How Nigeria secured Shell’s support to conclude NLNG Train 7 investment

To get the buy-in of the Shell Gas B.V, a subsidiary of Royal Dutch Shell Plc in concluding the Final Investment Decision (FID) on the Nigerian LNG train 7 project, the company extracted a formal commitment from partners providing financing for the project and an agreement to abide by tough conditions.

After the NNPC with a 49 percent stake in the NLNG, Shell has the second highest stake of 25.6 percent. Others are Total (15 percent) and ENI (10.4 percent). So the company’s support was crucial to the success of the project.

Apart from its stake, it is gas from the SPDC JV and the Bonga deep-water field operated by Shell, that is piped to the NLNG plant on Bonny Island. Here it is cooled to produce LNG for export to consumers in Atlantic Basin countries, such as Spain, Italy, Turkey, Mexico and the US, as well as markets in Asia.

The formal commitment extracts a guarantee that all the partners in the project will raise financing to fulfill their obligations. Shell in a note to its shareholders said the new LNG processing unit will be funded by NLNG without shareholder loans or shareholder equity requirements. The project cost is therefore not reported as part of Shell’s overall capital expenditure. Other partners could seek similar funding arrangements.

Due to the highly capital nature and high-tech involved in LNG projects, this current phase is billed to gulp $7billion, so financing is an important component of the agreement. But it comes with high returns. Nigeria contributed $2.5billion in 1989 as part of its equity in the project and has reaped over over $35billion from that initial investment.

One option for the cash-strapped Federal Government, to finance its obligation is to use its share of NLNG dividends. That may not amount to much this year, as the LNG market is seeing a glut following the crash of oil markets. So even oil companies in the deal could struggle – at least initially.

The construction phase is billed to last for five years so the partners would be banking on the glut easing within this period so that the project will be profitable.

Further conditions

Due to Nigeria’s penchant for disrespecting the sanctity of contracts and its political instability, one of Shell’s other conditions is that the NLNG Act be kept inviolable.

In 2016, the House of Representatives Committee on Gas Resources introduced a bill for an act to amend the Nigeria LNG Act so that it could pay a percentage of its profits as dues to NIMASA.

This was in a clear violation of the Act which has its origin in the agreement between the Federal Government, International Financial Community and Investors including the International Oil Companies (“IOC”) Shareholders of NLNG that the law cannot be unilaterally amended.

The NLNG Act is essentially the culmination of a business contract codified into law to preserve the sanctity of the assurances and guarantees ingrained into the Act.

“Indeed, it was one of the three essential conditions requested by the International Shareholders for participating in the NLNG Project in the first place, due to the view of the International community on Nigeria’s historically unstable political climate since 1965 when the idea of an LNG plant was first conceived,” said Tony Attah, NLNG managing director in remarks to the House Committee on Gas.

Therefore, the decision by Shell to sign on the contract would indicate that Nigeria has agreed to this important condition.

The NLNG Act also provided assurances and fiscal guarantees. “The venture shall be subject to the fiscal regime contained in the provision of this Act. Such fiscal regime shall not be amended in anyway except with the prior written agreement of the Government, the Company and each of the Company’s shareholders,” says the second paragraph of the Second Schedule to the NLNG Act.

Paragraph 3 goes further to state that: “…neither the Company nor its shareholders in their capacity as shareholders of the Company, shall in anyway be subject to new laws, regulations, taxes, …that are not applicable generally to companies incorporated in Nigeria…”

The incentives, guarantees and assurances to NLNG and its Shareholders enshrined in the NLNG Act, was a crucial condition to proceed with the project and also form the basis of the contract between the Federal Government of Nigeria and the investors in the NLNG project.

It represents a solemn undertaking and promise by the Federal Government of Nigeria to the International Community, all the Shareholders of NLNG and the respective Home Governments of IOC Shareholders and some legal analysts say it almost elevates the NLNG Act to the status of an International Treaty.

Apart from internal agreements to rotate management of the firm among the partners and run it on international best practices, these are some of the publicly available conditions Shell insisted that must be met before it joined the NLNG project and it is logical to conclude that the company would insist on keeping the conditions this time around, if not strengthening it.

Subsequent to the FID, NLNG has announced awards of engineering, procurement and construction (EPC) contracts with a consortium led by Saipem along with Chiyoda and Daewoo engineering firms.

Once operational, the new unit, known as Train 7, will add around 8 million tonnes per annum (mtpa) of capacity to the Bonny Island facility, taking the total to around 30 mtpa.

Currently operating six processing units, or trains, the decision to build a seventh will bolster NLNG’s contribution to the development of the country through generating revenues for the Nigerian government and delivering key natural gas products for domestic use.

“This decision is consistent with our long-term strategy and our disciplined approach to capital investment,” said Maarten Wetselaar, Shell’s Integrated Gas and New Energies Director.

“Natural gas is a core component of our strategy to provide more and cleaner energy solutions. With global LNG demand expected to double by 2040, the expansion of the NLNG Bonny Island facility is crucial in helping Shell meet the world’s growing energy needs.”

Osagie Okunbor, Country Chair, Shell Companies in Nigeria and Managing Director, The Shell Petroleum Development Company of Nigeria Ltd, said “Shell is positioned to support NLNG’s expansion by working with our government and other partners to develop new gas resources to sustain this growth and enhance both domestic and export gas supplies.”