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Nigeria's gas conundrum

The Nigerian gas sector remains short on investment and direction, but IOCs remain committed to the country and now Russia's Gazprom is securing its position, writes Ian Lewis

IMPROVED gas supply to Nigeria's Bonny Island liquefied natural gas (LNG) complex has boosted shipments in recent weeks, and Russia's Gazprom may invest more in the country's energy sector. But further LNG expansions are unlikely in the short-term, efforts to curb gas flaring are sluggish and the future shape of Nigeria's oil and gas industry remains unclear.

Nigeria LNG (NLNG) has boosted output from the country's only LNG facility in recent weeks, following the resumption in October of operations at Shell's Soku gas plant, which provides 40% of the gas feedstock to the Bonny Island export plant. NLNG declared force majeure on deliveries in November 2008 and cut production to little more than half of the previous level, after Shell closed Soku because of attacks on its pipelines in the volatile Niger Delta region.

With the force majeure lifted, increased gas supply meant shipments from the plant were on the rise in the last two months of 2009, although detailed figures remain unavailable.

Producing below capacity

Before the gas supply from Soku was cut, the NLNG plant was producing around 20bn-23bn cubic metres a year (cm/y) – well short of its capacity of around 30bn cm/y (21m tonnes a year), given a shortage of feed gas from other sources, but still amounting to around 10% of world LNG supply.

The reduction of Nigerian output helped keep global LNG production more or less flat last year, as its losses offset new supply coming on stream in Qatar, Yemen, Indonesia and elsewhere. So a return to 2008 export levels by NLNG will be noticed in the global LNG market, especially in light of the present glut of gas supply.

However, NLNG, which is jointly owned by Nigerian National Petroleum Corporation (NNPC), Shell, Total and Eni, should not have any problems offloading its gas, as most of it is sold to Europe under long-term sales and purchase agreements. And there is also the option of selling to North America – although the latter course may come at a cost, given over-supply in the US market (PE 10/09 p10).

"You can always sell your LNG to the US, but the question is: are you going to be happy with the price you receive for it?" says Andrew Pearson, an LNG analyst at Wood Mackenzie, an energy consultancy.

The world LNG glut, the global economic downturn that has contributed to it and continued unrest in the Niger Delta, have put a damper on expectations that any of Nigeria's proposed LNG plants will become a reality soon (see Table 1).

NLNG Trains 7 and 8, Brass LNG and OK LNG could add another 67bn cm/y of export capacity, but they all remain at the planning stage. Another possibility, the Progress floating LNG project devised by Flex LNG and local Peak Petroleum, seems to have been placed on the backburner, as Flex focuses on potential FLNG projects elsewhere (PE 10/09 p22).

However, some projects are likely to go ahead when companies become more confident about a pick-up in demand. "It's just a question of getting the timing right on some of these new projects. We are talking about an adjustment of just a few years, rather than longer-term delays," says Nikos Tsafos, a gas analyst at PFC Energy, a Washington-based consultancy.

The government's resolve to direct more of the country's gas reserves towards domestic usage rather than export markets is also affecting investment decisions. Nigeria has said it expects domestic gas demand to grow by over 20% a year to reach 102bn cm/y by 2015.

In a bid to eliminate a worsening of the country's power shortages, Nigeria's Gas Master Plan foresees construction of three gas-gathering and processing plants and three pipeline systems to feed gas to power plants by 2011. A shortlist of 15 possible participants, including various international oil companies and Gazprom, was drawn up in March.

In theory, the sheer size of Nigeria's proved gas reserves – 5.3 trillion cm, according to Cedigaz (see Figure 1) – means that there should be plenty of feedstock for both domestic and export markets. But, as has been the case in the past, uncertainty over the direction and pace of government policy and investment has not made planning easy for companies operating in the country.

"In terms of gas reserves, there is plenty to go round, but in terms of available gas and available capital to develop projects, there probably isn't. So the more domestic gas projects become a priority for Nigeria, the more difficult it will become for new LNG export projects to be sanctioned," says Wood Mackenzie's Pearson.

