Insurgency, non-passage of PIB leads to rise in cost of oil, gas projects

Militants26 February 2014, Lagos – Heightened insecurity in Nigeria, due to the Boko Haram increased attacks, has triggered an unprecedented rise in the costs of execution of oil and gas projects, THISDAY investigations have revealed.

Oil industry sources hinted yesterday that the spate of violence in Nigeria, particularly in the northern region, plus the renewed attacks on oil facilities and abduction of expatriates who work for oil companies located in the Niger Delta area, have pushed up costs of doing business in Nigeria’s oil and gas industry by about 100 per cent in the last two years, as Nigeria is now regarded a “high risk area”.

Investigations further revealed that most foreign and local firms that signed contracts with firms in Nigeria for the execution of various projects in the oil industry are seeking the renegotiation of contract sums on the grounds that the environment is highly insecure for business.
It was also reliably gathered that some projects have been abandoned, while the execution of others have been stalled because contractors handling such projects are reluctant to continue with the jobs for fear of attacks.

An industry expert confirmed that most contracting firms now turn down oil and gas jobs, while foreign experts develop cold feet once they are assigned jobs in Nigeria owing to security concerns.
He said the execution of drilling contracts had suffered major setbacks due to disagreements that arise in contracts renegotiation.

According to him, contracting firms argue that oil drilling is about the most expensive and difficult terrain in the industry because of the high cost of renting of oil rigs.

He admitted that Nigeria obviously has immense potential in oil and gas growth, but expressed fears that security challenges have become a major threat to Nigeria’s petroleum industry and the economy as a whole and urged the federal government to speedily arrest the situation by creating a conducive environment for sustaining investors’ interests in the oil and gas sector.
He said investors are now channelling their businesses to countries with investment climates, both in terms of the environment and regulations.

The lack of enabling environment for business to thrive, he added, has not only resulted in job losses, but has placed a huge financial burden on government and oil companies, especially the upcoming ones that depend on foreigners for the execution of highly technical oil service jobs due to the lack of in-country capacity.

THISDAY was also that aside from the various oil exploration and production contracts that have been affected, major gas projects affected include the Trans-Sahara gas pipeline project, the Olokola Liquefied Natural Gas (OKLNG) project, Brass LNG project and Russian Gazprom $25 billion gas project.

Multinational oil firms, Shell and Chevron had pulled out of the OKLNG project, citing security concerns, uncertainty around the Petroleum Industry Bill (PIB) and what they described as the non-commitment on the part of the government to pursue the completion of the project.
Also, ConocoPhillips’ decision to pull out of the Brass LNG project had been attributed mainly to security issues and delay in the passage of the PIB.

It was also feared that the Russian government might have jettisoned its plan to invest $25 billion in the development and production of Nigeria’s natural gas reserves owing to rising security issues in Nigeria.
The Nigerian National Petroleum Corporation  (NNPC), in 2008, signed a Memorandum of Understanding (MOU) with the Russian gas export monopoly, Gazprom, for joint venture projects scheduled to begin in 2015.

Another major project whose cost was skyrocketed owing to security concerns is the multi-billion dollars Trans-Sahara gas pipe project. The project cost is up by about 100 per cent, bringing it to $20 billion, from the $10 billion initial estimated capital cost.

The gas pipeline network project, which attracted the European Union and Russian energy majors, would transport Nigerian gas to Europe across the Sahara desert,
The project would send up to 30 billion cubic metres a year of gas to Europe via a 4,128km pipeline from Nigeria via Niger and Algeria, but has suffered years of setbacks due to security concern.

Gazprom, France’s Total and Anglo-Dutch energy giant Royal Dutch Shell, were among international firms that expressed interest in participating in the project.

President Goodluck Jonathan had tacitly confirmed the rise in the project cost recently in the Ethiopian capital, Addis Ababa recently, but assured Nigerians that the federal government was making frantic efforts to ensure the Nigeria-Algeria gas pipeline project is ready by 2015.
Jonathan said the $20 billion trans-saharan project, when completed would transport natural gas from Warri through Niger Republic to Algeria and to Spain and Europe.
The massive gas project would be jointly operated by NNPC and Sonatrach of Algeria, both of which would hold 90 per cent of the equity interest in the project.
He said government had mobilised $700 million to support the completion of the Nigeria-Algeria natural gas pipeline project.

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