Nigeria’s dreams of replacing declining oil revenue with LNG exports might be short-lived, according to a new report by the International Institute for Sustainable Development (IISD). While the country pushes forward with massive LNG projects like Train-7, the report warns of several significant risks that could derail these plans.
One key concern is the competitiveness of Nigerian LNG in the global market after 2030. The report highlights that production costs in Nigeria are likely to be higher compared to major competitors like Qatar and the United States. This cost disparity is reflected in the “weighted average breakeven gas price,” a metric indicating the minimum price needed for projects to be profitable. Higher breakeven prices make Nigerian LNG more vulnerable to becoming stranded assets – expensive infrastructure that becomes uneconomical to operate.
The report states that a significant drop in global gas prices could render most Nigerian production commercially unviable. This price sensitivity, coupled with high production costs, could squeeze profit margins and discourage investment in the sector, ultimately impacting Nigeria’s export competitiveness.
“If global gas prices dropped below the domestic breakeven prices, most national production would become commercially unviable,” the report states. This raises concerns about the ability of Nigerian LNG producers to generate the expected revenue for the government.
Increased Competition and Shifting LNG Market Dynamics
The global LNG market is becoming increasingly crowded, with major players like Qatar and the US ramping up production capacity. This growing competition could further squeeze demand for Nigerian LNG, especially considering the potential for long-term contracts with European buyers to be broken if more attractive options emerge. As LNG exporters become increasingly exposed to global markets, even established offtake agreements might not guarantee sales.
“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.”
The report also highlights the new EU methane import performance standards as a potential hurdle. Stringent regulations on emission levels from upstream operations and LNG processing could restrict export opportunities for Nigeria if the country fails to implement measures to reduce its methane footprint.
Bathandwa Vazi, a policy advisor at IISD, emphasizes the dangers of relying on LNG as a replacement for oil revenue. “Proponents of LNG suggest that it can potentially replace the diminishing oil revenues, sidestepping the need for fundamental economic reforms,” Vazi says in the report. “However, 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 high prices for LNG, and continued sustained investment in LNG production and export capacity. All of these conditions are uncertain.”
Uncertain Revenues and the Looming Gas Glut
The report casts doubt on the ability of LNG to fully replace oil revenues. While long-term contracts offer some stability, a significant portion of LNG sales occur on volatile spot markets. Furthermore, the International Energy Agency (IEA) predicts a global gas glut in the coming decade as Europe seeks to diversify its energy mix and reduce overall gas demand. This potential oversupply could significantly depress LNG prices, impacting the projected revenue streams from Nigerian exports.
Proponents of LNG expansion argue that it can bridge the gap left by declining oil revenue. However, the report emphasizes the need for several conditions to be met for this strategy to be successful. These include sustained high international demand, consistently high LNG prices, continued investment in production and export capacity, and minimal disruptions from theft or social unrest. The report concludes that the likelihood of all these conditions being met is uncertain.
Stranded Assets
The report warns of a high risk of stranded assets due to the current global push towards net-zero emissions. As Europe, a major LNG importer, transitions away from fossil fuels, its demand for gas is expected to decline further. This trend, coupled with competition from lower-cost producers, could render new LNG infrastructure in Nigeria economically nonviable.
Furthermore, stranded assets pose a significant financial burden. The government would be forced to choose between writing off these investments or subsidizing operations to keep them afloat, potentially leading to a situation of “throwing good money after bad.”
“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 emphasizes that continued investment in LNG infrastructure undermines global efforts to achieve net-zero emissions by 2050. It argues that such expansion contradicts the implementation of green energy policies.
Recommendations
The IISD report urges Nigeria to address the fundamental challenges in its economic model. The think-tank recommends careful, long-term, scenario-based financial analysis before embarking on any state-supported LNG expansion projects.
The report emphasizes the importance of considering issues related to inequality, environmental sustainability, and dependence on fossil fuels. It also highlights the need for contingency plans to address the possibility of declining demand as new global LNG capacity comes online.
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If You Ask Me
Nigeria stands at a crossroads. While LNG offers a potential short-term solution, the report underscores the need for a more sustainable and diversified long-term economic strategy. By carefully evaluating the risks and exploring alternative pathways, Nigeria can navigate the evolving global energy landscape and secure a more prosperous future.
However, the country must prioritize economic diversification to avoid overreliance on a potentially volatile market. Investing in renewable energy sources and fostering domestic gas consumption could offer a more sustainable path towards a secure and prosperous future.
