Global Insight Perspective | |
Significance | Both sides confirmed that Gazprom, the world's largest gas producer, is in early talks with the Nigerian government on a potential multi-billion-dollar gas exploration and development deal that would see the Russian firm secure a position in the emerging gas industry in the West African country. |
Implications | The Nigerian government is keen to clinch gas deals with non-Western firms, so a potential agreement with Gazprom, which is eager to expand its operations to become a truly international energy giant, could accomplish this goal. |
Outlook | While Nigeria is looking to further develop its gas industry, Gazprom's potential entrance into Nigeria may signal the Russian firm's determination for the first time to compete with the Western supermajors for access to energy reserves in West Africa. |
Just Talks, But…
In what could be a definitive move to expand overseas, a spokesman for Gazprom has confirmed that the Russian gas giant is in talks with Nigerian officials about a potential gas exploration and development deal in the West African country. Gazprom spokesman Sergei Kupriyanov was tight-lipped about the company's potential investment, however, merely confirming media reports over the weekend and noting that, "We are interested in Nigeria, and the talks are under way." An unnamed senior Nigerian government official working on gas policy told Reuters that the Russian firm is looking to invest between US$1 billion and US$2.5 billion in Nigeria to begin with, stating that, "Gazprom has come twice to visit the federal government. They want to invest in Nigeria in gas exploitation, gathering and processing."
Although there are few details as of yet, with little in the way of discussion on specific fields, it appears that preliminary talks between Gazprom and Nigerian officials have been fruitful. A senior Nigerian official told Dow Jones that talks thus far have been "productive", with discussions focusing on Gazprom bringing technology to help Nigeria develop its gas reserves, along with the Russian gas giant's apparent willingness to build infrastructure such as gas processing facilities. Nigeria has proven gas reserves that rank the country in the top 10 in the world, but only in the past decade has it come round to focusing on the development and monetisation of its gas assets. With construction of several LNG export facilities and the West Africa Gas Pipeline, Nigeria is beginning to realise its gas development (and export) potential, and Gazprom is keen to join in.
While Western energy companies have long dominated Nigeria's oil sector, the country's energy officials are keen to attract investments from Chinese, Indian, and non-Western energy firms, hoping to strike deals that would help Nigeria improve its non-energy infrastructure as well as develop its oil and gas reserves. Furthermore, under the government of President Umaru Yar'Adua, Nigeria is seeking to reform its energy sector, albeit while pushing foreign energy investors to set aside a portion of their gas output to meet the country's growing domestic consumption needs, which are being driven by the use of gas for power generation, petrochemicals, and fertiliser. With domestic gas prices still capped by the government, Western companies are somewhat loath to supply gas to the local market when exports are far more profitable.
Outlook and Implications
Enter Gazprom, which is only too familiar with subsidising the local market, as it has done exactly that for years on its home territory. Although officials from the Russian firm have reportedly voiced their concerns about the profitability of exploring and developing gas in Nigeria with the government's mandates to supply the local market, it appears that Gazprom believes that the political benefits (and longer-term geostrategic gains) of an investment in Nigeria's gas industry may outweigh any short-term economic losses. With Nigeria poised to increase gas production (and reduce gas flaring under the country's planned "no flare" policy from the end of this year), the West African country is positioning itself to become a more important player in the emerging global gas market.
Hence, by entering into the Nigerian industry now (or later this year, assuming the current talks lead to a deal), Gazprom will benefit in two ways. First, the Russian gas firm will further its own goals of expanding overseas, diversifying its portfolio with what is likely to be a major exploration and development deal. In addition, any deal with Nigeria will put Gazprom in more direct competition with the Western supermajors, demonstrating the Russian government's determination to begin to exercise its political and economic clout beyond the country's borders, using the state-owned energy giant as a proxy in Russia's battle to regain influence around the world. Gazprom hopes to benefit from Russian government assurances to the Nigerian government, while the Russian government stands to gain influence in Nigeria (and the wider West African region) by inking a non-commercial, energy-and-infrastructure deal from which Western energy companies would surely shy away.
What's more, by agreeing to supply the Nigerian market, Gazprom will also control some Nigerian gas that could potentially compete with Russian gas for a share of the European market. Gazprom could divert some of its Nigerian gas production to the domestic market, reducing the overall gas volumes available for export from Nigeria, and thus reducing Nigeria's ability to supply Europe, even as the Russian gas giant ensures that some of the gas that Nigeria exports is controlled by Gazprom. By agreeing to a deal with Nigeria, Gazprom not only will compete with the Western supermajors for access to energy in a new playing field, but could also shore up its southern flank in the battle with African gas suppliers for European market share.