Inside the recent rise in LPG prices: Looking at the key factors responsible

In Nigeria, liquefied petroleum gas (LPG) has been on the rise since September 2023, steadily growing, and is now being purchased at between N1,000 and N1,200 per kilogram, depending on the location of the buyer.

A recent review by ThePressNG highlighted that the cost of refilling a 12.5-kg LPG cylinder is averaging between N11,000 to N12,500, depending on the state.

This shift comes after President Bola Ahmed Tinubu’s announcement of fuel subsidy removal, which led to a spike in petrol prices from N185 to N615 per litre, prompting many Nigerians to switch their generators and vehicles to run on gas, including LPG.

In August 2023, for generators with a 7.5kVA rating or lower, the cost of conversion ranged from N50,000 to N55,000 if the cylinder and all required accessories were provided.

However, if these were not included, the cost would rise from N90,000 to N95,000.

On the other hand, generators with a rating higher than 7.5 kVA had conversion costs ranging from N55,000 to N100,000, again depending on the presence of necessary components.

Experts believe the recent surge in LPG prices can be attributed to increased demand, exacerbated by foreign exchange challenges.

This upward trend is a consequence of Nigeria’s dependence on LPG imports due to inadequate local production capacity and insufficient processing and storage facilities.

Despite the rising demand for conversions to LPG, as outlined by Solomon Asogba, the Lead Business Intelligence Analyst at Hydrocarbon Information Services Limited (HydroCIS), in July 2023, local prices are significantly affected by international pricing.

This underscores the need for developing more gas processing facilities and enhancing storage capacity within the country to stabilise local LPG prices.

According to a recent infographic by HydroCIS and the Nigeria Liquefied Petroleum Gas Association (NLPGA), the average cost of a 12.5kg LPG cylinder in Nigeria reduced from about ₦10,300 to roughly ₦7,500 in August 2023.

However, as of October 9th, it has increased to around ₦9,350 at ex-plants, indicating a dynamic and evolving market. According to the infographic, there are several key factors affecting LPG prices in the country, including:

According to HydroCIS, major players in the gas sector follow an international pricing index to establish the prices of gas products. When global prices rise, local prices tend to follow suit.

Various factors influence the cost of Butane and Propane (the major components of LPG) per metric ton, including the ongoing Russia-Ukraine conflict, supply constraints, and foreign exchange rates.

It is important to note that in Nigeria, the United States-based Mont Belvieu (MBV) pricing index is commonly used on a free-on-board basis, encompassing freight and associated costs.

Similarly, the Platts Pricing Index is also applied in Nigeria, also on a free-on-board basis, which includes freight and related costs.

These pricing indices provide a framework for determining the local prices of gas products in alignment with international market fluctuations.

HydroCIS pointed out that the price of LPG is determined based on the US dollar. When the naira weakens against the dollar, it tends to have a detrimental impact on LPG prices.

It’s crucial to understand that LPG pricing is significantly influenced by the exchange rate, particularly the naira-to-dollar rate.

To put this into perspective, let’s look at some recent data. In January 2022, in the parallel market, the naira stood at N565 to a dollar. By January 2023, this rate escalated to N750 to a dollar.

Moving forward, in September 2023, the naira weakened even further to N1000 to a dollar. As of the latest update on October 11, 2023, the naira had depreciated to N1040 to a dollar in the parallel market.

These shifts in the Naira-Dollar exchange rate have a direct impact on the pricing of LPG.

As the naira continues to weaken against the dollar, it amplifies the cost of LPG, affecting consumers and businesses alike. Keeping track of these currency fluctuations is essential to comprehending and anticipating changes in LPG prices.

As noted by HydroCIS, the cost of LPG in Nigeria is influenced by its source. The LPG market in Nigeria is supplied through both imported and locally sourced products, each contributing to meet the demand.

In terms of quantity, local production covers a significant portion of consumption. However, to bridge the supply gap, imports play a vital role.