Nigeria LNG outage threatens Europe, traders with higher costs

European countries and gas traders are reeling from the latest LNG supply shock – a force majeure from Nigeria LNG – that threatens nearly 4% of global supply and further squeezes the continent's resources in absence of Russian pipeline gas.

Nigeria LNG declared force majeure this week due to heavy flooding in that it said impacted virtually all of its gas suppliers.

NLNG, with 22 million tonnes per year of capacity, said it is working to mitigate the impact, but flood waters are still rising. No date was given for when the facility will be back online.

The outage comes just as Europe is working to stock up before winter, with LNG becoming a major alternative to Russian pipeline gas that fell significantly since Moscow's invasion of Ukraine.

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

While European inventories look healthy ahead of winter, 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 $57 in August.

Unplanned disruptions in the United States, Nigeria and Australia have forced traders to pay millions in inflated costs for alternative supplies.

Around 18-20 cargoes per month used to load from the facility, according to Alex Froley, LNG analyst at data intelligence firm ICIS. This is a similar overall volume to Freeport LNG, the second-largest US exporter of LNG that halted operations in June after an explosion and fire.

Rystad Energy said around 3.8% of global monthly supply was potentially impacted due to the NLNG outage.

NLNG's production has been at roughly two-thirds capacity this year due to prolific oil pipeline theft that has forced some companies to shut 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 on 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."

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 13% of its quarterly liquefaction volumes, Jefferies said. Shell declined to comment.

France's Total, the second-largest offtaker, takes around 3 million tonnes per year.

Alex Froley, LNG analyst at ICIS, said NLNG did not appear to be fully down. A cargo loaded on the Seri Balhaf on October 16 for South Korea, and another vessel, the Prism Agility, is at the loading jetty now.