Existing gas-fired power stations remain under-utilised, while liquefied petroleum gas (LPG) used for cooking remains in very short supply. The government blames international oil companies (IOCs) for not doing enough to provide gas to the domestic market, while the energy industry, at least in private, blames successive Nigerian governments for failing to provide either a clear direction or the means with which to develop the industry.

Uncertainty over the final shape of the country's proposed Petroleum Industry Bill, which is intended to overhaul the oil and gas sector by restructuring NNPC into a profit-driven enterprise more like Brazil's state-controlled Petrobras, is another reason for industry caution. A Shell executive recently expressed worries that the terms on offer to companies for deep-water operations in the draft bill did not look attractive.

Projects making headway

Some gas-related projects are making headway, however. Shell is considering an expansion of its Gbaran Ubie gas and oil project in Bayelsa state, which would result in a total of nearly 100bn cm of gas being exploited mainly for supply to NLNG, although government approval had yet to be granted and a final investment decision is yet to be taken.

In February 2008, the company signed an agreement with the government, under which Nigeria would provide $1.69bn to cover its share of the first phase of the Gbaran Ubie development, which is intended to produce 10bn cm/y of gas and over 70,000 barrels a day (b/d) of oil when it comes on stream in 2010 or 2011.

Meanwhile, operator Chevron has said Escravos Gas Plant 3A will start producing in the first quarter of this year. The company says the expansion will bring gas output up to 70bn cm/y from 3bn cm/y and increase LPG and condensate capacity from 15,000 to 58,000 b/d.

Elements of Gbaran Ubie and the wider Escravos project are tied to efforts to eliminate gas flaring – an issue that Nigeria is under increasing international pressure to tackle. The Shell plant runs in part on gas that would otherwise be flared; the $2bn Escravos 3B gas project, scheduled to start up in 2013, is part of Chevron's western delta gas-development programme, aimed at eliminating flaring. The 3B project involves the installation of a 1.2bn cm/y gas-gathering and compression platform and associated subsea pipelines. Several other projects also include plans to redirect flared gas for other uses.

Flaring has been illegal in Nigeria for decades, but in practice widespread exemptions granted by the government have made the ban meaningless. The amount of gas flared has been reduced in recent years. According to satellite data from the US National Oceanic and Atmospheric Administration, Nigeria flared 21.3bn cm in 2005, reducing that figure to 14.9bn cm in 2008. But this still leaves the country second only to Russia (40.2bn cm in 2008) in the league of worst offenders.

In what has become something of an annual ritual, the government said in November that flaring was to cease forthwith. "After December, there will be no gas flaring by any oil company operating in Nigeria," Bagudu Hirse, a junior foreign minister, told Agence France-Presse. However, this followed similar government pronouncements a year ago on hitting an end-2008 deadline agreed by Opec members, which came to little.

Analysts say flaring will not be eliminated until Nigeria channels more resources into sorting out the problem. "The government has become a lot more serious about gas flaring, but the process of investing in the measures needed to eliminate it is slower than it needs to be," PFC's Tsafos says.

Gazprom has been making efforts to position itself as a potential source of investment, signing a $2.5bn deal with NNPC in June to invest in refineries, pipelines and gas-fired power stations, as well as expressing an interest in building the Trans-Saharan Gas Pipeline (PE 4/09 p10). Recently, the Russian firm has formed a joint venture with rising local energy firm Oando to develop projects across the oil and gas sector in Nigeria and elsewhere in west Africa.

Analysts say the tie-up provides Gazprom with a well-positioned local partner, given Oando's rapid expansion from its origins as an importer and distributor of refined products into a notable player in Nigeria, both upstream and downstream. Oando has also boosted its international credentials, recently securing a $1bn-plus contract from Ghana National Petroleum Corporation (GNPC) to develop assets and infrastructure for gas from Ghana's Jubilee offshore oilfield.

But Gazprom's budding relationship with the government should not necessarily give the IOCs already operating in the country any cause for alarm. "Gazprom has yet to create a sizeable upstream position in any other country other than Russia. There is also the question of whether Gazprom is better placed than other companies to resolve the challenges facing Nigeria: it is not clear that it is," says Tsafos.

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