Nigeria: A Guide To The Nigerian Energy Sector - Gas - The Energy Of The Future

Last Updated: 30 January 1997
INTRODUCTION

Gas has been described as Nigeria's dominant natural resource and her greatest investment potential. Nigeria's proven gas reserves are estimated at between 150-300 trillion cubic feet (tscf) making it the country with the 9th largest gas reserves in the world.

Despite these vast reserves Nigeria's gas resources are still relatively under-developed compared to oil. Average daily production is around 2 billion standard cubic feet. Less than 25% is utilised, needless to say, the rest is flared. This makes Nigeria the biggest gas flaring nation in the world. The measure of the problem is demonstrated when we consider that the gas flared in Nigeria is enough to provide power for a small industrial country (Paul Adams, Financial Times, 13th September 1996).

There are several adverse results of gas flaring. The obvious ones are that it represents a huge waste of economic resources and impacts negatively on the environment causing pollution and contributing to global warming. Local residents also complain of health side effects.

Disposal of associated gas ("AG") is the most serious issue facing the Nigerian petroleum industry today. Most of the 2.0 billion SCF of AG produced daily is flared. The bulk of gas sold to consumers in Nigeria is non-associated gas (NAG).

The obvious question that must be answered is - why are we flaring associated gas? There are many reasons. First, the domestic market is not sufficiently developed. Secondly the available domestic market is not being served because the current price at which gas is sold is absurdly low. Third, the domestic market is also hampered by inadequate infrastructural facilities. Finally the macro-economic environment is hostile and cannot attract the enormous amounts of capital that characterise gas investments.

Having enumerated the difficulties attending the domestic gas market, gas remains clearly the energy of the future. It is available in abundance, cost effective and environmentally friendly. Analysts anticipate that gas demand will continue to grow and by 2010 will probably be the most important domestic energy source, with a concurrently increasing export demand.

The Nigerian Government has become increasingly aware of the need to diversify its sources of foreign exchange earnings and thus wean itself from its crude oil dependency. Efforts have been made by the government to discourage gas flaring by the imposition of fines - Associated Gas Re-Injection Act, 1979 - and to encourage gas utilisation projects by the grant of fiscal incentives and benefits, see for example, the Associated Gas Frame-Work Agreement (AGFA).

In 1996, the Minister of Petroleum, Chief Dan Etete announced that the Nigerian government has set a "flares out" target for 2010. Remarkably, the local Mobil affiliate, the second largest oil producer in Nigeria, plans to achieve a zero-flaring level by 1998! This will largely be achieved by the re-injection of gas. The Mobil target is even more remarkable in the light of its intention to increase production from current levels (400,000 bpd) to 800,000bpd. Mobil has indeed set the pace and it is now left for the other E & P companies to pick up the challenge.

The six multinational operators in partnership with the NNPC are beginning to take advantage of the government's willingness to diversify into gas. Several gas utilisation projects have been initiated or planned. The main gas projects are examined below.

LNG (Liquified natural gas).

The LNG is easily the largest and most ambitious single gas project in Nigeria. The estimated cost is US$4.0 Billion. The project situated in Bonny, Rivers State is being funded by the joint venture partners. Funding by the multinationals was raised based on guaranteed export revenue.

The project vehicle is a special purpose joint venture company, the Nigerian LNG Limited. The equity partners are NNPC (49%), Shell Gas BV (Shell) (25.6%), Cleag Limited (Elf) (15%) and Agip International BV (Agip) (10.4%). The Final Investment Decision on the project was signed in December 1995.

The Nigeria LNG project will produce 5.78 million tonnes per annum of liquefied natural gas and will consist of
  • a two train gas liquefaction plant
  • a gas transmission system linking the plant by pipeline to the gas supply fields
  • Six LNG vessels for CIF deliveries
  • Associated infrastructure.

Feed gas will be supplied to the liquefaction plant by three unincorporated joint ventures operated by Shell, Elf and Agip.

The NLNG signed sale and purchase agreements with four buyers for the delivery of a total of 5.79 bscm of regasified LNG per annum for 22.5 years. The buyers are ENEL (Italy), Enagas (Spain), Gas de France (France) and Botas (Turkey).

In December 1996, the largest volume buyer ENEL terminated its contract as it was unable to obtain necessary approvals for the construction of a proposed receiving /regasification terminal to be built at Moristalto di Castro, in Italy. The NLNG has stated that ENEL'S withdrawal will not affect the project's work schedule. Efforts are currently underway to secure new buyers in Europe.

The NLNG has to date acquired four ships - The LNG Bonny, LNG Finima, LNG Lagos and LNG Port Harcourt - and it is anticipated that the company will acquire two more.

The company has situated a preferred contractor for the lump sum, turn-key contract for the entire construction works. The contractor is a consortium(TSKJ) made up of Technip, Snamprogetti SPA, M.V. Kellogg Company and JGC.

If the project is finished on schedule then the first deliveries should come on stream by 1999.

The project enjoys extensive tax breaks and immunities.

OSO NGL PROJECT

The Oso NGL project is a direct offshoot of the successful Oso condensate development. NNPC has a 49% equity holding, while Mobil's holding is 51%. The partnership between Mobil and NNPC is aimed at processing the gas stream from the Oso condensate field and other Mobil/NNPC fields in order to obtain natural gas liquids (NGLS). When operational, the Oso NGL Project will have the capacity to process approximately 600 million standard cubic feet of natural gas per day. The project will produce about 50 thousand barrels a day (TBD) of NGL at production peak in year 2,000. The three NGL products expected are propane, butane and pentane-plus streams all destined for export.

