Strategy 4 Gas Flaring

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SPDC Corporate Strategy for Ending Gas Flaring in Nigeria Oslo June 2001 - 1 -

Shell Nigeria Corporate Strategyfor Ending Gas Flaring

A Paper Presented by

BASIL OMIYIExternal Relations Director,

Shell Petroleum Development Company of Nigeria Limited

AT A SEMINAR ON GAS FLARING AND POVERTYALLEVIATION IN OSLO, NORWAY, JUNE 18-19, 2001.


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Mr. Chairman,Co-presenters,Distinguished Ladies and Gentlemen.

It is my great pleasure to share with you the experience of the Shell

Petroleum Development Company of Nigeria Limited (SPDC) on gasflaring, an issue of primary importance to Nigeria and the rest of theworld.

I will in the short time allocated to me, share with you SPDCs long-standing concerns about gas flaring in Nigeria and all efforts since theearly days of oil production in the country to turn this waste to value.

I will also share our strategy, for the country to derive economic valuefrom flared gas through promotion and participation in gas utilization

programmes like: gas to power plants, gas as feedstock to petro-chemical plants, gas re-injection for oil reservoir management, gas conversion to LNG after some 30 years of trying, and most recently use of gas as fuel for local industries

I will describe our commitment to stopping routine gas flaring by 2008,an undertaking that requires some US$4.85 billion of Joint Ventureinvestment over eight years.

With some 120 trillion cubic feet (about 20 billion barrels oil equivalent,boe) of gas, Nigeria has the 10 th largest reserves in the world andsecond only to Algeria on the African continent. In energy terms, thereserves of natural gas in Nigeria is at least of the same order as thereserves of crude oil. Economic exploitation of the gas reserves,particularly putting the gas currently being flared to economic use, hasbecome of great concern to Nigeria. SPDC is the oldest and the largest

oil and gas producer in Nigeria and also the pioneer in gas utilisationefforts of the country.

On the average, about 1000 standard cubic feet (scf) of gas is producedin Nigeria with every barrel of oil. Therefore, with oil production of some2.2 million barrels per day, about 2.2 billion scf of associated gas isproduced everyday.

However out of the total associated gas produced about 17 per cent isre-injected, 33 per cent is used commercially and the remaining 50 percent flared.


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Why Gas Is Flared In Nigeria

Nigeria has been compelled by a combination of historical, economic,and geographical factors to flare gas. They include the following:

Limited numbers of appropriate reservoirs conducive for gas re-injection/storage and the economies of doing so.

The huge cost of developing major and inter-connecting network ofgas pipelines.

Low technological and industrial base for energy consumption in thecountry.

Limited regional and international gas market Inadequate fiscal and gas pricing policies to encourage investment

The difficult terrain of the Niger Delta which hindered the gasgathering process.

History of SPDC Gas Utilisation

SPDC has been concerned about gas flaring since the start of oilproduction in Nigeria. In SPDC, the volume of solution gas (gasproduced along with oil) is between 6 and 8 per cent of the companystotal hydrocarbon reserves in energy terms. Crude oil is about 44 percent of the hydrocarbon reserves, condensate 23 per cent; and non-associated gas, some 27 per cent. The remaining 20 per cent is the gascap in the same reservoir as oil but not dissolved in it. It is from theassociated gas in solution, which is some 6-8% of SPDCs hydrocarbonreserves that flaring is done and this issue has been the subject of socio-

economic and environmental debate.The company believes that the associated gas being flared could beused to economic advantage for the country. SPDC has demonstratedthis belief, not only in pioneering gas utilisation, but it has pursued agrowing gas utilisation programme since 1960s. This gas utilisationprogramme has grown progressively as follows, and this is illustrated infigs 1 & 2:


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Figure 1 - History of SPDC Gas Utilisation

Figure 2 - Domestic Gas Sales

1962: commenced the supply of piped gas to industries at Aba andPortHarcourt


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I963-65: Gas for electricity generation to the National Electric PowerAuthority (NEPA) plants in Afam and Delta Power Station.

