Can Europe's Energy Crisis Revive Brass and Olokonla LNG Projects?

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Russia’s invasion of Ukraine and the subsequent chain of events have culminated in acute shortages of gas in Europe, leading to a mad scramble for alternative sources of supply as the cold winter sets in.

While the European gas scramble unfolds, many Nigerians look back with nostalgia and imagine what could have been, regarding the abandoned mega LNG projects such as Brass and Olokonla LNG projects, which had stillbirths. But to the well-informed, it is not so simple.

In the wake of the invasion of Ukraine, Western countries led by the United States of America imposed comprehensive punitive sanctions on Russia, which retaliated by curtailing gas supplies to Europe. Many European countries have over the years, been heavily dependent on Russian gas for their energy needs, leading Russia to the miscalculation that the vulnerable European countries would break ranks on sanctions.

According to Statista, Bosnia Herzegovina, Moldova and North Macedonia depended 100 per cent on Russian gas for their energy needs before the war, while nine other countries, including Hungary, Serbia, Austria, Greece and Finland had dependencies ranging between 60 and 92 per cent.

The bigger European economies like Germany, Poland and Romania, while having smaller ratios of Russian gas to their much bigger overall consumption, were even more vulnerable. Indeed, the contentious Nodstream 2 gas pipeline project transporting Russian gas to Germany, was only just commissioned this year after extended knife-edge diplomatic brinksmanship between Germany and the United States, which opposed the project. Nodstream 1 and Nodstream 2 are a network of four pipelines constructed to carry natural gas from Northern Russia to Germany. They are all shut down at the moment due to sabotage.

In March, shortly after Russia launched her attack on Ukraine, the Economist Intelligence Unit published a “Russian Gas Vulnerability Index”, which showed the Czech Republic, Hungary, Latvia, Austria, Germany and Italy as the most vulnerable to Russian gas supply cuts.

The EIU report further argued that since 40 per cent of the gas consumed in Europe before the war came from Russia, even the ramped-up imports of LNG from the United States and the Middle East can at best provide short to medium-term solutions to the energy shortages.

Germany, the largest economy in Europe, acting in emergency mode, built and commissioned two floating LNG reception and regasification terminals in a record time of 200 days. Four other reception terminals will be available to receive liquified natural gas by January 2023.

 

 

Liquefied natural gas (LNG), is natural gas (mostly methane and very small percentages of ethane, propane and butane) frozen to liquid form, and transported through specialised vessels to a receiving country’s regasification terminal. There, the LNG is converted back into dry gas and transported through pipelines to power stations, fertilizer plants and petrochemical plants. In oil industry parlance, the whole chain of activities is known as a “virtual gas pipeline” (starting from gas gathering at the wellheads, through pipelines, to the LNG plant and to specialised ships, which in turn deliver the gas to the regasification terminals). The virtual pipeline is the cheapest means of transporting bulk natural gas over long distances.

According to the Reuters news agency, Germany completed construction of its first floating terminal for liquefied natural gas (LNG) at the North Sea port of Wilhelmshaven as that country raced to secure enough LNG imports to see her citizens through the winter and to eventually move away from Russian pipeline gas.

The six floating storage and regasification units being brought on stream by Germany will receive nearly 100 billion cubic metres of liquefied natural gas imports, about a third of Germany’s annual gas demand.

The rapid build-up of LNG reception facilities has been replicated in several of Europe’s net natural gas importing countries - at least as a short-term strategy to replace Russian gas, while ramping up investments and research in renewable energy sources like wind farms and hydrogen, to meet their longer-term energy needs. At the same time, they are also pushing hard to stretch some of the LNG supply contracts into longer-term arrangements. For instance, ConocoPhillips and Qatar Energy have inked two new contracts for a 15-year LNG supply to Germany at two million tonnes per annum. This means that the European gas consumers are flexible and open to adjustments in their overall strategy in the next three years at least - the minimum time they need to wean themselves off Russian gas.

Interestingly, the escalating European demand for LNG is targeting sources in the Middle East and North America, especially the US Gulf of Mexico, to the exclusion of West Africa and Nigeria with her huge reserves. Given the proximity of West Africa, sourcing natural gas from here should ordinarily be a very attractive proposition for European consumers.

