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Gas Utilization :
Nigeria is endowed with abundant natural gas
resources, which in energy terms, is in excess of the
nations proven crude oil reserve. Moreso, the gas was
discovered whilst searching for crude oil, as no
deliberate effort had been made to search for natural
gas then. The current reserved estimate of the
Nigerian gas is over 120 trillion cubic feet, with about
50/50 distribution ratio between Associated Gas (AG)
and Non Associated Gas (NAG). Only a small fraction
of this quantity is currently being utilized.

A large fraction (about 63%) of the AG produced

during the production of crude oil is currently being
flared. Even then this is a considerable improvement of
between 7% - 17% from what it used to be three years
ago, when it flared between 70% to 80%.

In order to diversify its revenue base and reduce the

huge wastage of valuable resource as well as the
degradation of the environment as a result of flaring,
the Nigerian Government, through the NNPC, is
vigorously pursuing a number of natural gas utilization
projects with its joint venture partners whereby
associated gas would be harnessed to achieve these
objectives.

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 The government is sufficently concerned about the
issues of environmental degradation so much so that it
Quick Link has targeted 2010 as the deadline year when all gas
flares must be extinguished. In line with this target
therefore, all the Joint Venture partners have also set
their own targets in order to meet this deadline.

These targets range from year 2005 to 2010. This

means that the gas sector in Nigeria is going to be a
beehive of activities, and a lot of room exists for
investment in this area. Some of these are: LNG
(Liquefied Natural Gas), IPP (Independent Power
Plant), GTL (Gas to Liquid Conversion), NGL (Natural
Gas Liquids) and Methanol. Gas supply to local
industries, is indeed an industry with great potentials
and future in the 21 st century.

While a number of gas utilization projects have already

been completed, commissioned and in operation,
several other projects are at various stages of
execution. In addition, local industries have started
converting from the use of fuel oil to gas due to
increase in awareness.

Domestic Gas Market :

On the domestic front, NNPC through its subsidiary,
Nigerian Gas Company (NGC), currently supplies gas
for power generation, either as source of fuel or as
feedstock to cement and fertilizer plants, glass, food
and beverages, manufacturing industries and so on.
More local industries are now aware of the advantages
and benefits of using gas, hence the demand for gas is
increasing. The Nigerian gas market is a profit oriented
market awaiting potential investors.

Export- Oriented Gas Projects :

For the international market, NNPC and its Joint
Venture partners are currently embarking on several
gas utilization projects, which include the following:

Escravos Gas Project :

This project was executed by NNPC/Chevron JV. The
plant is located in the Southwestern part of the country
and it produces mainly LPG for export from its first
phase. Detailed engineering for the second phase has
reached advanced stage, while a third phase is being
proposed.

Oso NGL Project :

The NNPC/Mobil JV recently commissioned an NGL
plant located at its OSO field in the South Eastern part
of Nigeria. It started production for export in the third
quarter of 1998.

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 LNG Projects :
Nigeria, through NLNG (Nigeria Liquefied Natural Gas)
Ltd., is currently embarking on the construction of its
first LNG plant in collaboration with three partners,
namely, ELF, AGIP, and SHELL. The LNG plant site is
located at Finima in the Eastern region of Nigeria and,
these three companies in joint venture with NNPC, will
also supply up to 1 billion standard cubic feet of natural
gas for feed stock/fuel to the plant from their Obite,
Obiafu and Soku fields respectively. It is expected that
Community flaring will be substantially reduced by the time these
Development projects come on stream, in addition to the expected
huge revenue.

Ekpe Gas Compression Projects :

The NNPC/MOBIL JV executed this project in order to
gather the gas that was being flared in this field for
enhancement of oil production by gas lifting and gas re
injection.

Oso 2Y2 Project :

This project is also being executed by the

NNPC/MOBIL JV. The objective is to provide additional
gas make-up for the Oso NGL as well as maintain
condensate production at the expected plateau.

Belema Gas Injection Project :

The NNPC/SHELL Joint Venture is executing this
project with an objective to reduce gas flares in Five
flow stations by re-injecting some of the gas, some for
gas lifting, some for use as fuel by local industries and
the excess for backing out NAG that is currently used
to meet various existing contractual obligations. The
contracts for the execution of the EPC and gathering
pipelines have reached advanced stages of execution.
About 80mmscf/d of gas is expected to be utilised.

Odigbo Node Gas Project :

The objective of this project is to gather about
113mmscf/d of AG from about Six flow stations in the
NNPC/Shell Eastern Nigeria Fields, for supply (about
92mmscf/d) to ALSCON (Aluminum Smelting
Company of Nigeria) as feed gas and for gas lifting.