1976: The establishment of the Port-Harcourt Refinery gave a bigboost to the gas utilisation programme.

1976 : Supply of gas to NEPA power stations at Sapele

1986: Gas supply to Delta Steel Company, Aladja.

1987: Supply to National Fertiliser Company of Nigeria (NAFCON).

1988: Gas supply to Ajaokuta Steel Plant.

1989: Another NEPA station, Egbin Station, started to receive

supplies. 1998: Piped gas supply to Aluminium Smelter Company (ALSCON)

commenced.

1998: The Shell Group incorporated Shell Nigeria Gas (SNG) to boostgas utilisation by promoting it as fuel of first choice in industry.

1999: The Nigerian LNG project began operation and to export LNG.Shell has been involved in the various attempts to promote the projectsince the early 1960s.

Under the companys gas flares-out policy, no new field isdeveloped without a comprehensive plan for the immediateutilization of the associated gas produced from it.

Major On-going Gas Gathering Projects

In order to actualise the companys gas utilisation programme, some 7major gas gathering projects have been initiated to gather associatedgas from over 52 of the companys 87 flowstations. They are listed andgeographically presented in fig. 3 below.


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Figure 3 - Gas Gathering and Utilization Projects

Soku Gas Project: Completed and already delivering some 60 million

scf/d to NLNG as from the first half of 2000. Additional supplies toNLNG later, will raise total supply to some 200 million scf/d by the endof 2001.

Obigbo North AGG: It will take some 100 million scf/d of AG fromnumber of fields to the north and east of Port-Harcourt. AG will besupplied to the NEPA power plant at Afam, the NAFCON fertiliserplant and ALSCON.

The Odidi Project-This project will take gas from the flares of Egwa,

Batan and Odidi fields; and would supply about 80 million standardscubic of associated gas initially to the Nigeria Gas Company (NGC)and later to the NLNG Train 3.

Cawthorne Channel Project- This is SPDCs largest gas gatheringproject, which will supply 200 million scf/d of associated gas from fouroil fields to local markets and the NLNG Plant, Bonny.

The Forcados Yokri Project: It will collect some 80 million standardcubic of associated gas from four flow stations. The gas will becombined with associated gas from Odidi and taken by Offshore GasGathering System (OGGS) to the NLNG Plant at Bonny.


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South Forcados Project-The project will gather 160 million standardcubic feet of associated gas from Tunu area.

The Belema Project is also moving into the construction phase.Already some 50 million scf/d of AG from Belema and Odeama fieldsis being sent to Soku for supply to NLNG Trains 1 and 2.

Major Future Gas Gathering Project

For the country to actualise its dream of growing its oil production tosome 4 million barrels per day in 2010, SPDC has to increase its outputof oil proportionately. This will mean an increase in the production ofassociated gas, that must be put to economic use. SPDC plans to

achieve this by gathering and supplying the gas to planned future Trains4 and 5 of the NLNG plant as well as supply to power generation plants.Currently envisaged gas gathering projects are as follows:

Greater Ughelli Project: This involves gathering AG from thesurrounding oil fields. More than 60 million scf/d will be gatheredbetween 2001-2002 for supply to the Delta power station and otherindustries in Delta State. Later additional production will be sent toNGCs Escarvos Lagos Pipeline System to supply industries in Lagosand the planned West African Gas Pipeline.

The Otumara Gas Gathering Project: This involves gathering 80million scf/d from oil fields to the north of the Forcados Estuary.

The Oguta Gas Gathering Project: Here, associated gas will beinjected into the oil field to maintain pressure in the reservoir, andGbaran/Ubie will supply gas to the NLNG Train 4.

Details of On-going Gas Utilization Programme :

Fig. 4 below shows the build of gas utilisation projects and how theycontribute to achieving SPDCs flares-out programme by 2008.


