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By Adewale Sanyaolu
Except key issues are significantly addressed, Nigeria is on the verge of losing its gas export value over high production cost, a new report has revealed.
According to the National Bureau of Statistics(NBS), Nigeria earned N1.379 trillion from the export of gas and its derivatives in the first six months of 2023
The new report: ”A Balancing Act: Considerations for the Expansion of Liquefied Natural Gas Projects in Nigeria,” by Bathandwa Vazi and Richard Bridle, noted that most national production would become commercially unviable if global gas prices dropped below the domestic breakeven prices.
Relatively high breakeven gas prices, it said, signalled higher production costs and lower profit margins for domestic gas producers, which could impact investment decisions and market competitiveness.
It added that increased competition could reduce demand for Nigerian Liquified Natural Gas, LNG as LNG exporters face exposure to global markets, even when offtake agreements are in place.
In the new study, the International Institute for Sustainable Development (IISD), an award-winning independent think tank, said it found that replacing oil revenues with LNG export revenues might seem like a plausible economic pathway, but that the approach was not without risks.
One of the risks, the report stated, was that the Nigerian LNG exports might struggle to compete on the global market after 2030, with gas projects costing more to produce in Nigeria than in key competitor countries.
The report calculated the weighted average breakeven gas price to determine the relative costs needed for projects to be economically viable, stressing that higher breakeven gas prices imply increased vulnerability to stranded asset risks.
The Nigeria Extractive Industries Transparency Initiative, NEITI, has estimated that for the gas utilisation policy of the federal government to work, there will be a compelling need for deliberate, ambitious investment in gas infrastructure.
NEITI’s Executive Secretary, Mr. Orji Ogbonnaya, further gave the details at the Decade of Gas Action Plan Dialogue, organised by the African Initiative for Transparency, Accountability and Responsible Leadership, in Abuja, recently.
“The network code provides a framework through third-party access to resolve some of the connectivity issues, but to a large extent, achieving the desired gas expansion will require an estimated $20 billion annually to bridge Nigeria’s gas infrastructure,” he said.
Nigeria currently exports about 60 per cent of its LNG to Europe. However, these contracts, the report noted, might not insulate the country from a global downturn in demand, as off-takers might choose to accept penalties and break contracts if the commercial incentives were great enough.
It stressed that the new EU methane import performance standards might also impact export opportunities, depending on the emission levels from Nigeria’s upstream and LNG operations and actions taken to reduce them.
According to the report, investing in LNG may not generate expected revenues as time may be running out for profitable investments.
The report said, “Though there are high hopes of contractual commitments for Nigeria to supply LNG to Europe, this does not come without risks. The International Energy Agency (IEA) has predicted a glut of gas when this infrastructure is up and running, likely in the next decade, as Europe seeks to diversify its energy mix and reduce overall gas demand.
“If gas projects are not profitable, then the government cannot collect revenues.”
On plans to replace oil revenues with gas revenues, the report said LNG projects might have a combination of long-term offtake agreements and short-term sales on spot markets. In both cases, it stated that prices were usually indexed to market prices.
The report stated, “Proponents of LNG suggest that it can potentially replace the diminishing oil revenues, sidestepping the need for fundamental economic reforms. LNG revenues are currently around $74 billion per year and account for around seven per cent of total government revenues.
“To replace declining oil revenues, there would need to be continued strong international demand and high prices for LNG and continued sustained investment in LNG production and export capacity. Operations would need to be undisturbed by theft and social unrest. All of these conditions are uncertain.”
The study stressed that there was a high likelihood that new LNG infrastructure might be stranded as additional investments in LNG faced real risks.