 

Another factor that may count in West Africa’s favour is the high price of US gas, owing to the fact that most of the exported gas comes from the expensive “fracking” process. Europeans are already grumbling that their North American allies may be profiteering from the Ukrainian war. Given that American gas producers are using the expensive fracking process, Nigeria may be in a position to deliver cheaper gas to Europe. Also, gas from fracking has more pollutants than the more environmentally friendly production from associated gas or simple vertical drilling into natural gas reservoirs.

Unfortunately, Nigeria and indeed the rest of Africa, despite huge gas reserves, have relatively limited LNG production capacity. This leaves them in a dilemma – should Nigeria for instance, fast-track previously abandoned LNG projects or even build new ones to cash in on the spike in gas demand in Europe?

What about installing floating LNG vessels on relatively small pockets of gas reservoirs discovered offshore Nigeria and leveraging the strong European demand and high prices of American LNG - a situation that may persist for the next three to five years, to make a business case for investment?  A case in point is UTM Offshore’s US$ 5 billion, 1.52 million metric tonnes per annum floating LNG project, Nigeria’s first such facility, located on OML 104, a mining lease operated by Mobil Producing Nigeria Unlimited, an ExxonMobil/NNPC joint venture, where the prolific Yoho field, one of ExxonMobil’s important production assets in shallow water Niger Delta, is also located.

The UTM Offshore project came to life because, in 2021, the Nigerian government allotted to the company, an indigenous operator, a portion of OML 104 with an undeveloped gas reserve suitable for extraction and evacuation through a floating LNG facility.

Another strong possibility for a floating LNG plant, which was first muted in the 1990s when a stranded gas reserve was discovered by Shell Nigeria offshore Niger Delta, is in OMLs 129 and 135, where the Nwa-Doro structure straddles two leases owned by Shell and Statoil (now Equinor), the Norwegian national oil company. While the two companies have agreed on unitizing the fields, legal and fiscal obstacles, as well as an unresolved judicial claim by South Atlantic Petroleum, have combined to keep the project on hold.

Very recently, UTM Offshore signed a front-end engineering contract with JGC Corporation, the Japanese chemical engineering giant; France’s Technip Energies and KBR, a former Halliburton subsidiary, which separated from the American energy giant in 2007 in the wake of several scandals, including Iraq war-related contracts and of course the bribing of Nigerian government officials for the contract to construct the Bonny LNG plant.

Without any doubt, KBR and the other companies recruited by UTM Offshore have intimidating credentials in chemical plants and field development procurement. More importantly, all three companies have worked as major contractors in Nigeria, including the EPC of the Nigeria LNG Limited Bonny plant, Eleme Petrochemicals, the Onne fertilizer factory and the Agbami field development project.

Nigeria may yet decide to move faster to achieve two longer-term projects to send gas to Europe through pipelines – the long-delayed Trans-Saharan Gas Pipeline, intended to transport natural gas through the Sahara Desert to Algeria and through existing pipelines under the Mediterranean Sea, to Europe. This was intended to be a backup and replacement for the declining Algerian gas supply to Europe. However, the project has been on the drawing board for decades, hobbled initially by a dearth of funding, after the feasibility studies were completed in 2006.

When fully installed, the 4,128 kilometres pipeline will be expected to transport 30 billion cubic meters of natural gas per annum from Nigeria to Algeria and onwards to Europe. The Nigerian component of the project, known as the Trans Nigeria Gas Pipeline, is already being constructed by an indigenous oilfield service company, Oilserve Nigeria Limited through a contract awarded in 2018.

The contract is to extend the national gas pipeline already linking Warri in the Niger Delta with the Ajaokuta steel complex in the middle of the country, to Kano - the major industrial centre in northern Nigeria. Known as the “AKK” (Ajaokuta – Kaduna – Kano) gas pipeline, the project will create an industrial corridor along the route, with the expected emergence of gas-based industries along the pipeline route.

The project is a US$2.8 public sector/private sector partnership, funded by an international consortium including the Bank of China and Nigeria’s Fidelity Bank. The terminal point of the Trans Nigeria Pipeline becomes the take-off connection point for the trans-Saharan project.

• A section of the 614-kilometre AKK.

An ominous latter-day challenge for the Trans Sahara Pipeline is security. The design of the project will have the pipeline running through thousands of kilometres of very dangerous ungoverned desert terrain, where terrorism reigns. Thus, providing security and adequate insurance for the project remains a huge challenge for the foreseeable future.

