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Reuters: ANALYSIS-Gazprom will struggle to gain Nigeria presence

01.08.08, 10:40 AM ET
By Tom Bergin

LONDON, Jan 8 (Reuters) – Gazprom will find it hard to become a major player in Nigeria, making it unlikely the Russian gas giant will rival Western oil companies’ dominance there, or be able to divert Nigerian gas from European markets.

Analysts warn nonetheless that if, in its quest to forge ahead overseas, Gazprom redirects cash from domestic to foreign investment, gas supplies to Europe may still be at risk.

State-controlled Gazprom said this week it wanted a foothold in Nigeria and a Nigerian government official said the Russian gas export monopoly had offered an initial investment of up to $2.5 billion to secure it.

With the world’s oil and gas resources increasingly controlled by state-backed companies, Nigeria is one of a diminishing number of major hydrocarbon producers where Western oil majors can access large reserves.

Royal Dutch Shell Plc (nyse: RDSA – news – people ), the world’s second-largest non-state controlled oil company by market capitalisation, is Nigeria’s largest oil operator, while larger rival Exxon Mobil Corp (nyse: XOM – news – people ) claims the number two spot.

Some analysts warn the arrival of Gazprom in Nigeria could mean Western oil companies start to face stiffer competition for the country’s gas reserves, the world’s seventh-largest, according to the BP (nyse: BP – news – people ) Statistical Review of World Energy.

While some Nigerian officials have spoken enthusiastically about the Russian company, Western oil executives say they are not worried, partly because they say Nigerian contract terms are tight. Also, licences to most of Nigeria’s proven gas reserves have already been awarded.

Nigeria flares a lot of gas, which is produced as a by-product when oil is extracted, but most of the flared gas that can be economically captured is slotted to be included in projects already under development.

Stewart Williams, Nigeria expert at consultants Wood Mackenzie, said if Gazprom wants gas reserves it will have to buy them from other foreign firms or bid for less prospective exploration blocks still available, and start drilling.

Whichever route it opts for will take much time and money. “You don’t get much for $2.5 billion these days,” Williams said.

The only other possibility would be for Gazprom to convince the government to cede some of its equity in gas projects — the state generally retains a controlling stake in big gas fields — but Williams sees this as politically unattractive for Nigeria.

“We question whether Gazprom will succeed in delivering anything material out of these discussions in the near term,” James Neale, oil analyst at Citigroup (nyse: C – news – people ), said in a research note.

EUROPE SHOULD STILL BE WORRIED

Nigeria is one of the fastest growing producers of liquefied natural gas (LNG), gas cooled to liquid for transportation in tanker over distances that are too far to economically bridge by building pipelines.

The European Union hopes the expansion of global LNG supplies will help reduce its reliance on Gazprom, which supplies Europe with a quarter of its gas needs.

Andrew Neff at Global Insight said Gazprom could be seeking Nigerian LNG assets so as to keep supplies away from Europe, where the Russian company is the dominant supplier, and keep prices for its gas high.

Most analysts think Gazprom will be unable to secure control of enough Nigerian LNG supply to achieve this, if that was the company’s goal.

Nonetheless, Otto Waterlander, head of the gas practice at consultants Booz Allen Hamilton, says Gazprom’s Nigeria adventure, and similar advances in Angola and elsewhere, could jeopardise European gas supplies.

“If the money they plan to spend is incremental, it is good, but if it is money being diverted from investment in Russia, it poses many more questions,” he said.

The International Energy (otcbb: IENI.OB – news – people ) Agency has said Russia is not investing enough in developing its gas reserves, possibly leading to a future shortfall in supplies to export customers.

Gazprom has not given details of its Nigerian plans or how they will be funded. (Additional reporting by Thomas Ashby in Lagos; editing by James Jukwey)

Copyright 2008 Reuters

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