Can Nigeria benefit from China’s decision to halt LNG sales to Europe

As winter approaches, China’s decision to halt reselling liquefied natural gas (LNG) cargoes to gas-starved Europe is expected to have big implications for Nigeria, the holder of the world’s ninth-largest gas reserve.

Ever since the Ukraine invasion eight months ago, Europe has been scrambling to replace Russian energy imports and grapple with soaring energy prices. Before the war, Russian natural gas accounted for 40percent of Europe’s consumption.

But China’s struggles have eased some of the pressure. Shuttered factories and a souring economy mean that China doesn’t need as much natural gas as before and can therefore resell some of its excess liquefied natural gas, or LNG, to Europe.

“The zero-COVID policy of China has been possibly one of the best allies of Europe in this current energy crisis, because the Europeans had to basically rush to get LNG to replace the Russian volumes,” Simone Tagliapietra, a senior fellow focusing on energy and climate policy at Brussels-based think tank Bruegel, told CNBC.

However, things are changing; A harsh winter in China or an improved economy next year could cause Beijing’s demand for energy to rise again, and leave Europe in the cold.

Reuters report shows the National Development and Reform Commission (NDRC), China’s top planning body, has told the country’s state-held LNG importers, including Sinopec, PetroChina, and CNOOC, that they should stop reselling LNG cargoes and keep them to ensure Chinese gas supply this winter, sources familiar with the development.

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Impact on the Nigerian LNG market

Nigeria’s best hope of meeting an LNG gap in Europe is the Nigeria LNG Limited (NLNG), which is currently struggling to keep its supply going amid rising floods and a wave of pipeline attacks.

With European inventories looking uncertain ahead of winter, Jefferies Group, an American multinational independent investment bank says any supply disruption will push companies to secure replacement cargoes from the spot market, where prices rose from record lows below $2 per million British thermal units (mmBtu) in 2020 to highs of $40 in October.

Portugal, which last year got nearly half of its LNG from Nigeria, and oil major Shell, NLNG’s largest single offtaker, are at the most risk from the outage, according to investment bank Jefferies.

Nigeria’s NLNG export facility on October 17 declared force majeure on its supplies citing disruption by the recent flooding in Delta State did to its feed gas suppliers’ production.

Jefferies estimated that replacing each lost NLNG cargo on the spot market would generate around 100 million euros of pre-tax losses for Portugal’s oil and gas company Galp Energia, which typically receives 2-3 cargoes per month from Nigeria.

Galp last Monday said it could face sourcing disruptions, adding that “It is not clear at this point when local operations will be restored or if there will be impacts from this event that may result in additional sourcing disruptions.”

Reuters report say delays and interruptions in gas supply from Nigeria had forced Galp to buy natural gas at higher prices on the spot markets, incurring a loss of 135 million euros in the first half of this year because of these interruptions.

For Shell, the 6.5 million tonnes per year under contract it takes from NLNG equates to roughly 13ercent of its quarterly liquefaction volumes, Jefferies said. Shell declined to comment.