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Nigeria's gas masterplan
The Nigerian Federal Government has suffered a setback in its efforts to improve the country’s underperforming gas sector. Having already been repeatedly pushed back, the latest deadline to end associated gas flaring in the oil rich Niger Delta expired on 31 December 2008, with little success.
The Senate has threatened to sanction oil companies that continue flaring past this date, even suggesting the possibility of shutting down some oil wells.
The major oil producers in Nigeria, including Shell, Chevron, Elf and Exxon Mobil, contend that the date set by the government is unrealistic. Amid this heightened tension there are question marks about the government’s ability to tackle the wider problems of infrastructure development and boosting supplies to the domestic market.
With estimated reserves of 187,000bn cubic feet, Nigeria is the world’s 7th largest natural gas producer. The country has flared heavily in the past due to a non existent domestic gas market and underdeveloped infrastructure. According to research by the intelligence provider Global Insight, as much as 70 percent of all gas produced was flared in 2000. With the emergence of liquefied natural gas and natural gas liquid exports this has been reduced to approximately 30 to 35 percent, or just under 2.5bn cubic feet per day.
Gas exports now contribute billions to government revenues, with the majority coming through the Nigeria Liquefied Natural Gas Limited’s project in Bonny Island in the Niger Delta. Nigeria LNG is a joint venture between the Nigerian National Petroleum Corporation, Shell, Total LNG Nigeria Limited and Eni.
Yet despite such reductions, thriving exports and vast reserves, the domestic sector remains heavily underdeveloped with most gas produced being exported. Like the country’s power sector, investment in infrastructure development in the gas sector has been lacking for years. There are few transmission lines that connect the Niger Delta in the south east with other parts of the country, and where pipelines exist they are often in poor condition.
This lack of investment has implications for Nigeria’s economy as there is a strong connection between the gas sector and the country’s acute electricity shortage. Approximately 62 percent of Nigeria’s installed electricity generating capacity consists of gas-fired power plants. These operate well below their full capacity due to poorly maintained transmission lines.
“It is a major constraint on production, the standard of life and the budget,” says Sebastian Spio-Garbrah, Africa Analyst at Eurasia Group, a US-based political risk consultancy. “The Nigerian economy is growing at rates of 5 to 7 percent a year and it could easily grow at 15 percent or something in that range.” He adds that these problems are compounded by continuing militant activity and vandalism in the Niger Delta. In December 2008 Nigeria LNG declared a force majeure on LNG exports following damage caused by thieves to the Shell-operated Soku gas feed plant in River State that supplies approximately 40 percent of Nigeria LNG’s feedstock.
Efforts to address the issue of infrastructure were first announced under the government of former president Olusegun Obasanjo, and have since been carried further by his successor, Umaru Yar’Adua. In February 2008 his administration announced a comprehensive new “Gas Masterplan” that seeks to improve supply to a domestic market that has become a feasibly destination for gas in recent years, boost production for exports and provide much needed energy to the power sector. However, progress has been slow according to Eurasia’s Mr Spio-Garbrah, who argues that one of the main sticking points is the issue of pricing. Part of the new gas policy would oblige oil producers to sell increased amounts of gas to the domestic sector at prices that are a fraction of international export markets. Oil producers are reluctant to comply with such a request, says Mr Spio-Garbrah, as it would effectively force them to lose money.
“The phrase collision course might be a little too strong but the oil companies have definitely got different ideas about how to use the gas from the government,” says Thomas Pearmain, Energy Analyst for sub-Saharan Africa at Global Insight. He argues that coercing oil producers to increase gas supplies to the domestic sector is politically not feasible in the short term, but suggests that future oil licensing rounds could be used to address this problem. “It’s possible that the government will prioritise companies that have invested in domestic gas infrastructure. This has happened before, when especially China and India were given priority on the oil blocks for investment in domestic infrastructure.”
For the time being President Yar’Adua’s government is reluctant to force the issue. This has raised doubts about his administration’s level of commitment to addressing the constrains on the gas sector, with the president of the Senate, David Mark, publicly criticizing the federal government for a lack of political will in its dealings with oil majors operating in the country.