A separate natural gas pipeline project from Nigeria to Europe, which appears to be gathering more steam than the Trans-Saharan project, is the more attractive Nigeria-Morrocco gas pipeline. This will be a continuation of the West African Gas Pipeline originally conceived to supply natural gas from Nigeria to Benin, Togo and Ghana. The new project will extend the existing sub-sea pipeline to Morrocco, passing through Cote D’Ivoire, Liberia, Sierra Leone, Guinea, Guinea-Bissau, the Gambia, Senegal, Mauritania and terminating in Tangiers, Morocco.

The two projects mentioned above are essentially long-term and their viabilities do not depend on the Russian-induced spike in European gas demand.

What is more fundamental is that in the face of the worldwide energy transition, and with hydrocarbons becoming the villains of earth warming, Nigeria has the decision to make on how best to convert her petroleum resources to rapid industrialisation, jobs and wealth for her people before the technology, and especially equipment available for oil production become unavailable, as they will become unviable to manufacture when the major international players stop investing in hydrocarbons.

It is, therefore more plausible, many informed industry operators have argued, for Nigeria to deploy her oil and gas resources and production infrastructure towards the rapid expansion of gas-based industrial activities, leveraging projects such as the Ogidigben Gas Industrial Park, the Dangote integrated energy and chemical industrial complex in Lekki, the new Kolmani integrated energy project in Bauchi, and other oil and gas processing clusters - to hedge against the projected reduction of investment in exploration, drilling and field development by the major international players.

With the unrealistic targets set for eliminating carbon emissions and by extension, fossil fuels, underdeveloped oil producers like Nigeria should be more interested in growing their economies through crude oil and natural gas-driven industrialisation, and full in-country processing of crude oil, than going with the energy transition train.

While experts have argued that natural gas has carbon emissions within acceptable “transition” thresholds, a strategic balance must be struck by Nigerian economic planners between exporting her natural gas and deploying the same for gas-based rapid industrialisation of the country.

Speaking at one of the meetings of the Abuja Petroleum Roundtable, Felix Amieyeofori, pioneer Managing Director of Energia Limited, an innovative independent E&P operator in Nigeria, stated that since Europe, Asia and the Americas are playing politics with oil, Nigeria should mobilize Africa to also play African oil politics. “The huge potential from the 1.2 billion people in the African market, along with the massive available natural resources, present a new strategic direction for Nigeria”, he concludes.

The “African oil politics” he describes, translates to 100 per cent in-country processing of Nigeria’s crude oil and natural gas, while downstream and derivative products are sold and distributed in the domestic and African markets. This strategic direction is key to Nigeria’s industrialisation and economic prosperity. It needs concerted scrutiny and intense study by the planners of Nigeria’s economic development. This is the development paradigm bound to deliver the most value to Nigerians, even as the rest of the world downgrades the role of petroleum in their energy portfolios.

Still, on the gas export front, another argument put forward by those who should know, is that new LNG projects may not take off easily given the laborious process and time it took for Nigeria LNG Limited, (which is a successful six-train LNG project), to reach the final investment decision for train seven. If the process drags out, the emerging European demand may fizzle out, thereby eliminating the need for the rapid increase in gas exports, especially with huge existing LNG production capacities in Australia, the Middle East, the United States, the Caribbeans and even Mozambique.

As for Nigeria’s abandoned LNG projects, the most viable ones were Brass LNG and Olokonla LNG. Politicians have been making the appropriate noises and showing “commitments” to the completion of the Brass and Olokonla LNG projects, although there is no sign of the return of the IOCs who sponsored the projects at the time – ConocoPhillips for Brass LNG; Shell, Chevron and British Gas for Olokonla LNG. They all divested from Nigeria to invest elsewhere in the humongous Australian LNG project, other Gulf of Guinea jurisdictions and the Middle East. Returning to re-invest in either of these projects will be unrealistic, against the backdrop of the very successful Australian and Qatari ventures.

For instance, the uncertain fiscal environment for such projects in Nigeria in the last two decades has seen prospective core investors drift to other Gulf of Guinea resource-rich countries like Equatorial Guinea and Angola, both of which now have successful LNG projects, in competition with Nigeria.

