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ANALYSIS-Nigeria hopes its gas can keep the lights on

Source: Reuters - Fri, 21 Mar 2014 11:09 GMT
Author: Reuters
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* Nigeria needs huge gas consumption to fix power blackouts

* Africa's top energy producer missed out on LNG boom

* Lack of pipelines, legislation low prices a deterrent

* Nigeria has world's ninth largest gas reserves

By Tim Cocks

ABUJA, March 21 (Reuters) - The first power cut to hit the luxury hotel venue of this week's energy conference here struck the Nigerian oil minister's speech on gas supply reforms with uncanny accuracy.

"The gas masterplan aims to develop infrastructure delivery for the domestic market ...," Diezani Alison-Madueke was saying - before a blackout took out the auditorium lights and speakers.

Muted laughter followed, then a lone heckle.

"Well, this is why we need these major gas infrastructure improvements," her barely audible voice continued, just before the diesel generator kicked in and light returned.

Nigeria's desperate need for power could well be the catalyst that opens up its proven gas reserves of about 180 trillion standard cubic feet (scf), the world's ninth biggest, after Africa's biggest energy producer missed out on the last decade's liquefied natural gas (LNG) boom.

"Most people are still only here for the oil, yet Nigeria is sitting on a gas canister," said an oil industry executive.

Industry sources put the real quantity at 500 trillion scf.

For 50 years Nigeria used its petroleum fields almost exclusively as a source of crude oil for export.

"Gas was just this poisonous thing associated with the oil," Abiye Membere, head of exploration and production at the state-run Nigeria National Petroleum Corporation (NNPC), said.

That began to change a decade ago with the completion of one of the world's largest liquefied natural gas (LNG) terminals, fed largely by fields owned by leading operator Shell. Shell also has 25.6 percent stake in the plant.

Yet two other planned LNG projects - Brass LNG and OKLNG - have become mired in disputes over fiscal terms that have gone on for years, long enough for Nigeria to miss its opportunity to be a global LNG leader, analysts say, as Qatar and Australia stepped in with giant projects.

"Governments have muddied the waters by increasingly aggressive demands," said independent London-based energy consultant Claudio Steuer. If you add the cost of pipeline vandalism, "the operating environment does not look that great."

The U.S. shale boom, set to further depress gas prices, is making it look even less great.

HUNGER FOR GAS

Nigeria may have a second chance - if it can unlock pent up demand for electricity that Africa's most populous country needs massive quantities of gas to produce.

At 4,000 megawatts, Nigeria's electricity output is a tenth of South Africa's for a population three times the size. It lasts some 4 hours a day in urban centres while many rural areas get nothing.

President Goodluck Jonathan's government has privatised much of the decrepit state oil firm and a bidding process is underway for 10 new gas-fired plants.

"A huge amount of the power privatisation has been about creating a domestic industry for gas," said Fola Fagbule, an Africa-focused Nigeria investment banker.

"But there's still a lot of work to be done on infrastructure for transporting gas, which is a key limitation."

Alison-Madueke said Nigeria had begun building 1,860 km of planned pipeline gas infrastructure and designing a 850 million scf gas processing facility to support domestic supply.

Shell, Chevron, Eni and Total all produce natural gas for domestic or other West Africa customers.

Yet the orange flares lighting up the sky over the Niger Delta, burning off the precious resource, show that more could be captured.

Nigeria is the world's second biggest gas waster after Russia.

The minister said flaring was down 20 percent in two years, giving no absolute figure. It was 30 billion cubic feet per month two years ago. Niger Delta activists were sceptical.

"We've mapped out the flare sites and we haven't seen a lot of them go off in the past two years," Inemo Samiama, head of the delta-based Stakeholder Democracy Network told Reuters.

LOW PRICE, POOR LAWS

Pipelines are not the only hurdle. Regulated gas prices are a cheap $1.5 per cubic foot, and though Diezani and other officials pledged to bring them to export parity, no time frame was given. Even at that price, power producers often default on obligations, said a government official in the power sector.

The price is so unappealing that some Nigerian companies completely write off associated gas when they value oil assets they are buying or have bought, an executive from one company said.

The government fears raising the price would push up power bills, but analysts say gas is only one unit cost among many so the impact would be muted, and anyway most power comes from diesel generators which are much more costly.

"Politically its quite toxic," said Antony Goldman of London-based PM consulting. "But how much are people really paying for power when they've got to buy generators and diesel?"

There is too the lack of a proper legal framework for gas ventures, something that was supposed to be solved by the wide ranging Petroleum Industry Bill.

That has been stuck in parliament since July 2012. The chair of the Senate gas committee Nkechi Nwaogu said the upper house would pass it this year, but many doubt that. And the ruling partly just lost its majority in the lower house.

Petroleum Resources Department Director George Osahon said this week that Nigeria aimed to increase domestic gas consumption threefold to 5.4 bcf per day, from 1.7 bcf per day, by 2019.

Not impossible, but a tall order, analysts say. (Additional Reporting by Oleg Vukmanovic in London, editing by William Hardy)

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