Global Insight Perspective | |
Significance | The European Union and Russia appear to be competing to play the leading role in the development of a US$21-billion 4,300-km pipeline that would carry Nigerian gas to the Mediterranean. |
Implications | There are a number of factors—political and geographic as well as economic—that need to be considered before embarking on such a large-scale project, but Nigeria appears keen to proceed. |
Outlook | Nigeria has a successful LNG export facility and wants to further monetise its gas resources, but Global Insight believes this project is very much a long-term one, even if it receives government approval. |
Europe Vs Russia
The European Union (EU) and Russia are now competing against each other over a proposed 4,300-km pipeline that would carry Nigerian gas from the West African country through the Sahara Desert and Algeria to the Mediterranean. Andris Piebalgs, the EU energy commissioner, visited Nigeria earlier this month to once again state that the EU saw Nigerian gas as an important source, seeing it as a way to diversify its gas supplies and increase Europe's energy security. The US$21-billion planned Trans-Sahara Gas Pipeline (TSGP) could supply up to 30 bcm/y of gas to Europe as early as 2016, though this time-frame is optimistic. The EU could use its influence to help co-ordinate the project—which involves Nigeria, Niger, and Algeria—and the European Investment Bank (EIB) could assist in financing the project. Piebalgs told the Financial Times recently: “We need to follow where the Nigerian government is leading us, and the Nigerian government is very clearly leading towards a pipeline. That means we should be more engaged in the trans-Saharan gas pipeline.”
The EU has been shocked into action by Russia's recent conflict with Georgia and by the fact that earlier this month Russian gas giant Gazprom signed a memorandum of understanding (MoU) with NOC the Nigerian National Petroleum Corp. (NNPC) to co-operate on oil and gas projects in Nigeria. Few details were disclosed, but an NNPC spokesman, Levi Ajuonoma, said that the MoU covers oil and gas exploration, as well as power. The agreement follows the announcement at the start of the year from Gazprom that it was considering a multi-billion-dollar investment in Nigeria. Gazprom's potential participation in the TSGP—indeed, the Russian gas giant's interest in investing in Nigeria—appears to flow from a desire by the Russian government to once again project its power on the world stage, this time as an energy superpower, if not a military superpower. Gazprom is surely interested in expanding its reach beyond Russia, thereby diversifying its commercial portfolio geographically, but the state-run gas firm is increasingly being used by the presidential administration at the Kremlin as the business tool of the government's political aspirations in the international arena. No sooner do Russian leaders visit a country than Gazprom officials sign an "energy co-operation" agreement with the host government's state oil and gas firm, vowing to boost economic ties between the two countries in the all-important energy sphere—an area in which Russia clearly can wield substantial influence, even if the country's own oil production is stagnating.
With respect to the Trans-Sahara pipeline, Gazprom could well be of two minds, figuring that its involvement will lend the project some credibility as a possible future export option for Nigeria but will also effectively neutralise the pipeline as a potential alternative supply corridor for Europe. Striking a deal with Nigeria allows Gazprom to expand its operations in Africa while announcing Russia's intentions to compete with the entrenched Western energy firms on the continent, while Gazprom can simultaneously hedge its bets with regard to the TSGP: either the pipeline goes forward with Gazprom's involvement (thereby thwarting Europe's attempts to free itself from Gazprom's dominance as a supplier, even if it diversifies supply sources) or the project never gets off the ground, in which case Gazprom effectively kills off the threat of possible competition from Nigerian pipeline gas for European market share.
Despite the EU recent declaration of support for the TSGP, closer analysis reveals questions about its ability or, in fact, the need for it. Global Insight has identified 21 current planned major pipeline projects that have been proposed to date for the development of export capacity to Europe or the expansion of transit capacity across Europe. There is also currently 268 bcm/y-worth of LNG regasification projects being proposed for Europe. Despite the reported delays in many of these infrastructure projects, Global Insight believes that not all planned pan-European import pipelines are required to meet expected European gas-demand growth, especially if demand destruction occurs as a result of high gas prices. If gas-to-gas competition fails to develop, or gas prices are not brought into line with competing coal prices, this will have implications for European gas demand and lead to demand destruction. Quite apart from whether the demand is in the European market in the first place, the political and commercial backing required for a project of this size might be hard to drum up in Europe. Member states and companies involved in the Nabucco pipeline to pump Caspian (or possibly Iranian) gas to Austria bypassing Russia, have been held up repeatedly over a lack of supply contracts and political interference, particularly from the United States.