The project to be operated by Mobil, will cost approximately US$ 810 million with NNPC and Mobil contributing 49% and 51% of the cost respectively. The Oso NGL project will operate from two locations - the offshore site at the NNPC/Mobil joint venture Lease (OML 70) and the onshore site at Bonny River Terminal. The engineering, procurement and construction contract was in February 1995 awarded to a consortium comprising ABB Lummus Crest Inc, Bouygues, JGC and Spie Batignolles. Work has started and is expected to be completed in December 1997. Production should thereafter commence early in 1998.

Like the NLNG project, the OSO NGL project enjoys fiscal incentives. It is estimated that the government will earn a net revenue of over US$ 3.2 billion over the 25 years production period of the NGL project.

ESCRAVOS GAS PROJECT

This is an NNPC/Chevron joint venture designed to gather and compress associated gas which will then be processed through a liquid extraction plant to produce Liquified Petroleum Gas (LPG). Chevron is the third largest oil producer in Nigeria. The project envisages the piping of compressed gas, from two main offshore fields namely, Chevron's Okan and Mefa fields in the Escravos area.

The Floating Storage and Offloading (FSO) is thought to be the first of its kind in the world. It is being built by the Ishikawajima-Harima Heavy Industries Company of Japan. Other project contractors are ABB, Kawasaki Heavy Industries and Saipem SPA. The Escravos gas project is expected to come on stream in May 1997. The liquefied gas will be transported by tankers for export, while the dry gas derived will be sold to the Nigerian Gas Company for supply to local industries.

The project cost is estimated at US$570 million.

THE COMPRESSED NATURAL GAS PROJECT (CNG)

This project is being operated by Agip and is aimed at servicing the automobile industry by providing an alternative to petrol and diesel. Already, two filling stations each capable of servicing 16 vehicles per day have been constructed in Warri and Lagos.

As the use of CNG as automobile fuel becomes commercialised there will be opportunities to invest in CNG filling stations. Clearly, it will be necessary to convert vehicles from petrol/diesel to CNG operation.

THE WEST AFRICA PIPELINE COMPANY

The Heads of Agreement in respect of the proposed joint venture was signed in September 1995 by the oil Ministers of Nigeria, Benin, Togo and Ghana. The project involves the construction of oil and gas pipelines linking the four countries. The West African Project will cost US$ 260 million and will be jointly financed by the four partners. A company, the West African Pipeline company, is to be set up to own and manage the pipelines.

The pipelines will supply Nigerian gas to Benin, Togo and Ghana, with Ghana consuming by far the largest volumes. The gas to be supplied by the Nigerian Gas Company is expected to be drawn from fields in the Escravos area. At the last meeting of the steering committee (Council of Ministers) held in October 1996, it was decided that the WAGP company be incorporated.

OTHER GAS PROJECTS

Other gas projects are the Mobil Edop Gas Injection Project, Mobil Ekpe Gas Compression Project, Soku Gas Plant and Agip/Elf Gas supply to LNG Project.

THE NIGERIAN GAS COMPANY

The Nigerian Gas Company Limited (NGC) was established in 1988 as one of the eleven subsidiaries of NNPC.

The NGC is responsible for developing an efficient gas industry to serve domestic energy needs, provide industrial feedstock requirements through a national integrated pipelines network and engage in the export of gas and its derivatives to African and International markets. As such the NGC has a monopoly of the supply of natural gas to the domestic market.

The bulk of transmission facilities in Nigeria today are operated by the NGC, whose gas supply infrastructure is made up of two main networks, Western and Eastern. There are plans to link the two networks and a Northern network is being developed.

Current gas supply projects include the Escravos Lagos Pipeline (ELP), SPDC-JV Utorogu gas plant, Nigerian Fertiliser Company gas supply (NAFCON), the Aluminium Smelting Company gas supply (ALSCON). It is anticipated that in the near future associated gas utilisation will increase, thus reducing flaring when several on-going and proposed projects are completed. The proposed projects are:

  • NAFCON phases 11 & 111 projects
  • ALSCON Associated Gas gathering
  • Odidi Associated Gas gathering
  • Nigerian Electric Power Authority (NEPA), Abuja
  • NEPA Geregu
  • Extension of the Escravos-Lagos Pipeline.
In addition, present gas utilisation levels in Nigeria are set to rise with industrial growth. Factors which are expected to influence higher demand are:

  • Improved performance of the power sector e.g the Nigerian Electric Power Authority (NEPA) intends to build additional power stations at Geregu and Abuja.
  • Increased industrial application as feedstock, e.g there are five proposals from different organisations for Methanol MTBE production using associated gas.
  • Extension of the ELP to industrial estates in the Lagos area - i.e the Lagos Industrial Gas Project.
  • The West African Gas Project which will extend the ELP to the Nigerian - Benin border.
  • And the emerging markets in the Calabar Export Processing Zone, now undergoing construction.

HOW AKINJIDE & CO. CAN ASSIST YOU

Akinjide & Co. is a leading Nigerian law firm based in Lagos, Nigeria, with branch offices in Ikeja and Ibadan and with a representative London office.

This guide on the energy sector is intended to provide general guidance and information only. Specific questions and enquiries should be referred to:

Jumoke Kola-Balogun (Mrs)
Akinjide & Co.
Barristers & Solicitors
NCR Building (4th Floor)
6 Broad Street,
Lagos, Nigeria.
Tel: 234 (0) 1 263 5315
Fax: 234 (0) 1 264 5525.
E-mail:  Click Contact Link 

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