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Figure 4 - Gas Utilisation Programme

Gas to Domestic Industries:

(Yellow Colour on Fig. 4)

Shell Nigeria Gas, a gas transmission and distribution company, wasincorporated in 1998 as a major step towards effective gas distribution toindustries in the country. Unlike the NLNG, which aims at theinternational market, the company aims at gas penetration into industriesin the domestic economy.

The company will take gas to the fences of about 50 to 60 industrial

customers in the first phase, to which over US$38.8 million has beencommitted. Among the company's customers are factories andcommercial centres which use significant quantities of energy for theirbusinesses; industries which use natural gas as feedstock for theirproducts; and businesses which require permanent change to thereliable supply of fuel and feedstock.

Gas supply to industry is a win/win for the community, the industry, thegovernment, the gas supplier and gas distributor. The gas supplier anddistributor benefit because hopefully it will be a reasonably profitablebusiness. Industry benefits by having a more reliable and cheaper fuel,leading to cheaper products. The government benefits by having oil


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substitution, thereby making more oil available for export. Thecommunity benefits by having a more vibrant economy, moreopportunities for employment and cheaper products. And lest we forgetthe environment benefits by having a cleaner burning fuel.

Gas as Feedstock for Industry:(Brown Colour on Fig. 4)

This is principally a product for larger companies, such as fertilizercompanies or for the manufacture of urea and ammonia. Basically anagricultural country, the importance of fertilizer to Nigeria andgovernments food security programme cannot be underestimated. Ourcurrent major customer is the National Fertilizer Company of Nigeria(NAFCON).

Gas for Power Generation:

(Pink and Orange colours for ALSCON on Fig. 4)

Gas supply for power generation has been a long running strategy forgas utilization in Nigeria. Power generation clearly offers a large marketfor gas in Nigeria. Nigerias generating capacity is approximately6000MW, of which 4000MW is thermal.

It is estimated that as much as 3500 MW of auto-generation capacityhas been installed by industry, commerce and residential customers dueto the poor reliability of the public electricity supply system.

In the short to medium term, gas could displace diesel in auto-generation, as a fuel for gas engines, for industrial consumers whosegenerating sets are capable of conversion or due for replacement. Andin larger installations where gas turbines offer improved economics,perhaps in co-generation facilities, which produce both power and

steam, gas would definitely be the fuel of choice.The government has announced emergency plans to encourage theinstallation of a number of medium scale gas fired thermal power plantsby private investors (Independent Power Producers or IPPs). Theabundance of gas, the comparatively lower cost and short constructiontime make gas-fired generators attractive in comparison withhydroelectric schemes.

The Federal Government has charged NEPA with ensuring availability of

10GW (10,000MW) by 2005 and 25GW by 2010. SPDC has been invitedto support the Governments plans to develop up to 2000 MW of


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additional thermal power capacity for the nation. Additionally SPDC isactively engaged in the development of power generation projects andhas commenced talks for a memorandum of Understanding with NNPC,NEPA, and the Federal Government for this purpose.

Compressed Natural Gas (CNG) for Vehicles:

The use of compressed natural gas (CNG) as a relatively cheap andclean transport fuel could make good economic sense for Nigeria.However, with a conversion cost of typically around US$1000 for a car,generally old vehicle stocks and limited facilities for filling fuel tanks,private motorists and commercial vehicle operators in Nigeria areunlikely to rush to convert. But with expanded gas infrastructure,competitive fuel costs and a growing economy, CNG should gainpopularity with industrial fleet and major commercial vehicle operators.

In view of this, SPDC is pioneering demonstration and promotionalprojects in this regard, which entails conversion of some 60 vehicles toCNG use with the collaboration of Nigerian Gas Company.

Liquefied Natural Gas:

(Light Blue and Red stripes on Fig. 4)

The domestic market can only take a fraction of existing reserves. Shellbelieves that securing reliable export markets is therefore key to majorgas utilisation. After 30 years of abortive attempts, 1995 saw the finalinvestment decision of the re-launched flagship NLNG project at Bonnyat a total cost of some US$3.8 billion.

