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Financial Times: Nigeria targets $20bn investment in gas

By Matthew Green in Lagos
Published: March 14 2008 02:00 | Last updated: March 14 2008 02:00

Umaru Yar’Adua, Nigerian president, wants to raise $20bn from energy companies to invest in harnessing gas reserves to solve the country’s chronic power crisis.

Nigeria is an increasingly important supplier of liquefied natural gas (LNG) – gas cooled into liquid for easier shipping – to growing markets in the US, Asia and Europe. But a new policy, seen by the Financial Times, calls for “unequivocal” action to “prioritise domestic gas supplies over export”.

A senior Nigerian official said the government may require producers to set aside as much as 25-30 per cent of gas to use in Nigeria, where power cuts are perhaps the biggest barrier to faster economic growth.

The plan follows moves by big producers Russia and Indonesia to divert gas away from exports to boost their domestic economies, raising concerns over supplies to tight global LNG markets.

But Nigerian officials and executives at Western energy companies both downplay the risk to exports, saying Nigeria’s reserves – the seventh largest in the world – are big enough to satisfy both local and domestic demand.

“We are going to develop domestic usage of gas without detriment to export,” the Nigerian official said. “The policy does not say that we’re going to starve LNG [clients] of gas.” The key to the new policy, part of a wider overhaul of the energy sector launched by Mr Yar’Adua after he came to power last May, is encouraging investment to increase the overall amount of gas available.

Western oil companies have traditionally focused on oil production during Nigeria’s 50-year history of energy exploration. But growing global demand has spurred faster development of gas in the past decade.

Royal Dutch Shell, Total and Eni hold stakes in the sole existing LNG export terminal. Chevron and ConocoPhillips are considering similar plans. A West Africa pipeline is due to start exporting gas to the region within months, while there is talk of a Trans-Sahara pipeline to link Nigeria to export terminals on Algeria’s Mediterranean coast.

But in spite of the growing interest, five times more of Nigeria’s gas is still “flared” as waste during crude extraction than is used for domestic power generation.

Part of the problem is that Nigeria has failed to provide a fiscal framework where investment in domestic gas usage would be anything like as profitable as the much more lucrative business of exporting LNG.

Mr Yar’Adua’s policy – which has yet to be voted into law – aims to sweeten Nigeria’s appeal by doubling the aggregate price producers are paid for gas locally to $1/mcf by 2009. Gas exported as LNG fetches more than $2/mcf.

Many in the industry are sceptical, questioning how big domestic gas projects will make money given the security, technical and cost constraints of operating in Nigeria.

Mr Yar’Adua is banking on attracting new participants more willing to take on risk than established companies, hoping to capitalise on the increasing importance of Nigeria’s gas in the competition for global energy security.

The policy says it aims to reduce the “stronghold” of the incumbent Western groups on Nigeria’s “vital strategic infrastructure”.

Gazprom, the Russian energy group, has offered to invest heavily in domestic gas-gathering in Nigeria, keen to secure a foothold in reserves strategically located near European and US markets. Western companies such as Eon, the Germany utility, and UK-based BG Group and Centrica are also keen to expand in Nigeria.

Energy consultants say more modest gas-gathering schemes, where companies supply power stations near particular oil and gas reserves, may be more feasible than the kind of mega-projects envisaged by the government.

Copyright The Financial Times Limited 2008

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