Angolan Oil Output Squeezed by LNG Plant Closure

• LNG plant shutdown overwhelms oil platforms with gas
• Oil output squeezed by 50,000 barrels a day
• Production constraints may reduce demand for tenders - lawyer
• Future exploration could be set back by squeeze

The lengthy shutdown of a liquefied natural gas (LNGLF) (LNG) plant is helping push Angola's crude oil exports to their lowest levels since 2006, having clogged offshore platforms with unwanted gas supplies and forced operators to limit extraction.

With few alternatives available to unblock oil flows, the highly polluting practice of burning off gas in flare stacks, which the plant was built to prevent, looks set to return for as long as it takes to carry out repairs, local industry sources with knowledge of the matter said.

But a more far-reaching consequence of the constraint on oil output could be to deter investor appetite for Angola's frontier pre-salt blocks, which are deep and therefore costly to exploit, as the government prepares to launch licensing rounds next year, industry and legal sources told Reuters.

Before the LNG plant started up, Western oil majors would mostly re-inject gas back into the oilfields to boost flow, a method that had grown in use since the government clamped down on large-scale flaring about a decade ago.

But it is now falling into disuse across Angola as many reservoirs cannot accommodate more gas, while extended gas re-injection can also diminish oil recovery rates.

This means April's closure of the LNG plant, beset by problems ever since it started up last year, has trapped a growing glut of natural gas in offshore pipeline networks and production rigs.

As nearly all Angola's wells contain gas mixed with oil, the gas pile-up means that oil output suffers.

A production engineer for the national oil company Sonangol confirmed that the liquefaction plant closure was affecting oil flows, while another industry source said daily output had fallen by 50,000 barrels -- about 3 percent of Angola's daily output -- at blocks tied to the plant.

Output Falling
"As these deepwater fields get older, the gas content rises, and that only increases the importance of having the LNG plant online," said an industry source in Luanda.

Sonangol did not respond to repeated requests for comment at its London headquarters. In Luanda, the Oil Ministry could not be reached, while officials at the Energy Ministry declined to comment.

The government has repeatedly said that new production will push output above 2 million barrels per day, though it has rowed back from estimates of when this will occur.

For now, Reuters data shows oil production declining. Over the year so far, oil exports average 1.62 million bpd, their lowest since 2006, at a time when the price of oil has fallen to its lowest level for around four years.

The five offshore oil and gas blocks supplying the LNG plant are Exxon's Block 15, Total's Block 17, BP's Block 18 and, once pipeline links are built, the Chevron (CVX)-operated Blocks 0 and 14.

Some fields in Blocks 17 and 18 have hit their capacity limits for gas re-injection, while Exxon's Block 15 is getting close, local industry sources told Reuters.

"Greater Plutonio in Block 18 continues to produce oil due to the ability to re-inject (and flare) gas," a BP spokesman said in an email. "Production levels are not materially affected."

Exxon said it did not normally comment on operational matters, while Total did not respond to requests for comment.

Long Closure
The major reconstruction required to fix design flaws at the LNG plant and replace nearly-new equipment that has already corroded could keep it shut beyond a planned restart in mid-2015.

Alex Vines, head of the Africa programme at the Chatham House think-tank, said new Sonangol chief executive Francisco de Lemos was taking more direct control over decisions about future projects to avoid a recurrence of similar problems in future.

"I believe the problems ... were one of the key drivers for the new strategies," he said. "This is visible through the restructuring of Sonangol and will also be visible in the decisions made about future licensing round awards."

Those new fields are being opened as economic growth stalls in Africa's No. 2 oil producer, reliant on oil exports for 80 percent of state revenue.

But with the drop in world oil prices already squeezing the potential viability of wells that will be deeper and costlier to operate, the LNG problems could give foreign oil companies even more leverage as they negotiate terms with the government.

"Will potential investors even want to get involved if they can't find an outlet for the gas with the LNG plant shut, posing a hurdle also to extracting oil?" said an energy lawyer with commercial experience in Angola.

For now, in order to keep the oil flowing, there appears to be little alternative to a return to flaring off the gas, which not only releases environmentally damaging carbon into the atmosphere but also deprives the government of income from LNG.

(By Oleg Vukmanovic and Simon Falush, Additional reporting by Yumna Mohammed in Johannesburg and Michel Rose in Paris; Editing by Kevin Liffey)