WHO WILL GET NIGERIA'S NATURAL GAS? (CORRECTED

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000640

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E.O. 12958: DECL: 10/20/2016
TAGS: EPET ENERG PGOV NI
SUBJECT: WHO WILL GET NIGERIA'S NATURAL GAS? (CORRECTED
COPY)

REF: A) LAGOS 00208 B) 06 LAGOS 01358 C) LAGOS 01365

Classified By: Ambassador Donald McConnell, Consul General a.i.; Reason
s 1.4 (B,D)


1. (C) Summary: Godwin Billy Agha, Deputy Director, Gas
Division, Department of Petroleum Resources told Pol-Econ
Chief that the Government of Nigeria (GON) has shifted its
priorities from gas to export to gas for domestic use.
Currently, there is not enough gas to feed into export
projects awaiting completion. Agha catalogued problems with
the West African Gas Pipeline (WAGP) and the OK and Brass LNG
projects. End Summary.

How Much Gas; Who Will Get It?
--------------


2. (C) Godwin Billy Agha, Deputy Director of the Gas
Division, Department of Petroleum Resources (DPR) told
Pol-Econ Chief that the government's shift in priorities from
export to domestic use for the nation's natural gas will be
reflected in new gas regulations which are ready to be
promulgated. Agha suggested that the owner of an LNG plant
would not be allowed to supply the LNG plant with gas. Such
a regulation would allow each plant to buy from many
different sources and prevent the owner of the gas from
subsidizing the plant, Agha said.


3. (C) Reserves, as calculated by the international oil
companies (IOCs),are not all proven and much more investment
will be needed to prove them, Agha said. The Brass LNG
project may not be able to prove its reserves for 20 years
because, he opined, the reserves "are just not there." Nor
are all gas reserves recoverable, he warned. Some gas is
"stranded", that is there is no infrastructure in place to
allow the gas to be gathered and connected to markets.


4. (C) As a result, Agha believes that there may not be
sufficient gas to support all the LNG projects currently
planned. (Note: NLNG executives suggested the same thing;
see Ref. A. End Note) Nigeria's first priority must be
domestic; "keeping Nigeria alive" necessitates serving the
domestic market first. Gas is needed to run the aluminum
smelter in Ikot Abasi, Akwa Ibom State; and iron ore
processing facilities in Warri, Delta State, and Adjobata,
Kwara State. Gas could also be used as feedstock for
fertilizer production (Note: The country currently imports
most fertilizer. End Note) and as fuel for the refineries.


5. (C) Despite the uncertainty about gas availability, there
are many investors whose plans require large quantities of
natural gas for export. Agha ran down the prospects for and
problems with each project:

West Africa Gas Pipeline Plagued with Problems
-------------- -


6. (C) The West Africa Gas Pipeline Company (WAGPCO),made up
of Chevron, Shell and the Nigerian National Petroleum Company
(NNPC),is the consortium supplying Nigerian natural gas to
the West Africa Gas Pipeline (WAGP). Chevron and Shell have
been plagued with problems in gathering the gas and moving it
through NNPC pipelines to the WAGP.


7. (C) Alagbado Connecting Line: Feed for the WAGP is
intended to come from onshore fields, primarily Chevron's
Escravos field and secondarily Shell's Sapele-Oben field via
the Escravos to Lagos Pipeline (ELP). A connecting line from
Alagbado is planned to carry gas from the ELP to the WAGP.
Willbros, an oil services company, won the contract to lay
that connecting pipeline. However, the company ran into
difficulties (see Refs B,C) and ultimately sold the business
to Ascot, a Nigerian firm. Ascot did not realize how

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difficult engineering for the job would be, Agha said. The
terrain through which the pipeline runs is very difficult and
requires a far higher level of engineering than Ascot can
provide. Ascot wants to renegotiate the contract, but "no
one is talking to them", Agha said. The connecting pipeline
would also carry large quantities of gas from fields offshore
Escravos, Agha said.


8. (C) Chevron Pipeline, Gas Storage Problems: Upstream from
Alagbado, the Shanomi Creek pipeline that feeds into the ELP
trunk line has been vandalized. Chevron,s Escravos fields
produce associated gas (AG),that is, gas that is found with
oil. However, the Escravos tank farm provides storage and
off-loading facilities only for oil. As a result, all AG
found in the area is currently being flared.