Algeria's Role
Algeria has recently seen increasing amounts of gas being discovered in its south-central Sahara region, with a number of pipeline projects being built and considered for transporting the volumes north to its Mediterranean coast. The TSGP would in this regard fit well into ongoing plans and projects, and be able to draw on existing surveying and projecting work. Indeed, it is quite possible that it will run alongside with, or be integrated into, the main Algerian gas pipeline transporting production from the Reggane basin and the In Saleh gas treatment hub.
While Algeria has suffered—and continues to suffer—its own terrorist insurgency, the nature of the movement is more urban and semi-urban, being confined to the country's densely populated and mountainous northern parts. Its insurgents largely lack the logistical capability to mount attacks deep into the Sahara desert, where the Algerian military's hold has been strong. Pipeline security has also been well maintained, even during the 1990s, when the insurgency was of civil-war proportions for several years.
The main gain for Algeria will be the enhancement of its strategic position vis-à-vis the European gas markets. Already a key gas supplier to Europe, the North African country has been keen to strengthen its market power, signing co-operation agreements with Russia and promoting larger greater collaboration between the world's gas producers—possibly within an OPEC-like framework. Algeria has also tried to influence the world's gas producers to strive to abandon the practice of tying their exports up in long-term contracts, working to create a more fluid gas market both within the LNG sector and within piped gas. Whether or not it is followed by others in this, it has committed to start implementing these strategies itself as its own long-term sales contracts expire, and it is likely that Sonatrach would attempt to influence the Trans-Saharan pipeline consortium in this direction, to achieve greater pricing flexibility.
Outlook and Implications
The project's underlying raison d'être is to utilise Nigerian gas, and the choice of partner will ultimately be made by Nigeria's federal government. The country's Minister of State for Energy (Gas) Emmanuel Odusina earlier this year said that, after detailed study of Nigeria's gas reserves, the country intends to put aside 14 tcf of gas for the TSGP. The pipeline's departure terminal is expected to be Brass in the Niger Delta; it will then traverse Niger on its way to its arrival terminal in Algeria (either Beni Saf or El Kala). With Nigeria's gas minister approving the utilisation of 7% of the country’s gas reserves, which are estimated at 185 tcf, the project is beginning to take shape. Nigeria's federal government is setting out its gas master plan at present, and waiting for legislation to be approved by parliament that will prioritise gas for domestic demand over more lucrative LNG exports. However, due to the higher gas prices attained on the international markets new gas export projects are still expected to receive governmental approval, especially as Nigeria is looking to several new projects to monetise gas resources at its disposal as it strives to reduce the massive and widespread flaring that currently occurs in the country.
Two LNG exports projects, Brass and Olokola, are awaiting their final investment decision, but due to the continued insecurity in the Niger Delta, where militant groups sabotage pipelines and oil-company infrastructure, the Western oil majors are reluctant to approve multi-billion-dollar investments in projects when the safety of their own workers cannot be assured. The violence in the Delta perhaps gives encouragement to those proponents of the TSGP, but the pipeline itself has to travel through Nigeria. It also has to traverse Niger, where it could be targeted by Tuareg rebels, although the government of Niger is committed to the project.
Nigeria has not fared well with the previous regional pipeline built to export gas to the wider region. The West Africa Gas Pipeline (WAGP) is more than 25 years in the making and, despite signs the pipeline is ready to export gas to Togo, Benin, and Ghana, the facility is still not fully operational. This poor performance should concern potential partners for the TSGP, particularly since Nigeria has had great success in exporting LNG—as the six-train facility on Bonny Island demonstrates. The Nigerian government has said it is looking to become less reliant on the Western majors that dominate its oil and gas sector—and this should please Russia—but Nigeria will gladly deal with either party if they can commit to the project. Given the geographical expanse between Nigeria and Europe, and the potential for political stumbling blocks, the TSGP has to present a more convincing case for its construction than the simple principle of diversity of supply.