Prolonged NLNG force majeure exposes oil sector woes

…sparks worries over $5bn Train 7 project

The force majeure put in place by the biggest gas exporter in Nigeria more than 15 months ago has left several industry experts increasingly worried about the mounting headwinds plaguing the country’s economic lifeblood: the oil and gas sector.

The Nigeria LNG Limited (NLNG), owned by the federal government of Nigeria and three international oil companies, has seen its output decline owing to gas supply constraints, which also pose a threat to its expansion plan.

The NLNG had on October 17, 2022, declared a force majeure on product supplies from its production facilities on Bonny Island, following the declaration of force majeure by all its upstream gas suppliers.

It said the notice by the gas suppliers was a result of high flood water levels in their operational areas, leading to a shut-in of gas production that caused a significant disruption of gas supply.

The force majeure, the first in over a decade and the second in the company’s 24 years of operations, has persisted amid a global demand boom, especially in Europe, that propelled the prices of liquefied natural gas (LNG) to unprecedented heights.

“It’s very bad news for NLNG’s buyers. Buyers who have long-term contracts may have been forced to go elsewhere to get additional supply or the supply that NLNG is not giving them,” Godswill Ihetu, a former managing director of NLNG, told BusinessDay.

He pointed out that there are contracts that penalise a supplier for not supplying the contract quantity. “I am not sure whether NLNG negotiated things with some of their buyers to mitigate the penalties.”

He said the development has deprived the company of the money it had thought it would make.

“That’s why they are not making any noise about Train 7. If they cannot supply six trains, is it the seventh one that they will supply? Two years ago, they were beating their chest; they said even Train 8 might be coming soon after Train 7. But now nobody is talking about Train 8,” Ihetu said.

“Train 7 is under threat; of course, the contract has been awarded and you can’t shut it down. But when the time comes to commission, they may not have the gas to do it.”

He said the drop in crude oil production in the country has something to do with the gas shortage facing the NLNG, as associated gas – natural gas produced along with oil – accounts for the majority of the supply in the country.

He said oil theft and pipeline vandalism as well as the use of aging pipelines have disrupted gas production.

The country’s crude oil production stood at 1.25 million barrels per day (bpd) in November last year, almost half what it peaked at in 2010, according to official data.

Ihetu, a former chairman of Petroleum Club Lagos, expressed hope that the steps being taken by the government in collaboration with security and the Nigerian National Petroleum Company Limited (NNPC) will help matters.

With six trains currently operational, the NLNG can produce 22 million tonnes per annum (mtpa) of LNG, and 5 mtpa of natural gas liquids from an intake of 3.5 billion standard cubic feet of gas per day.

In December 2019, the company’s shareholders took the final investment decision for Train 7, which is aimed at increasing the total production capacity to 30 mtpa.

The Nigerian Content Development and Monitoring Board, in a statement in November last year following an engagement session with NLNG management, said the construction of the $5 billion Train 7 project had reached 52 percent.

Abdullahi Bukar, a former NNPC board member and ex-project director for Uquo gas field development, described the gas shortage as “a perennial national problem that we have been shouting about for the last 10 years”.

“We are losing money when the market is booming. We are supposed to be exporting maximally. All the people who have got LNG are laughing all the way to the bank, but unfortunately, we are not part of that,” he said in a phone interview.

He said the country has ended up with an oil and gas industry where investment and production have been on the decline.

“In the past, we used to sell extra LNG cargoes. Now we cannot even supply what we have signed contracts on,” Bukar said.

He highlighted the need for an investment enabler in the sector to ramp up exploration and production of oil and gas.

“We are talking of doing 1.7-1.8 million bpd this year. We should be targeting in the next two years to be doing 3-4 million bpd, and we should be able to provide the gas we need for NLNG to be satisfied and also for Train 7 to materialise,” he said.

Asked if the prolonged force majeure had any implications for the Train 7 project, NLNG said it “is in progress according to schedule”.

It said the force majeure was taken into account in its 2023 revenue projection.

“NLNG is working closely with its customers to manage the impact of the force majeure,” it said in an emailed response to questions from BusinessDay.

The gas exporter said the force majeure had not been lifted because of the unavailability of major liquids evacuation pipelines from upstream gas suppliers, occasioned by sabotage and vandalism.

“NLNG is continuously evaluating the situation and will decide on the next steps once these issues are addressed. Despite the force majeure, NLNG continues to operate its plant on Bonny Island,” it added.

Feedgas to the NLNG plants comes mainly from some its joint ventures partners, including Shell Petroleum Development Company Limited, TotalEnergies and Nigerian Agip Oil Company.

“Nigeria’s LNG exports are expected to fall for a fourth consecutive year due to declining domestic production and increased domestic demand,” the International Energy Forum said in a report released in November last year.