9. (C) Shell Condensate Disposal Problem: Shell,s
Sapele-Ogben field is gas-rich. However, the gas contains a
high level of natural gas liquids (NGL),benthene and C5
condensate. The Egbin thermal power plant in Lagos can use
gas as fuel but only if it is condensate-free. In order to
get the gas to Egbin, space in the Escravos-Lagos pipeline
must be created. Shell pumps the gas with condensate to
Warri, where the Warri Refinery has a condensate holding
tank. However, the tank is damaged, and consequently must be
evacuated often or backflow will occur and create problems at
Egbin. To avoid these problems, Shell has been pumping some
condensate directly to the jetty. The company is seeking
bidders on a contract for condensate disposal.


10. (C) Another problem facing the WAGP is that a leak has
been discovered in the pipeline between Lagos Beach and
Ghana. The leak is difficult to find because the line is
buried underground offshore. Agha predicts it will take a
long time to find and repair the leak.


11. (C) A third major problem with the WAGP is that large
rocks between the pipeline and the shore of Ghana make
installing a connecting pipeline difficult. A solution must
be found to remove or reduce the size of the rocks that lie
along the shore. In addition, the pipeline will have to be
angled so as to create a sufficient gradient to allow gas to
flow. These are large engineering hurdles to overcome, Agha
said.

OKLNG: Obasanjo's Home State Project
--------------


12. (C) Chevron and Shell are partners in the Olokola
Liquefied Natural Gas facility (OKLNG) which will produce gas
for export. Former President Obasanjo took a keen interest
in this project, seeing it as a way to transform Ogun State,
where he has his farm, into an oil and gas producing state.
To accomplish this, he forced a change in the location of the
project from Delta State to the border between Ogun and Lagos
states. However, by the time the OK project was on the
drawing boards, Agha said, the Government of Nigeria had
begun to have second thoughts about using for another plant
the same model on which the Nigeria Liquefied Natural Gas
(NLNG) project had been built (See Ref A) for another plant.
NLNG was a huge success but on terms very favorable to the
investors and less so to the GON, in the government's view.
NLNG buys gas, which includes both condensate (the equivalent
of light crude oil) and Liquefied Petroleum Gas (LPG) in
volume then sells the resulting LNG in energy value.
According to Agha, the government believes it gets no profit
from this arrangement and feels shortchanged.


13. (C) As a result, Agha said, the government decided not to
use the NLNG model for the OK plant. OK was created as a
tolling project. Each supplier company owns the gas it sends
to the plant. Chevron has announced that before sending the
gas to the plant, the company will separate the gas into LPG

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and condensate, measure each, then recombine them and send
the recombined gas to the plant where it will be processed
into LNG and condensate. Chevron will pay for processing the
gas and will collect its own condensate at the end of the
process.


14. (C) Front-end engineering for the OK project has been
completed. There are some supply issues and some metering
issues that have had to be resolved. In addition, the
pipeline from the plant to the ships will be very long,
creating numerous engineering problems similar to those faced
by the Brass LNG project, Agha said.

Brass LNG: Expensive Engineering Problems
--------------


15. (C) At a cost of USD 8.8 billion, the Brass LNG plant is
the most expensive of all the plants planned for Nigeria. A
consortium made up of Total, Shell and Conoco Phillips will
supply gas to the facility. The major problem with the plant,
aside from its expense, is that the pipeline that takes the
LNG from the plant to the ships is eight kilometers long.
This is because there is a very gradual dropoff, making it
impossible for deep draft vessels to come in close to the
shore to load. In addition, the high level of sedimentation
near the shore makes it difficult to dredge to a depth
required by ocean-going vessels. The gas, which is liquefied
by cooling, must remain at -161 degrees Fahrenheit as it
passes through the 8 kilometer pipeline so that it will flow
as a liquid; if the temperature in the pipeline goes up, the
LNG will turn back into gas, and escape upon loading, Agha
said.


NLNG: Sweet Deal Guaranteed Add-On Trains
--------------


16. (C) The agreements initiating the Nigeria Liquefied
Natural Gas Project provided that any expansion of the
project be on the same favorable terms as were granted for
construction of Trains 1-3. The project makes money both on
the exported gas and on condensate. Train 7 is now on line,
Agha said and the company plans to add additional trains.


17. (C) Comment: Nigeria's Minister of State for Petroleum
Resources told the press on the margins of the recent OPEC
meeting that the government is exploring new mechanisms for
funding joint venture oil and gas operations. His comment
may mean the GON is showing a new willingness to pay its
rightful share of the cost of exploration for new fields and
to prove reserves to provide gas for both domestic and export
use.
MCCONNELL