Nigeria experiences perennial shortage of transportation energy despite being a leading oil and gas exporting country. While the country has installed refining capacity that exceeds domestic demand, the refineries are dilapidated and – partly as a result – do not operate anywhere near capacity and compel importation of more than 80% of the refined petroleum products consumed locally. Additionally, the Nigerian population grew by almost 400% to nearly 180 million between 1960 and 2016 and witnessed significant urban drift in the same period, from 14% of the population living in urban areas in 1960 to over 50% in 2016. These changes suggest increase in demand for transportation energy.
Despite these challenges, Nigeria continues to flare about 20% of the associated gas encountered in the oil exploration and production process. The government owned national oil company – Nigeria National Petroleum Corporation (NNPC) reported that oil producers flared about 51% of the associated gas produced between 1990 and 2010, a volume of about 459 billion cubic meters (bcm). To put this into perspective, this volume represents 53 billion litres gasoline equivalent, which is more than 14.5 years worth of Nigeria’s gasoline consumption. To address the twin challenges of gas flaring and transportation energy shortages, the Nigerian government proposed the use of compressed natural gas (CNG) as an automotive fuel in the 1990s as part of a range of initiatives to harness natural gas resources but progress has been slow with only 2,210 natural gas vehicles (NGVs) representing 0.04% of the total national vehicle fleet and only eight operational CNG refuelling stations.
NGV implementation approaches and outcomes in seven countries with diverse experiences were examined to gain understanding of the barriers to NGV market development, identify the critical success factors for adoption of CNG as an automotive fuel, and draw lessons for Nigeria. The countries studied were selected to represent the market spectrum comprising of early development (India), sustained growth (Argentina and Brazil), rapid growth (Pakistan and Iran), low penetration (the US) and collapsed market (New Zealand). Analysis employed philosophical hermeneutic principles to secondary data derived from academic literature, published reports from a variety of national and international agencies, grey literature and text from online sources.
i. Clarity of the strategic intent or main drivers for the use of CNG as an automotive fuel;
ii. Provision of legal backing, including legislation, regulation, policies and operational guidelines to guide and drive the CNG programme;
iii. Learning and adaptation, which are reflected in the processes adopted by the country in conceptualization and execution of its natural gas (NG) programme;
iv. Assignment of responsibilities to specific entities for various elements of the NGV market development;
v. Application of financial incentives to promote NGV market development;
vi. A sufficient price gap between NG and conventional fuels;
vii. The building of consumer and market confidence deliberately; and
viii. Development of domestic NG pipelines and other NG refuelling infrastructure.
Eight critical factors were identified for the successful adoption of CNG as an automotive fuel as follows:
An evaluation of Nigeria against these critical success factors indicates significant gaps in the current situation in the country, except for the strategic intent, where the country compared favourably. Table 1 summarizes the analysis and shows the diversity in experience of the countries examined.
Strategic intent: CNG has been adopted as transportation fuel in many countries for various reasons of which economic benefits/considerations, environmental concern/benefits, energy security, and availability of natural gas resources are the major drivers. For example, the Supreme Court of India in an effort to control vehicular emissions ordered the conversion of the city bus fleet to CNG and the USA is pursuing alternative energy for energy independence and security. While Iran’s crude oil reserve is the second largest globally and the country is the fourth largest producer of crude oil, over reliance on importation of petrol in satisfying domestic demand led to the adoption of CNG as transport fuel. In Nigeria, the need to reduce gas flaring, spiralling fuel prices and increasing environmental concerns are the driving forces for domestic utilization of NG in general. However, these strategic intents have not resulted in change in the transportation sector. Until 2008, when the National Domestic Gas Supply Policy and the National Domestic Gas Supply and Pricing Regulation were introduced, the focus of government was the abatement of gas flaring as seen in the provisions of the Petroleum (Drilling and Production) Regulation 1969 and the Associated Gas Re-injection Act 1979. Consequently, oil producers focused on gas re-injection rather than gas gathering and utilization leading to a significant increase in the volume and percentage of associated gas re-injected and slow adoption of gas as a fuel domestically. As reported by the NNPC, more than 0.5 trillion cubic feet (tcf) of associated gas has been re-injected annually since 2002. Incentives for gas exploration and production were only provided through the Nigerian Liquefied Natural Gas (NLNG) (Fiscal Incentives, Guarantees and Assurances) Act 1990, the Associated Gas Framework Agreement of 1992 and later through Section 39 of the Companies Income Tax Act 2007.
Legal backing: Establishment and enforcement of sound guidelines, codes and standards, as well as the use of legislative, regulatory and/or judicial mandates, help deepen penetration. Divergence from established conversion standards in New Zealand caused technical problems, which resulted in unfavourable publicity and fluctuations in vehicle conversion rates, while adherence to standards in Argentina spurred growth. In India, the various mandates issued by the Supreme Court were pivotal to CNG adoption. In Pakistan, Iran and New Zealand, mandates were used to foster vehicle conversion, obtain OEM participation and achieve CNG infrastructure development. The situation is different in Nigeria where there are no legal provisions to promote the automotive use of CNG. While successive governments have promulgated laws aimed at abating gas flaring, these have failed to achieve the desired results. Apart from making pronouncements at public functions, the government has not demonstrated any seriousness towards the implementation of NG in the transportation sector, as there are no standards or regulations.
