How NLNG Train 7 project can benefit Nigeria

17 Jun 2020, 12:00 am
Kayode Oluwadare

Summary

Over the last 20 years, the NLNG has helped the country's oil industry to reduce its gas flaring from 65 per cent to below 25 per cent, generating revenue of over $100 billion in the process.

A shipment of Nigeria Liquified Natural Gas cargo

The global coronavirus disease outbreak has greatly impacted energy demand and prices. The economic crisis resulting from the lockdown of countries, many of which have begun to gradually reopen, has put ongoing energy projects at great financial risk – even as some anticipated projects have either been suspended or foreclosed. Under the circumstances, it was a positive development last month when the Nigeria Liquefied Natural Gas (NLNG) signed Engineering, Procurement and Construction (EPC) contracts with the SCD Joint Venture Consortium on the long-awaited LNG expansion plan, described as the Train 7 Project.
    
Estimated to cost about $6 billion, the project is expected to increase the six processing units (trains) of the NLNG plant at Bonny Island to seven trains. This will increase the current installed capacity of the plant from 22 million tonnes per annum (mtpa) by 7.6 mtpa. Led by the Italian multinational, Saipem, with a share of $2.7 billion of the contract value, other members of the consortium are Japan's Chiyoda Corporation and Daewoo Engineering & Construction of South Korea.     

The fall in crude oil prices has negatively impacted gas prices as global natural gas prices are usually indexed to crude oil prices. But despite the drop in natural gas prices – which started in recent years with the supply glut largely caused by shale gas production in the United States and unconventional gas production elsewhere in the world, and recent pressure on prices due to the Covid-19 pandemic – the commencement of construction on the NLNG Train 7 project will provide a timely economic boost to the Nigerian gas sector in particular and the Nigerian economy as a whole.

For one thing, the project has added new profiles to the domestic gas sector. A consortium of some Nigerian banks, international development finance institutions, as well as three export credit agencies will provide $3 billion of debt financing for the project, making it the world's first LNG project with multi-tranche corporate financing. According to Templars, the Nigerian law firm that advised the lenders, the amount is the largest debt financing on the continent thus far in 2020.

Jason Kerr of the New York-based White & Case LLP who was the international counsel to the lending consortium said the financing support for the project in the middle of a pandemic shows the high esteem the NLNG is held in the international markets. With this ground-breaking pact with the consortium, the NLNG is not only consolidating its standing as the leading LNG brand on the continent; it is also providing the blueprint for multi-tranche corporate financing in future large-scale LNG projects.

Incorporated in 1989 as a Joint Venture (JV) of the Nigerian National Petroleum Corporation (NNPC) with Shell Gas B.V., Total LNG Nigeria Ltd. and Eni International, the NLNG was regarded as the fastest growing LNG company in the world a few years after it started operation in 1999. The company was constantly adding liquefaction trains to its plant. But since 2006, not much has been done in terms of expanding its capacity due to the failure by NNPC and its JV partners to reach an agreement.

While the installed capacity of the NLNG plant stalled for over a decade, the Nigerian government tried to launch new LNG projects but without much success. Former President Olusegun Obasanjo launched the Olokola LNG project a few months to the end of his two-term tenure in 2007. The siting of the project in his home state of Ogun elevated parochial reasoning over economic and technical considerations. The project was disadvantaged from the beginning due its lack of proximity to sources of feed gas. Similarly, former President Goodluck Jonathan prioritised the Brass LNG, another green field project, over the expansion of the NLNG.

When completed in 2025, the 7-train LNG facility is expected to bolster the NLNG's contribution to the development of the country on multiple fronts. Up until now, the NLNG has paid out about $15 billion in dividends to shareholders and $7 billion in taxes to the Nigerian government. Over the last 20 years, the NLNG has helped the country's oil industry to reduce its gas flaring from 65 per cent to below 25 per cent, generating revenue of over $100 billion in the process.

With a 35 per cent increase in installed capacity, more value will be generated from the 200.79 trillion cubic feet (tcf) of gas reserves in Nigeria. The project is also expected to generate $20 billion in net revenue for the government. The increased capacity will also support the renewed commitment of the government to continue to reduce gas flaring in the country's upstream oil and gas industry.

Currently, the bulk of the feed gas used to run the NLNG's existing plant are the associated gas, which are by-products of crude oil exploration. The project's feed gas demand will stimulate investments in other upstream gas supply projects and resuscitate some stranded natural gas fields in Nigeria.

In recent years, a good number of the international oil companies (IOCs) and indigenous oil companies have been deepening investments in the development of non-associated gas fields. In December 2019, Shell Petroleum Development Company of Nigeria (SDPC), Total and Nigerian Agip Oil Company (NAOC) signed a 20-year agreement with NLNG to make daily supply of 3.5 billion cubic feet (bcf) of feed gas to the upcoming 7-train facility.

Executive Secretary of Nigerian Content Development and Monitoring Board (NCDMB), Simbi Wabote, said the Train 7 project would provide over 40,000 direct and indirect jobs during the construction phase. He also said about 55 per cent of the project's engineering activities will be carried out in Nigeria, and 55 per cent of all procurements will be done by Nigerian vendors. This will further enhance the development of local content in the Nigerian energy industry.

Another beneficiary of the project is the domestic liquefied petroleum gas (LPG) market. At the moment, NLNG produces one million metric tonnes of LPG and supplies 350,000 metric tonnes of the product to the domestic market, accounting for 50 per cent of LPG supply in Nigeria. With the additional capacity of the plant, the production and supply of LPG to the domestic market is expected to increase, thereby deepening the penetration of the low-cost and high efficiency cooking fuel in the country. Compared to kerosene and traditional biomass (such as firewood and charcoal), LPG is considered a cleaner alternative fuel.

Increasing the capacity of the NLNG at this time will enhance Nigeria's position in the international LNG market in an era awash with LNG projects. Even countries and regions that are not regarded as crude oil producers have recently been exploiting their natural gas deposits to become natural gas producers. Mozambique and Tanzania are two African countries that fall in this category and are poised to compete with Nigeria. For instance, some tens of billions of dollars are expected to be invested in two of Mozambique's projects, the Coral South FLNG and Rovuma LNG. The southern African country reportedly holds 100 tcf of proved natural gas reserves – it is the third-largest holder of proved natural gas reserves on the continent after Nigeria and Algeria.

While the recent progress made on the NLNG project is commendable, the government would do well to abide by its own terms of the contracts so that the project can achieve its stated developmental objectives.

Kayode M. Oluwadare, an energy economist and entrepreneur, is the Managing Director and CEO of Green Fort Ltd, an energy project company with core interests in LPG projects, as well as consultancy in natural gas value chain management.


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