New Report Says Nigeria’s Liquefied Natural Gas Expansion Drive Faces Severe Future Risks

•Lists shrinking EU consumption, high cost of production as downsides

Emmanuel Addeh in Abuja

Although Nigeria is embarking on massive expansion of its Liquefied Natural Gas (LNG) footprint with many big ticket projects, like the Train-7, there are several risks to be surmounted by the country, a new report has said.

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.

The report titled, “A Balancing Act: Considerations for the Expansion of Liquefied Natural Gas Projects in Nigeria,” and was written by Bathandwa Vazi and Richard Bridle.

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 authors 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 report stated 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 LNG as LNG exporters face exposure to global markets, even when offtake agreements are in place.

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.

It said, “Natural gas, as a whole, accounted for 10.1 per cent of the country’s energy mix and 52.8 per cent of net exports in 2021 , as gas is primarily a commodity for export.

“Global LNG prices are likely to remain above the cost of production; as a result, new LNG infrastructure investments are also unlikely to recover their capital, rendering them stranded assets.

“If assets are stranded, then the government will be forced to choose between writing off such investments or providing subsidies to keep projects operating. There is a risk of throwing good money after bad.”

The report said due to the current global net-zero commitments, fossil fuels faced projected reductions in demand as Europe’s dash for gas demand was likely to drop further, considering that natural gas consumption in Europe fell by seven per cent in 2023, reaching its lowest level since 1995.

According to the study, “Second, competition from other producers is likely to squeeze prices. Major LNG exporters such as Qatar, Australia, and the United States have been ramping up their gas capacity for export and making improvements on their LNG infrastructure and technology, rendering themselves more competitively placed against smaller players, like Nigeria.

“Even if demand does not collapse, Nigeria could find itself priced out of the market by cheaper producers. And finally, the eventual transition to a low carbon world could leave LNG assets stranded, mirroring challenges faced by other fossil fuel production infrastructure.

“For this reason, extending LNG infrastructure not only undermines global targets for net-zero emissions by 2050, but also suggests that green energy policies will not be implemented.”

The think-tank said Nigeria needed to pay immediate attention to addressing the challenges in its economic model. The expansion of LNG projects in Nigeria, it said, required careful long-term, scenario-based, and sound financial analysis.

“It is crucial to consider issues related to inequality, environmental sustainability, and economic dependence on fossil fuels,” it added.

Before embarking on state-supported LNG for export expansion, it noted that contingency planning needed to account for the possibility that demand might fall as new capacity came online or was in commercial operation.

“Some of the global risks can be offset with local demand generation, but for export-led projects, there remains a substantial risk,” the report stated.