The Nigerian oil industry has stepped up efforts to reduce the flaring of gas in recent years, with private sector investments paying dividends. Cutting down on flaring, which is economically improvident and environmentally damaging, goes hand-in-hand with the development of infrastructure to process natural gas.

FALSE ECONOMY: Flaring is the combustion of so-called associated gas – that is, natural gas in oilfields that is brought to the surface during the process of oil extraction. Flaring is the simplest and cheapest method of dealing with associated gas, while processing it involves capital investment in facilities to collect and refine the gas and pipelines to distribute it. For many years, flaring was considered normal practice, particularly in areas such as the Niger Delta where oilfields have high levels of associated gas. This was partly due to low demand for gas, and limited technological capacity for processing associated output.

But flaring is also wasteful and very damaging to the environment, accounting for around 40% of Nigeria’s greenhouse gas emissions. In burning off associated gas, the country robs itself of a valuable resource which could have a number of uses, not least firing power plants and fuelling the petrochemicals industry – an area which Nigeria is looking to develop as it moves its energy sector up the value chain. While savings are made on capital costs by skimping on gas infrastructure, for a country with Nigeria’s energy needs and environmental problems, it is something of a false economy.

SO FAR, SO GOOD: The good news is that Nigeria has made significant progress in reducing flaring in recent years. In 2011, 25.8% of gas extracted was flared, down from 45.1% in 2002. While rising overall output means that the fall was 17% in absolute terms, it is clear that investments in gas infrastructure are paying off, reducing waste and ensuring that the country retains more of one of its most valuable resources.

The decline in flaring has continued in 2012. In July, Osten Olorunshola, the director of the Department of Petroleum Resources, said that, of 8bn cu feet (bcf) per day of gas produced, only 1.4 bcf, or 17.5%, had been flared. Nonetheless, when considering just the associated gas output of 5.2 bcf per day, the proportion burned rises to 26.9%. Plenty of progress has been made, but there is still some way to go.

One of the challenges has been the limited ability of the Nigerian National Petroleum Corporation (NNPC) to make the investments needed to increase the amount of associated gas captured by its joint ventures (JVs), as well as slow contract approval processes. Instability in the Delta region has also made infrastructure construction and operation difficult at times, with some installations having been vandalised.

In March 2012, the NNPC’s group executive director for gas and power, David Ige, said that Nigeria was losing more than $1bn a year through flaring, adding that only 12% of the country’s liquefied natural gas output was used by power plants and industry. Ige said that stronger infrastructure and a better commercial framework would help increase gas usage.

PRIVATE SECTOR BENEFITS: Given the right circumstances, the private sector certainly has incentives to reduce their flaring: firstly, it can profitably use the associated gas; secondly, companies can burnish their environmental credentials. The latter is especially important in Nigeria, where international oil majors’ presence is so politically and socially sensitive.

International firms have indeed made substantial progress in reducing their own flaring, and are keen to emphasise the fact. Shell, for example, has reduced flaring to 9.9%, the lowest rate of any onshore JV, down from 40.2% in 2002 and 22.2% in 2006. This does not come cheap: Shell Petroleum Development Company of Nigeria estimates that its associated gas gathering (AGG) project will have cost $6bn by the time it is completed, having started in 2000.

France’s Total was an early leader in reducing flaring, and is continuing with its commitment. In February 2012, the company announced that the phase two development of its Ofon offshore oilfield would focus largely on improving gas recovery. Associated gas will be compressed and sent onshore as part of the company’s plans for increasing oil output from Ofon.

CREATING A MARKET: Reducing flaring has also been linked to demand for natural gas. This has been rising in recent years, but infrastructure has not always kept pace. Oil companies argue that they would have greater incentive to capture associated gas if reforms were introduced to encourage the growth of the gas market and investment in capacity. As a 2011 report by Shell on flaring in Nigeria noted, “To encourage further investment and to boost the supply of gas to domestic consumers, Nigeria needs a comprehensive and flexible gas infrastructure that allows for distribution to various customers. It also needs a stable fiscal and robust commercial framework to make it profitable for investors.”

Again, the private sector has taken the lead, investing in onshore gas processing capacity. Shell points to its Afam VI power plant, which uses gas from its Okoloma gas plant, and the Gbaran Ubie integrated oil and gas plant, as examples of its work to increase downstream capacity for associated gas. Further opportunities for development are likely available. “There is likely to be a need for gas gathering plants on oil and gas production sites,” Peter Dugdale, the managing director of AMG Terminals, which has increasing interests in oil and gas infrastructure across Africa, told OBG. “As flaring declines and pipelines are being led, these facilities will be needed. There is huge investment potential as Nigeria needs much more storage space.”

TOWARDS A BAN: The government is now moving towards an outright ban on flaring, which has been proposed for more than a decade now. The Petroleum Industry Bill (PIB) was still working its way through parliament at the time of writing after several years stuck in the legislature, but looked closer to being passed than ever before. Among other provisions, the PIB proposes an end to flaring by the close of 2012, with fines imposed on offenders. Exemptions would be granted for periods of up to 100 days in the case of start-ups, technical failure, or the gas off-taker being unable to receive the gas. Other measures in the bill, particularly changes in what foreign partners pay to the government on their production, are expected to encourage foreign investment in the oil sector.

Many are sceptical about the short timeframe for the flaring ban, with the end of 2012 apparently unlikely to be the final date once the dust settles. Anti-flaring campaigners also question whether the penalties will deter oil producers from the practice. More pointedly, they note that not only the much-maligned oil majors must play ball. They say that government-owned facilities, some of which are outdated, must be overhauled to improve efficiency and environmental protection.

Hydrocarbons companies and analysts are correct when they say that the most important factor in reducing waste and using more of Nigeria’s substantial gas resources is the development of capture, processing and transmission infrastructure. The development of the downstream gas market should provide private investors with the incentive to increase this capacity.