Time to Shell out?
The world hardly needs another LNG plant but a capacity expansion at Nigeria's NLNG looks more probable than it has for a while
At a time when African nations with no history of liquefied natural gas exports are managing to attract investment to the sector, Nigeria, the world's fourth-largest producer, is still struggling to expand its only facility, the long-established Nigeria LNG.
The owners of the six-train plant—a consortium of operator Shell (25.6%), Total (15%) and (Eni 10.4%), along with the state-owned Nigerian National Petroleum Corporation (NNPC, 49%)—have been talking for years about adding further trains. But unfavourable investment conditions, political uncertainties and unrest in the Niger Delta, which has disrupted gas supply, have prevented any expansion since Train 6 was completed in 2007.
Mozambique, Equatorial Guinea, Senegal, Mauritania and Cameroon are among African countries that have recently attracted investor interest and advanced plans to develop LNG-export projects that, all being well, would start producing in the 2020s, around the time most analysts think the LNG market will begin to tighten again. Most of those countries would be debutants on the export market, and Nigeria is desperate to attract investment to one of the flagship sectors of its stuttering economy—so NLNG, with its long track record of exports from its Bonny Island facility, would seem a shoo-in to join them.
NLNG is talking publicly about its desire to add one or even two more trains of over 5m tonnes a year each to the facility. Capacity is already 22m t/y, which represented around 6.5% of global nominal capacity in 2016.
The company's chief spokesman, Kudo Eresia-Eke, has suggested the development of Trains 7 and 8 at NLNG would need around $25bn of investment, once the wider project, including the search for further gas reserves, is taken into account. He said the exploration component could result in Nigeria's proven gas reserves multiplying more than threefold from today's estimate of 187 trillion cubic feet.
Efforts to improve the business environment—notably those aimed at improving the transparency of the local currency market—and legislation governing the hydrocarbons sector since the government of President Muhammadu Buhari came to power in 2015 have bolstered investor confidence. Just as importantly, a flare up of militancy in the Niger Delta, including attacks on supply lines to NLNG—one of which prompted Shell to declare force majeure on shipments for around a month in August 2016—seems to have died down following talks with the government over a new deal to support communities in the impoverished Delta region.
Fighting the levy
That all looks promising. But, as ever in Nigeria, it's not that simple.
The government has incurred the wrath of NLNG's shareholders, including NNPC, which are unhappy with the terms of an amendment to the act that governs the company's operations, which is currently being discussed in the country's National Assembly. The change means NLNG would become liable to pay 3% of its annual budget as a levy to finance development in the Niger Delta. While other companies operating in the area already pay this levy to the Niger Delta Development Commission, NLNG has been exempt to date, despite long-running efforts by the NDDC to change this.
The parliamentarians behind the move see it as a way to increase funding for local communities by tapping one of the region's biggest investors. But the company has baulked at the idea, claiming that investment in new trains could be put at risk, not only because of the direct impact on its financial resources, but also because potential investors may keep their cash in their pockets if they are concerned that the company's terms of business could be adversely affected by further legislative changes in the future.
NLNG argues that the levy would be counter-productive if it meant Trains 7 and 8 weren't built. The company says investment and job opportunities in the Niger Delta could be lost and opportunities to reduce gas flaring—a curse for Delta communities living close to processing plants—would be reduced, because NLNG is currently the main destination for gas that would otherwise be flared. NLNG has also mooted that operations at the existing Train 6 could be in jeopardy, if gas reserves supplying the plant were not replenished through further exploration and production.
Such comments partially reflect NLNG's own business interests, of course, but the government will be mindful that the loss of revenues, jobs and investment generated by one of two new export trains would be a big setback for an economy only just turning the corner after a deep recession. At the same time, the international oil companies in the NLNG group will be keen to make sure they don't fall out with politicians to the extent that their places in Nigeria's LNG export hierarchy are jeopardised. The search for a mutually acceptable compromise is now on.
Strong investment case
Another key question is whether the economics of extra trains on Bonny Island stack up at a time when Nigerian LNG is in direct competition from the cheap supply now online just across the Atlantic basin in the US.
"One of the challenges of an NLNG expansion is that you need to find a market and, at the moment, the world does not need a huge slug of 11m t/y of LNG from two new trains," says David Ledesma, an LNG consultant and senior fellow at the Oxford Institute for Energy Studies.
However, the case remains strong for expansion of NLNG, assuming buyers can be lined up for cargoes in a few years' time when the new capacity comes on-stream and demand has picked up. Shell may even be able to facilitate the development by guaranteeing to take a chunk of the output for its own sales network.
"Expansion of NLNG is a no-brainer. Get Train 7 done first, then follow-on with Train 8 if LNG demand is there. This would be relatively low cost, so if the gas is available, and especially if it can produce LPG [liquid petroleum gas] as well, then it would make sense," Ledesma says.
The same cannot be said of prospective greenfield projects in Nigeria, as these would not be able to benefit from the existing infrastructure and economies of scale that NLNG can call on, and so would need to achieve a higher price for their output. Long-mooted projects such as Brass LNG still get discussed, but there seems little chance of investors plumping for those now, when NLNG would be a much better bet.
Floating LNG, which is proving successful in kick-starting LNG exports elsewhere in West Africa, is also unlikely to curry favour in Nigeria. While it offers the advantage of providing a relatively cheap way of providing smaller amounts of LNG—around 3m t/y—it wouldn't tick many boxes for the government, which is keen to add substantial amounts of LNG to the global market in the long run to boost its dwindling share and also create jobs and infrastructure onshore—FLNG wouldn't achieve any of that.
Abuja is also keen to attract substantial investment to upstream gas exploration and development to provide the extra reserves needed to support plans to increase the use of gas in the domestic power and industrial sectors—something the quest for gas to fill new trains at NLNG would also help achieve, if it yielded the expected jump in reserves. That seems somewhat speculative, but any investment in upstream gas is likely to benefit both domestic and export markets.
A Gas Master Plan, originally published in 2008, aimed to expand the domestic use of gas. However, botched unbundling of state monopolies and poorly implemented privatisations along the gas supply chain have severely limited the sector's success. A revamped master plan is now in the offing, but with the West African Gas Pipeline—designed to fuel domestic demand across the region—often running well below capacity, finding fresh reserves is a priority.
For NLNG, the story is not just about the pros and cons of expansion—it must also find new buyers for its existing output, with several large contracts—mainly with European buyers—expiring within the next five or six years. Those contracts were based on the old rules of LNG trade, when sellers had the upper hand and could negotiate long-term contracts favourable to themselves.
Now, NLNG is seeking to sign new contracts for up to 9m t/y of LNG supply from its first three trains at a time when buyers expect flexibility on price, based to some extent on hub pricing for spot deliveries, and on cargo destination, while they also have a wider choice of sellers with whom to deal.
"You can argue it's an oversupplied market, but more important than that, many buyers are going to be looking for hub-related pricing. They will also be looking for greater flexibility in volumes and for the ability to divert cargos. They are unlikely to accept destination clauses," says Ledesma.
NLNG's old stalwart markets in Europe are still on the radar, but NLNG is also targeting Asian buyers, notably in Japan, going head to head with Australian and Qatari export projects. What NLNG lacks in proximity to these markets it hopes to make up for in terms. While Australia's new projects must still command high enough prices to pay their debts, NLNG's trains have long been paid for, allowing for more attractive pricing structures.
Source: Petroleum Economist
This article is part of a report series on Nigeria. Next article is: Waste not, want not in Nigeria