AMSTERDAM () -- In the coming years, Europe's gas sector will be under threat if decisions currently made by Nigeria regarding its exports are implemented. The Nigerian government has stated that the country will be assessing its overall gas export options (largely LNG) with regards to the growing domestic demand for natural gas.
Since October 2007, the Nigerian government has been discussing the possibilities to increase domestic gas supplies, as local demand is surging. The main reason behind the domestic demand increase is the fact that Nigeria has commissioned, and will be commissioning, a vast amount of new power plants throughout the country. The idea behind boosting electricity generating capacity is to utilize the immense volumes of associated gas currently being flared by the producing companies.
However, the policy was put in doubt after it became clear that the no-flaring targets of 1 January 2008, which were set by the Nigerian government, were unattainable. Until now, most associated gas is flared; only a slight amount is used.
International operators such as Shell [NYSE:RDS-B; LSE:RDSB] and Chevron [NYSE:CVX] have openly stated that they will not be able to meet targets set, urging the government and the Nigerian National Petroleum Company (NNPC) to delay targets to a later date. Due to this development, large volumes of natural gas already committed to export projects are being targeted to be fed into the domestic pipeline system for use.
Analysts have warned that this will especially threaten new LNG export projects as there is not enough volume available. In the last few weeks, Nigerian officials have repeatedly stated that new LNG projects planned to come on-stream during 2008-2011 are being delayed until around 2015 or even later.
The primary export country for these LNG volumes is the U.S., with the European markets on second spot. A real delay in project implementation will result in a major setback to LNG spots available, while at the same time, markets in Europe and the U.S. will have to cope with shortages. New Nigerian LNG projects were set to supply around 35%-40% of total expected LNG volumes coming available in the coming years.
At the end of 2007, and during the first months of this year, Nigerian official have stated that they will keep to the government's declaration that the projected policy review will place pre-eminence on meeting domestic gas demand to fire the nation's power plants before consideration can be given to exports. This has elicited great anxiety as well as a wait and see attitude among investors in three major liquefied natural gas projects in the country.
Main projects expected to feel the pressure of these developments are the Olokola LNG, Brass LNG and Trains 7 and 8 of the Bonny LNG. These projects are an official part of the government oil and gas policy review by the Umar Yar'Adua administration. The multi-billion investment schemes of Agip, BG, Shell and others are also under threat.
The said supply crunch will come at a strategic moment in time. Around 2011-2012, Russian gas exports are also expected to be under stress. The growing domestic demand for natural gas in Russia, in combination with a lack of hard-needed investments in new projects, could be a major stumble block for gas exports.
Russian politicians and gas officials will have to decide which customer is more of a strategic importance, Europeans or Russian voters. The expected domestic-export conflict is set to take place in 2011-2012, when production has become flat and demand has increased substantially.
New investments are needed, but national doctrines and political-economic interests have taken the upper hand. The elections of the new Russian president have revealed how much influence of natural gas and oil officials have in the Russian political arena. As long as Post-Soviet Russia's economic kingmaker is natural gas, with support of the high crude oil prices - Russia is the second largest oil exporter in the world - politics and energy intertwine.
Russia's new President-elect Dmitri Medvedev has been built-up by Vladimir Putin on his experience and pull in the energy sector. Russia's gas monopoly, Gazprom, has been led by Medvedev for years. But in the current political situation, in which the government has become gas sensitive, shocks can be expected.
As one analyst has stated in the press, the correlation between Russia's politics and resource stocks is stronger than ever. Results of the more pro-active energy and foreign policy, based on Putin's heritage, already came to light when Gazprom cut natural gas supplies to Ukraine by half over a pricing dispute. Russia's future foreign policy is expected to be more and more energy sector focused.
For the European market, but increasingly in the U.S. as well, Russian adventures will have an effect. If other LNG suppliers are not able to supply the committed gas volumes, both Western consumer markets will have to bear the brunt. Russian supplies have been historically secure, but there is no guarantee for the future.
The growing dependency of both markets on third party gas supplies is a danger. The combination of a new Russian president and Nigeria's increasingly inward looking energy policy leaves less room for manoeuvring. Medvedev's Gazprom background will craft his policy decisions on both national and international energy affairs.
Gas consumers need to be aware of this, taking the future in their own hands. Gas is needed, but supply is becoming less and less secure.