Learning and adaptation: The current implementation approach lacks coordination and is without focus. The government-owned Nigerian Gas Company Limited (NGC), which is wholly responsible for gas transmission and sales, and a local company entered into a joint venture agreement in 2007 to establish a chain of CNG refilling stations. The pilot scheme is in Benin City, within the Niger Delta region, where gas is produced. Targets included the conversion of 50,000 vehicles in the first four years and the construction of between eight and ten CNG stations, 50km of steel pipeline and two conversion workshops in the first two years. As at the end of 2015, nine years after the commencement of the pilot programme, only the target for conversion workshops had been met.
Assignment of responsibilities: Each country studied, had a focus for implementation and assigned responsibilities for the critical elements of market development. In India, GAIL (India) Limited was charged with the implementation of the CNG programme, Mahanagar Gas Limited (MGL) – a joint venture between GAIL (India) Limited, British Gas and the Government of Maharashtra and Indraprastha Gas Limited (IGL) – a joint venture between GAIL (India) Limited, Bharat Petroleum Corporation and the Delhi Government were responsible for developing the Mumbai and Delhi markets respectively. In Argentina, Yacimientos Petrolífero Fiscales (YPF), a state-owned petroleum and NG exploration and production company, was charged with implementation while Gas del Estado, a state-owned NG transmission and distribution company was assigned the supervisory function. In Brazil, Inmetro was charged with the responsibility of establishing quality and safety regulations, Ibama was responsible for providing environmental related regulations, and Petrobras was responsible for the production and transportation of NG. Conversely, there is no specific agency set-up to promote the automotive use of CNG in Nigeria. The Nigeria Gas Company, established in 1988, has the mandate to efficiently gather, treat, transmit and market the country’s NG and its by- products to the domestic and regional markets.
Financial incentives: CNG programmes must offer incentives to all stakeholders for successful adoption. For example, Argentina offered credit lines to vehicle owners and removed restrictions relating to proximity of refuelling stations to encourage investment and competition, as companies could site their stations in locations considered feasible without any restrictions Pakistan offered custom duty and tax exemptions as major incentives to refuelling station operators. In contrast, there is no known form of government support for the promotion of CNG as transportation fuel in Nigeria, It important to note that CNG programmes must not rely on excessive government subsidies as can be seen from New Zealand where the programme was over-reliant on government incentives and, as such, their removal resulted in the collapse of the market.
Price gap between NG and conventional fuels: As seen in the countries examined, the price differential is a key success factor and ranged between 33% (USA) and 75% (Iran). The fastest growth is in Iran, where the price differential is the greatest, while Pakistan, having the highest saturation, has CNG priced at 50% of equivalent gasoline. NGV penetration in India is less than 5% and this could be due to the long period of subsidy for gasoline and diesel, which depressed the potential price differential. Similarly, a price gap range of 6 to 37% between gasoline and NG in Nigeria does not appear to be compelling, as the subsidy on gasoline erodes the long-term economic benefit of CNG. Catalysts for the adoption of CNG in Nigeria are a market operator-set price per energy equivalent of a litre of gasoline, in a deliberate manner to encourage conversion, along with a dual pricing structure similar to Argentina, where credit lines cover conversion costs, to be repaid with savings from the use of CNG. The operator offers vehicle conversion as a service through wholly owned and operated workshops and offers a soft loan scheme to encourage conversion. The minimum cost of conversion is 200,000 naira (N) (USD 1,000) and private vehicle owners are required to make a down payment of a minimum of N40, 000 (USD 200) or 20% of cost, while owners of vehicles used for commercial purposes, such as taxis, are required to make a down payment of a minimum of N80, 000 (USD 400) or 40%. The loan repayment is through a price adjustment mechanism during refilling. Vehicle owners who pay fully for conversion buy at N55 per energy equivalent of a litre of gasoline, while those who take the financing option pay N80. These prices translate to price gaps of 37% and 6%, respectively, when compared to gasoline. Whereas the price gap of 37% might seem attractive, paying outright for conversion is not easily affordable for a majority of the population. On the other hand, the price gap of 6% for vehicle owners who take the financing option for vehicle conversion is marginal and insufficient to stimulate the market. The market outcomes, since the commencement of the CNG pilot in 2008, support this argument.