The four-train Brass LNG, estimated at the time to cost over US$20 billion with an annual production capacity of 8.4 million metric tons, was initiated by President Obasanjo in 2005. Recently, some prospective investors have apparently shown interest. But it is not clear yet if there are any serious proposals on the table.

As for the Olokonla project, which was estimated to cost US$9.2 in 2003, there is no hint yet that the government can attract new investors to the project.

Nigeria has lost more investors in the last two decades in the energy value chain than she has attracted - in part due the stalemate in the passage of the Petroleum Industry Act. For instance, most of the IOCs have sold off large portions of their assets in the on-shore Niger Delta basin and retained only their deep-water assets due to the relatively more secure environment and attractive fiscal terms offered in the deepwater production sharing contracts.

In the days when confidence was high in the prospects of investing in Nigeria, big players like Petroleum Geo-Services (PGS) and other major exploration operators, carried out speculative 3D seismic surveys in deepwater Nigeria and the Gulf of Guinea in general and recovered their costs by selling the data to E&P operators bidding for acreages in Nigeria. But with Nigeria going silent on acreage bids for a long time until last year, even the commissioned exclusive surveys have been absent. Logically, the absence of exploration has brought with it relatively few discoveries and addition to reserves in the last 20 years.

In addition, since the Federal government took over the original Port Harcourt refinery built by the Shell Petroleum Development Company of Nigeria in the 1960s, all the midstream projects sponsored by the IOCs or other international operators in Nigeria, have been 100 per cent export-oriented. The lack of interest in the domestic market, especially for gas, was so bad that the Nigeria LNG plant in Bonny did not have any facility at inception, to directly supply cooking gas, one of its by-products, to the domestic market. Nigerian vessels had to go out to sea to “import” LPG produced at the Nigeria LNG plant on Bonny Island!

The impending commissioning of the Dangote industrial complex in Lekki will be a turning point for Nigeria. First, it will set a template for the government to pursue local processing of her crude oil and gas resources. Rapid replication of the Dangote-type complex may be the viable way to go, first to address the inefficiencies in the broken and corrupt midstream and downstream petroleum industry, including the fraud-ridden subsidy regime. And secondly, it will create the incentive for other Nigerian entrepreneurs to mobilise capital for such industrial activities even on smaller scales than the Dangote project while strengthening and fine-tuning the regulatory functions of the two agencies created by the Petroleum Industry Act.

Another very important fallout of aggressive local processing of crude oil and gas will be the empowerment of indigenous independent operators who have small reserves of crude oil and natural gas, to invest in integration. Walter Smith Petrolman in partnership with the Imo State government has the Ibigwe field in Imo State where it has a refinery; Niger Delta Petroleum Resources has its Ogbelle field in Rivers State where it is producing diesel.

Similarly, companies in the “Midwest Cluster” who operate four marginal fields with sizeable natural gas and crude oil reserves plan to integrate their operations there, although they are currently evacuating their gas production through the Kwale Gas Gathering facility; and their oil through the Kwale-Akiri pipeline connected to the Brass Export Terminal. Both the crude oil pipeline and the gas gathering facility are operated by the Nigerian Agip Oil Company, a joint venture between NNPC and Italy’s ENI Group.

The marginal fields in the Midwest Cluster are Umusadege, operated by Midwestern Oil and Gas; Umuseti operated by Pillar Oil; Matsogo, operated by Chorus Energy; and Ebendo operated by Energia Limited. These are examples of projects that have the potential for replication across the hundreds of shut-in wells in the brownfields left idle by the IOCs in their onshore and shallow water Niger Delta acreages. With policymakers thinking outside the box, the right fiscal regimes can be created to actualize these opportunities.

Just like UTM Offshore, many of those with no oil or gas production may be incentivized to acquire and re-enter the wells abandoned by the IOCs, leveraging on the support of government agencies like the national oil company and the Nigerian Content Development Management Board.

Overall, the Nigerian government, having signed the Paris Agreement, must adopt a “Nigeria first” approach rather than chasing unfavourable targets for eliminating fossil fuels. Her energy-related natural resources including coal, bitumen, crude oil and natural gas – all of which she has in abundance, must be put on the table and remain in her energy portfolio. After all, we saw European countries returning to coal the moment their energy crisis hit. And South Africa is holding strongly onto her coal resources as the mainstay of her energy industry. Nigeria and Africa are not serious polluters and should not suffer for the sins of the industrialised countries of the northern hemisphere.

 

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