Nigeria is embarking on a major expansion of its Liquefied Natural Gas (LNG) footprint with projects like the Train-7.
However, a new report by the International Institute for Sustainable Development (IISD) highlights several risks that could impact the country’s LNG ambitions.
The report, titled “A Balancing Act: Considerations for the Expansion of Liquefied Natural Gas Projects in Nigeria,” authored by Bathandwa Vazi and Richard Bridle, cautions against relying on LNG export revenues as a replacement for dwindling oil revenues.
The study points out that Nigerian LNG exports might struggle to compete on the global market after 2030 due to higher production costs compared to key competitors.
One of the key risks identified in the report is the high breakeven gas prices for Nigerian LNG projects.
”These prices, which reflect the relative costs needed for projects to be economically viable, imply increased vulnerability to stranded asset risks if global gas prices fall below domestic breakeven levels.
”High production costs and lower profit margins could impact investment decisions and market competitiveness, making Nigerian LNG less attractive compared to cheaper alternatives from other countries,” the report stated.
Nigeria currently exports about 60% of its LNG to Europe. However, the report warns that these contracts may not fully protect Nigeria from a global downturn in demand.
”New EU methane import performance standards could also impact export opportunities, depending on the emission levels from Nigeria’s upstream and LNG operations,” the report warned.
The report highlights the potential for new LNG infrastructure to become stranded assets. It states that while global LNG prices may remain above production costs, new investments in LNG infrastructure are unlikely to recover their capital if global demand falls or if cheaper competitors dominate the market.
”This scenario could force the Nigerian government to either write off such investments or provide subsidies to keep projects operating, potentially leading to financial losses,” the report stated.
The study notes that major LNG exporters like Qatar, Australia, and the United States are ramping up their gas capacity and improving infrastructure, making them more competitively placed against smaller players like Nigeria.
”Additionally, global commitments to net-zero emissions by 2050 could reduce demand for fossil fuels, leaving LNG assets stranded and undermining global climate targets,” it noted.
The IISD report stresses the need for Nigeria to address the challenges in its economic model and consider long-term, scenario-based, and sound financial analysis before expanding LNG projects.
It calls for careful contingency planning to account for the possibility of falling demand and emphasizes the importance of addressing issues related to inequality, environmental sustainability, and economic dependence on fossil fuels.
While Nigeria has high hopes for its LNG sector, the report by IISD suggests that the path to replacing oil revenues with LNG export revenues is fraught with significant risks.
”Careful consideration and strategic planning are essential to ensure that the expansion of LNG projects contributes positively to Nigeria’s economic future without leading to stranded assets and financial losses,” the report concluded.