NG infrastructure development: making national interest, a priority ahead of regional infrastructure is a critical success factor, as seen in Argentina, Pakistan and Brazil. The Argentine and Pakistani successes are in part due to their well-developed NG transmission and distribution networks. In Brazil, meanwhile, national pipelines were developed ahead of the Blue Corridor initiative. The situation is different in Nigeria as the country embarked on the development of the regional and international export markets ahead of domestic use, as demonstrated by the 687 Km West Africa Gas Pipeline that runs from Nigeria to Ghana and Nigeria Liquefied Natural Gas Limited (NLNG) that has exported over 5 tcf of liquefied natural gas (LNG since 1999. These facilities were developed ahead of the domestic distribution network and indicate that Nigeria prioritized the export market ahead of domestic supply. Nigeria has a paltry 1250km gas transmission pipeline for its 923,768-km2 landmass. However, a number of private companies are developing transmission and distribution pipelines to complement this. An example is the 128km South-South Gas Pipeline System, which links the Calabar Cluster of Industries to the existing grid. With respect to refuelling stations, Nigeria has seven public CNG-refuelling stations in Benin City, within the Niger Delta region, where oil and gas are produced. In addition, there is a ‘mother station’1 with an attached refilling station, in Lagos. There are indications that some companies have private refuelling infrastructure. The low vehicle-to- refuelling infrastructure ratio (VRI) suggests that further growth can be accommodated in the NGV population within the geographical location of the stations. The NGV fleet of 2,210 is largely retrofitted and mainly light-duty vehicles.
Policy implications and lessons for Nigeria
Based on the outcomes of the case study, potential policy interventions that might encourage market development emerged as follows:
Pricing reform: There is an urgent need to address both retail and wholesale prices of natural gas. Wholesale prices are set below world prices and need adjustment to encourage supply into the domestic market. With respect to the retail market, a holistic approach to the pricing of petroleum products is required to develop a framework that will accommodate the dynamics that exist for gasoline and create headroom for NG to thrive concurrently. There may be lessons from India here, in terms of the gradual removal of subsidy on the pump price of gasoline.
Government support for the establishment of refuelling infrastructure: Although the current VRI is low, stations are limited in number and concentrated in Benin City. To stimulate private sector involvement, NNPC could establish CNG stations in strategic locations, following the example of Argentina. As seen in the analysis, refuelling infrastructure is critical to market development, as the most successful markets have a VRI that is within the range recommended by the International Gas Union or even higher.
Establishment of standards for both vehicles and refuelling stations: Establishment and enforcement of adequate guidelines, codes and standards – including proper measures for the safety of vehicles and refuelling infrastructure – aid adoption and instil confidence in the market.
Promotion of bi-fuel NGVs: Emphasis on bi-fuel NGV technology, rather than dedicated CNG vehicles, could help in accommodating the shortcomings of both NGVs (e.g. limited vehicle range, leading to more frequent refuelling) and infrastructural development (e.g. inadequate refuelling stations), as bi-fuel vehicle can run on either NG or gasoline/diesel.
Alignment of stakeholders’ interests: The importance of alignment of stakeholders’ interests came to the fore in the analysis. Analyses indicate that Nigeria will benefit from alignment of and cooperation between stakeholders.
Promotion of NGVs: as seen in the countries studied, creating awareness helps in creating gas demand, which in turn stimulates development of NG infrastructure. Hence, Nigeria may benefit from increased public awareness of the social, environmental and economic benefits of NG as a transportation fuel.
Introduction of financial incentives: all the countries studied had financial incentives, either from government or industry, for vehicle owners and/or CNG-refuelling station owners. Although the operator in Benin offers some incentives, the conditions do not appear to be particularly compelling. The experience of Pakistan suggests that incentives to corporations to invest in the CNG programme may have a greater impact.
Though the motives, applications, political will, regulatory environment, institutional capacity, level of infrastructure and energy market dynamics of the countries examined are diverse, concerns for ambient air pollution, energy security and economic considerations are also issues that resonate with Nigeria. Analyses indicate that lack of coordination in implementation is a principal impediment to the market development of NGV in Nigeria. The absence of legal backing, the lack of government support, insufficient price advantage, misplaced priority and non-alignment of stakeholder interests evidence this. Furthermore, comparison of the role of the Nigerian government in the implementation approach with those of the countries studied indicates a wide gap. Hence, there might be a need for the Nigerian government to play a more central role – to set strategic goals, formulate policies, establish the necessary legal and regulatory frameworks and assign responsibilities to relevant agencies – in order to develop the market and encourage entry of both local and global players. The key lessons for Nigeria are in the areas of government involvement, implementation coordination and attractive NG retail pricing and strategic refuelling infrastructure development. The experience of Pakistan, which has the highest NGV penetration rate in the world, suggests that incentives to corporations to invest in the CNG programme may have higher impact than consumer incentives. While the conclusions reached may be useful for other countries with similar situation, they may not be transferable to countries with different dynamics in the energy markets.
For a detailed analysis of the case studies, please see Ogunlowo O.O., Bristow A.L. and Sohail, M. 2015. Developing Compressed Natural Gas as an automotive fuel in Nigeria: Lessons from international markets, Energy Policy 76, January 2015, 7–17, Available at: http://dx.doi.org/10.1016/j.enpol.2014.10.025.