Odidi AGG Project: This project is also being executed

by the NNPC/Shell JV in the South Western part of
Nigeria. The objective of the project is to gather gas
and inject into the ELP (Escravos to Lagos Pipeline),
which will eventually form part of the West African Gas
Pipeline that will supply gas to some West African
Countries.

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Cawthorne Channel Gas Injection
Project :
The objective of this project is to gather the gas that is
currently being flared in this field for re-injection and for
supply to a third party for LPG extraction. The
conceptual design is currently on-going.

The West African Gas Pipeline Project :

The objective of this project is to supply gas to some
ECOWAS countries, pursuant to Nigeria's commitment
to Article 48 of the ECOWAS Treaty, which encourages
member nations to co-operate, consult and co-ordinate
their polities regarding energy and mineral resources.

Following deliberations by member-states on

improving co-operation on energy, the governments of
Nigeria, Ghana, Benin and Togo, through their
ministries and departments responsible for energy
matters, signed Heads of Agreements (HOA) in 1995,
to provide a framework for the construction of a
Ministerial Steering Committee (MSC), and Project
Implementation Committee to monitor the development
of the project.

A commercial group has also been set up comprising

Nigerian Gas Company (NGC), Ghana National
Petroleum Corporation (GNPC), SOBEGAZ (Benin)
and SOTOGAZ (Togo); and two gas producers
Chevron Nigeria Ltd. (CNL) and Shell Petroleum
Development Company of Nigeria. (SPDC). In 1998,
the commercial group retained a German company to
conduct a feasibility study and the final report was
submitted in March 1999. The report showed that the
WAGP was commercially viable and technically
feasible. Negotiations are currently on-going with a
number of prospective buyers in the sub region which
now include companies in Senegal.

In order to achieve the flare-out target date of 2010,

NNPC and some of its partners, have drawn up
activities and strategic programmes for the utilization of
all gas that is currently being flared as well as future
gas production resulting from growth in oil production.
These programmes include: NNPC/Elf JV has set its
flare-out target year at 2006, and some of their
planned projects include Amenam/Kpono, Ofon
(Phase-2) and 4-bar integrated oil and gas projects.

NNPC/Shell JV's flare-out target year is 2008. Some of

their planned projects include Akri/Oguta, S. Forcados,
EA, Bonga, Ubie, Bomu etc, and gas gathering and
utilization projects. NNPC/Chevron JV's flare-out target
year is 2006 and their planned projects are EGP
phases 2 and 3.

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Fiscal Incentives In Nigerian Oil and Gas
Industry :
Oil:

• There is a minimum guaranteed notional margin of

$2.50 per barrel,

after Tax and Royalty on the company's equity

crude.

• The minimum guaranteed notional margin

increases to $2.70 per barrel if the actual capital
costs exceed $2.00.

• The notional fiscal cost is now $4.00 per barrel

instead of $3.50 per barrel.

• Tax inversion rate of 35% rewards for prudent

producers whose operating cost are less than
$1.70 per barrel.

• No penalty for small companies producing below

an average of 175,000

bbls per day, for operating cost not greater than

$3.00 per barrel.

• No penalty for companies producing above

175,000 bbls per day, for operating cost not
greater than $2.30 per barrel.

• Capital cost of haulage fees limited to 50% of

total sum paid to third parties, in respect of crude
oil transportation,

processing and terminalling, is excluded from

operating cost in determining high cost
producers.

• All levies and other impositions paid either to

federal, state, local governments or their
agencies; including withoutlimitation, Central
Bank

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 of Nigeria commissions, other than Royalty and
PPT, are treated as allowable costs.

• Investment tax allowance of 50% for PSC

arrangements.

Gas:

• All Capital costs of upstream gas investments up to

the custody transfer

points, are treated as oil investments and the

resulting capital allowances are deducted from
PPT (at a marginal rate of 85%). These
incentives also apply to some downstream
investments.

• The upstream producer is exempted from

payment of royalty and PPT on any gas that is
transferred to a downstream project.

• The LNG projects receive a 10-year tax

holiday/break.

• The LNG project is also exempted from

withholding tax on interest and dividends paid to
non-residents and from incometax on work or
services

provided by non-residents.

• There is an additional investment allowance of

20% for upstream projects, 35% for NGL
extraction and gas-to-liquid facilities and 15%

for downstream projects.

• Downstream investments receive accelerated

capital allowances of 90% of cost of plant and
machinery expenditure in the first year with 10%

retention.

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 • Downstream gas projects which received a 3-
year tax holiday/break that begins on the first day
of production, is renewed for a further 2 years,

and the accumulated capital allowances can be

carried forward until the end of the holiday.
Qualifying dividend distribution during the tax

holiday are tax-free.

• Downstream projects are allowed to fully deduct

interest on project-financing for corporate income
tax purposes.

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