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Analysis & Opinion
25.05.10 Graced With Gas
By Irina Aervitz

It has been a year since Gazprom signed an agreement with the Nigerian National Petroleum Corporation (NNPC) forming a 50/50 joint venture, called the Nigaz Energy Company Ltd. Gazprom committed $2.5 billion of investment to Nigaz. The agreement sent shockwaves across Europe and the United States because it was viewed as Russia’s strategic move not only to expand to Africa, but also to preserve its traditional gas market in Europe by claiming a stake in the Trans-Saharan gas pipeline. However, even considering the overall strategic implications, would Russia be better off building, or adding to, its own gas utilization capacity?

Nigeria possesses the seventh largest proven natural gas reserves in the world. However, most of these reserves remain untapped due to a lack of infrastructure for its extraction, transportation, and marketing. For the last decade, the Nigerian government has been working to realize a long-term strategy to commercialize its gas endowments. Part of this strategy is to reduce the amount of associated gas flaring.

Utilizing gas domestically as an energy source is also part of Nigeria’s government “gas plan.” Nigaz is anticipated to add to the gas utilization infrastructure in Nigeria by constructing refineries and gas power stations. It will also bid for Nigerian gas exploration projects. Finally, one of the major components of the joint venture’s scope of activities is to build a section of the Trans-Saharan gas pipeline (TSGP), the 4,128 kilometer-long pipeline from Nigeria to Algeria via Niger, expected to be completed in 2015.

But there is still a long journey from the project’s announcement to its realization. The TSGP will be the longest in the world, stretching over the trying sands of the Sahara desert. Alexander Burgansky, the head of oil and gas research at Renaissance Capital, said that like any project of this technical complexity, be it in Africa or in Europe, it entails a long process of consensus-building over the ecological, technical, and financial aspects. He added that despite its long-standing economic and geopolitical significance, the joint-venture might be low on Gazprom’s priority list right now. Indeed, there was no mention of Nigaz, or any corresponding investment, in Gazprom’s 2009 financial statements and management report.

The realization of the TSGP has been repeatedly stalled since July of 2009, when Nigeria, Niger, and Algeria signed an agreement on the start of the construction. The anti-pipeline resistance in Nigeria, political tensions in Niger, and jihadists in Algeria pose a tangible security threat to the pipeline. Nigeria's militant Movement for the Emancipation of the Niger Delta (MEND), which had previously attacked Nigeria’s oil and gas infrastructure, threatened to attack the Trans-Saharan gas pipeline. Thus, the TSGP’s viability is still in question.

Despite Russia’s anticipated contribution to Nigeria’s gas utilization strategy, Russia is the world leader in gas flaring. According to the U.S. National Oceanic and Atmospheric Administration (NOAA)/World Bank Global Satellite Survey on Gas Flaring, Russia leads the list of all offenders worldwide, with 40.2 billion cubic meters flared in 2008, and Nigeria is second with 14.9 billion cubic meters. Russia lacks the infrastructure to connect gas pipelines controlled by Gazprom to oil wells run by others. There is also a lack of political will to provide incentives to oil producers for the capture and use of associated gas, for instance, in generating energy. Another reason is the regulation of domestic gas prices.

In Russia, extraction licenses are issued by the Ministry of Natural Resources and regions. Gas flaring regulations are determined locally, since the federal licensing standards do not include restrictions on flaring. In 2008, the World Bank developed a gas flaring reduction project, which would involve the utilization of associated gas that would otherwise be flared at the new gas power plant at the North-Danilovsk oil field in Western Siberia. The project is supposed to be financed by a supply contract between the plant owner and LUKoil. This and similar projects demonstrate that there are market opportunities for associated gas utilization in Russia.

In 2007, PFC Energy, an energy consultancy, conducted an economic study on the use of associated gas in Russia. The study concluded that even though significant volumes of associated gas are produced from small oil fields in regions remote from major gas markets, existing technologies would allow utilizing one third of the currently flared gas. As a result, $2.3 billion in incremental annual revenues will be generated at current prices. That is, of course, if gas transportation and utilization infrastructure is made available and market mechanisms are effectively introduced.

The estimated 150 billion cubic meters of gas flared annually in the world are equivalent to about 30 percent of the European Union’s gas consumption per year. In 2008, Russia flared 27 percent of the above amount. This means that the country wastes roughly a quarter of its annual supply to Europe, since Russia satisfies about 25 percent of Europe’s gas consumption. Why go to Africa then? The answer lies in the geopolitical arena.

Firstly, Nigaz is part of Gazprom’s ambitious strategy to expand its operations worldwide. Gazprom has just announced that it is looking into buying a U.S. shale-gas company to boost its expertise in shale extraction technology.

Second, on a broader geopolitical scale, Gazprom’s commitments in Nigeria imply its participation in an alternative gas transportation route to Europe via the Trans-Saharan gas pipeline. Nigaz is also part of the government’s strategy to boost its presence in Africa vis-?-vis Chinese, American, and European interests. The so-called “Africa strategy” of the Russian government is a reality that manifested itself in Medvedev’s visit to Nigeria, Egypt, Angola, and Namibia in June of last year to reaffirm Russia’s interest in a number of projects, ranging from a nuclear power plant in Egypt to the construction of dams in Angola.

The joint venture between Gazprom and NNPC is an example of Russia’s long-term, strategic interests in the world energy markets. However, it is not clear how these ambitious plans will help Russia to deal with its own lack of associated gas utilization infrastructure.

Irina Aervitz is the head of International Research and Analysis and an adjunct professor at George Mason University and the University of Maryland.
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