Shell has a 25.6 per cent shareholding in the Nigeria Liquefied NaturalGas Company (NLNG), and is also the technical adviser to NLNG. Theother partners are NNPC (49%), Totalfinaelf (15%), and Agip (10.4%).

In addition, SPDC supplies more than half of the gas requirements of theproject. During the year 2000, SPDC supplied an average of 374mmsfc/d to NLNG, 53% of its total feedstock.

In early October 1999, Nigeria joined the world club of LNG exportingcountries when it shipped its first cargo. After more than 30 years ofeffort, the dream was finally realised.

In spite of the major challenges which had to be overcome in the earlyyears of the project implementation, NLNG has maintained its original

construction schedule, and budget. The first cargo was delivered in


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accordance with commitments, and the construction of the whole of thetwo train Base Project was completed on time, in February 2000.

LNG Production will be some 6 million tones this year, and will generatefor the Government royalty payments, taxes and dividends of someUS$20 billion over a 20 - 25 year period.The plant site was initially designed to accommodate 5 LNG trains. TheBase Project involved the construction of the first two trains andassociated facilities. The Third Train is being constructed alongside thefirst two. It will include LPG facilities that will produce about 1.2 x 10 6

tonnes of LPGs per annum from 2003 onwards, for which markets areexpected to be the Americas and Western Europe. Preliminary studiesfor a further two train development are under way.

Further expansions of the NLNG project with two trains (trains 4 and 5)will increase output by 7.6 million tonnes per annum and position Nigeriaas a key player in the international LNG market. LNG export also forms astrategic economic solution to commercialising large volumes ofassociated gas that will result from Nigerias Vision 2010 objectives ofgrowing its production to some 4 million barrels per day.

West African Gas Pipeline Project (WAGP)

Figure 5 - West African Gas Project


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SPDC has also been actively involved in the exploration of the localmarket in the West African sub-region. In partnership with Chevron, theNigerian National Petroleum Company (NNPC), Ghana NationalPetroleum Company, Societe Binenois de Gaz, and Societe Togolais deGaz, SPDC has signed a Memorandum of Understanding with thegovernments of Nigeria, Benin, Togo and Ghana to develop the WestAfrican Gas Pipeline Company, (WAPCO), project. This involves thesupply of gas from Nigeria to the neighbouring countries.

Nigeria is in a unique position not only to fuel the economic developmentof the West African sub-region but to also play a major role in regionaldevelopment. The WAGP is an extension to the western segment of thedomestic gas market and will be a catalyst to regional integration anddevelopment. Export of gas to Ghana, Benin and Togo via the Pipeline is

expected to contribute some 250 MMscf/d to the domestic marketdemand for Nigeria by 2010, almost all of which will be sold for use inpower plants in Ghana.

Conclusion

SPDCs confidence in eliminating gas flaring in its operations throughmonetisation remains strong.

The company has put together a series of strategic investment in gasgathering/utilisation projects that will lead to the elimination of gasflaring by 2008. This constitutes a significant part of the publishedUS$8.5 billion investment programme of the NNPC/Shell/Elf/AgipJoint-Venture over the next few years.

Fig. 6 below, demonstrates the challenge of the programmre andshows that by 2004 a volume more than the equivalent of the currentflaring level would have been monetized. The significant growth

(300%) in the NNPC/Shell/Elf/Agip joint venture oil productionprogramme is the reason it takes up to 2008 for the last flares to goout.


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Figure 6 - Gas Utilisation / Flares-out Plan

The cornerstone of the strategy is LNG exports.

Currently, 40% of electricity generation in Nigeria is based on gassupplied by SPDC.

With the on-going deregulation of the economy, industry hascommenced partnering with the National Electric Power Authority(NEPA) to meet the rising demand for domestic power. Shell isactively working towards full participation in this regard.

Finally, via Shell Nigeria Gas Company, some level of success isbeing achieved in promoting gas as industrial fuel of choice in thelocal economy. Partners are required here to accelerate this processand programme.

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Strategy 4 Gas Flaring

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