USD 8.7 billion.

Autogas, as a cleaner and greener fuel, offers significant environmental gains with lower emissions than petrol and diesel. Gas has about 30 percent lower CO2 emissions than petrol or diesel, and considering that the transport sector is said to contribute about 24 percent of the CO2 emissions in a typical country, this becomes very important in light of Nigeria’s commitment to reach net-zero emissions by 2060 as committed by President Muhammadu Buhari at the recent COP26 event in Glasgow, UK.

However, there are significant barriers to the adoption of Autogas in Nigeria’s transport sector. The goal is simple: We want cars and other vehicles to run on Autogas. To achieve this, we need facilities available nationwide to help vehicle owners convert their cars to run on Autogas. We also need retail stations and supporting infrastructure to ensure that Autogas is readily available across the nooks and crannies of the country.

This is where the government must back its talk with a commitment to the development of associated infrastructure to drive Autogas adoption. This means the funding, construction and provision of CNG compression facilities, LNG liquefaction plants, CNG, LNG & LPG retail stations and storage facilities, CNG, LNG & LPG semi-trailers for gas transportation, Auto conversion centres, etc. This infrastructure will ensure that the production, distribution and eventual sale of Autogas can be carried out on a scale that is attractive to investors and available to Nigerians regardless of their location.

Funding and encouraging vehicle owners to convert their cars to run on Autogas is another problematic area the government must pay attention to. While the long-term gains of the conversion are being well publicised, the cost and the technology to achieve this is still out of the reach of the average Nigerian. At the moment it costs about N300,000 to N400,000 to convert an average sedan to run on Autogas. For many Nigerians, there is simply no incentive to make this financial commitment. A government-backed financing scheme offering funding for conversion with payments spread over a few years will serve as an incentive to vehicle owners and encourage adoption.

There’s also a need for an active government buy-in with federal and state governments across the country mandating the conversion of government-owned fleets and urban mass transit buses to run on Autogas. In addition, policies and fiscal incentives to encourage the importation and/or manufacturing and assembly of vehicles that are either gas-fired only or dual fired (Gas + petrol/diesel) will go a long way to grow the sector.

While the use of gas powered vehicles is still a very novel concept in Africa, Nigeria can draw policy inspiration from China, Iran and India who deploy over 50% of the world’s natural gas vehicles fleet. according to the World LNG Report 2021.

Across these markets, a common theme is strong government support for Autogas schemes. This includes:

– Setting clean fuel and conversion targets to measure the progress of Autogas policies.

– Funding the construction of conversion facilities across the country

– Rapid construction and funding for Autogas retail stations and associated infrastructure

– Payment support for individuals and companies purchasing natural gas vehicles

– Conversion of state-run public transportation schemes to run on Autogas

– Ensuring the competitiveness of Autogas in comparison to diesel and petrol (removal of petrol and diesel subsidies)

Closer home, Egypt offers a compelling case to follow for Autogas adoption. Egypt has an ambitious plan to grow the number of natural gas vehicles in the country to one million in less than three years. To drive this growth, it is focusing on providing enough Autogas retail stations and centers for natural gas conversion and supply.

Whether in Africa or Asia, the blueprint for ensuring a seamless and sustained adoption of Autogas is the same; massive investment in the infrastructure for fuelling, conversion and financing. People have to be aware of the benefits of switching to Autogas, be able to access financing at a subsidized rate to make the switch and be certain that Autogas will be available all year round no matter where they live.

These goals seem like a tall order but by repurposing our current subsidy payments, Nigeria can begin its journey towards driving mass adoption of Autogas.  With Autogas, we can build a transport sector that provides a cheaper and more environmentally friendly fuel, reduce the financial burden incurred via subsidy payment and position the country on a path towards meeting its carbon reduction targets.