A Lack of Flare

THE WALL STREET JOURNAL

OCTOBER 19, 2009

Nigeria hopes that by stopping oil companies from burning off natural gas, it will also help quell domestic violence

By BENOIT FAUCON

In the oil-rich Niger Delta region of Nigeria, petroleum companies use giant torches to burn off natural gas found with deposits of crude oil.

The decades-old industry practice, known as flaring, has long been criticized as wasteful and harmful to the environment because of the carbon dioxide it releases into the atmosphere. But more recently, flaring has become a lightning rod for protests and armed attacks by Nigerian locals, many of whom lack reliable access to electricity and the economic opportunities that go along with it.

Amid escalating unrest that has shut down production of more than one million barrels of oil a day at a cost of billions of dollars in lost revenue, interest is growing in a handful of pioneering power plants that use unwanted gas to provide electricity to communities near the oil fields. There is a push on to build more of them in the belief that the way to prevent the violence that has shaken the West African nation is to address underdevelopment in the Delta, where the wealth generated by oil has done little to improve the lives of residents, who subsist on an average of $2 a day.

“Power will be a key issue” if a recent disarmament deal is to be followed by durable peace, says Kennedy West, who mediates between militants and the government as president of the Association for Non-Violence in the Niger Delta. “Everybody is looking at it.”

Some say proposed legislation that would fine oil companies for failing to stop gas flaring by the end of 2010 at twice the burned gas’s international market value is helping to spur action. Previous deadlines to end flaring in Nigeria have come and gone, but the fines proposed in the latest bill are much steeper than what the government has set in the past.

Cycle of Violence

Today, about a third of the natural gas associated with crude-oil extraction in Nigeria is set ablaze in vertical columns. Most of the rest is liquefied and exported abroad.

While that is an improvement from five years ago, Nigeria ranks behind only Russia when it comes to gas flaring, accounting for 10% of flared gas world-wide—and more than 40 million tons of carbon-dioxide emissions annually—according to statistics from the World Bank’s Global Gas Flaring Reduction Partnership.

Flaring has been going on for decades in Nigeria, the fifth-largest supplier of oil to the U.S. The practice took off for a variety of reasons: The value of natural gas was low compared with oil, the oil industry lacked the pipelines and infrastructure to process and export gas, and there was no organized opposition to petroleum companies—armed or peaceful.

But it has become clear that in addition to carbon emissions, flaring takes a toll on the local environment, aggravating respiratory diseases in people living near the wells and generating acid rain that affects agriculture and fishing.

The most privileged communities in Nigeria are powered by generators that, ironically, rely on expensive imported fuel. At that price, “even hairdressers can’t work,” says Westham Adehor, president of Delta-based charity Youth and Development Initiative, or YDI.

The result is a chicken-and-egg situation, where lack of power fuels a seemingly unbreakable cycle of unrest and underdevelopment.

Unemployment in the Delta bred a new generation of militants who launched a string of attacks against the oil companies over the past three years. They also steal hydrocarbons from pipelines and sell it as a cheap, unsafe fuel for generators. Anglo-Dutch oil giant Royal Dutch Shell PLC says the unrest hurt efforts to end flaring by making it unsafe to bring in teams to study or set up gas-utilization projects.

Several key militant leaders recently disarmed, but there are fears unrest will resume again if the region’s lack of development isn’t addressed.

Helping residents benefit from the oil companies’ presence is the goal of gas-utilization initiatives like Bonny Utility Co., created in 2001 with $5 million of funding mostly by Shell, France’s Total SA, Italy’s Eni SpA and the Nigerian National Petroleum Corp. The project is an offshoot of the firms’ Nigeria LNG joint venture, which produces liquefied natural gas for export in the eastern Delta’s Bonny Island. Nigeria LNG used to export all its gas, provoking the ire of locals who saw little benefit from the international sales.

While blackouts are a fixture of life in Nigeria, Bonny says its customers enjoy availability above 95%. Clients get power free of charge, up to a certain limit, though the utility now has 8,858 paying customers, according to Effiong Henshaw, a spokesman for Nigeria LNG, which manages the nonprofit project.

Revenue generated from those paying customers currently covers about 50% of the utility’s operational spending, says Mr. Henshaw, who adds that the utility has created previously impossible public-service and commercial opportunities, including a doubling of operations at a local hospital.

About 90 miles north of Bonny, in the Onelga area of the Delta, Total and Eni are funding similar gas-utilization projects. Since March 2005, Total has been using gas from its Obagi field to supply power to 40,000 people living in Onelga’s Egi Kingdom.

In all cases, local leaders say power generation has contributed significantly to reduced violence against oil companies.

Egi Kingdom used to be a notorious flashpoint, where locals violently protested pollution from Total. But Rexford Masi, an Onelga youth leader, says there is now “less violence,” partly because access to reliable power has spurred a local industry of palm oil and cassava processing. And while the plant in Onelga isn’t big enough to mop up all of the gas unearthed by drilling, it has halved the number of torches burning off unwanted gas, Mr. Masi says.

Branching Out

Ufot Ekaette, minister for the recently created Niger Delta affairs portfolio, and Augustine Nwokocha, power commissioner for the eastern Delta’s Rivers state, say they both have discussed with foreign investors plans to supply power to local communities using local gas.

Nigeria LNG, meanwhile, has “been approached by others wanting to try out the [Bonny Utility] model elsewhere,” says Mr. Henshaw.

The Delta-based YDI charity is involved in one such effort. It has joined with Bournemouth University of the U.K., local electricity contractor Weltek Ltd. and Norwegian gas-technology firm Hamworthy Gas Systems AS in studying the feasibility of setting up power plants similar to Bonny elsewhere in the Delta.

Halfdan Millang, who is conducting the technical study for Hamworthy, estimates that for a $35 million investment, one plant typically could produce 10 megawatts of power—enough to supply 20,000 households with electricity. And by mopping up gas that otherwise would be burned, a plant that size could reduce carbon-dioxide emissions by 40,000 tons annually, the equivalent of the exhaust fumes released by 15,000 cars, he says.

A $35 million investment is the equivalent of 12 hours of oil revenue currently lost to unrest, according to Dai Davies, a trustee of Niger Delta Development Initiative, a U.K. nonprofit that also is involved in the project. And because such plants would lead to the development of local business, a $35 million investment could be recouped within less than two years, he says.

U.K. environmental group Living Earth Foundation, meanwhile, is looking at a smaller project. It has received $2 million from the European Union through a broader EU budget. And it’s in talks with Shell’s Nigerian unit, among others, to get the remaining $1 million needed to build a plant serving 3,000 households and 500 businesses, says Dara Akala, the manager in charge of the project at the London-based charity.

Shell declines to comment on that, but says more generally that it is considering installing “microturbines for power projects for nearby communities” to use gas currently flared.

While community leaders welcome the developments, they caution that community-based power stations aren’t the answer to all of the Delta’s problems.

“We also need more schools,” says youth leader Mr. Masi.

In the end, the success of any energy-related project will depend on community involvement, says Mr. West, the mediator. The key, he says, is giving residents a direct stake in the energy industry’s success.

—Mr. Faucon is a reporter for Dow Jones Newswires in London. He can be reached at [email protected].

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