Nigeria gas is back on demand as investors switch spotlight back to long-term Liquefied Natural Gas (LNG) contracts raising the prospects of higher revenues in the form of dividends for the fourth biggest exporter of natural gas.
The prospect of higher dividend is a huge relief for Nigeria as $365.1 million in dividend from its 49 percent stake in the NLNG saw it through its 2016 recession. The economy entered another recession in 2020, the second in four years, and could do with all the revenue it can to jumpstart an economy slowed down by Covid-19.
Nigeria is targeting N208 billion in dividends from NLNG in 2021 – it received N144 billion in 2020, 79 percent more than the N80.3 billion it expected and despite the economic challenges the pandemic caused.
“If this materialises, it will be a significant pay-out in dividend in naira terms competing with the N238.4 billion expected from VAT,” Ademuyiwa Adegun, an Abuja-based gas commercial advisor, said.
Victor Eromosele, former general manager, finance, and chief financial officer of Nigeria LNG Limited, said the global shift to long-term contracts would create a better outlook and opportunities for Nigeria’s LNG capacity of 22.5 million tons per year.
The global shift would provide unique prospects for countries like Australia or Qatar to increase their market share, which could have been the case for Nigeria if the government had not abandoned the $20 billion Brass LNG project in Bayelsa State and the $9.8 billion Olokola LNG project, located on the border town between Ogun and Ondo states, Eromosele explained.
“This would have been an ideal time for Nigeria to gain more market share in the global market,” he said.
NLNG exports around 300 cargoes of liquefied natural gas annually from the Bonny plant, representing about 40 percent of global LNG supplies.
All efforts to reach NLNG’s head of media relation Anne-Marie Palmer-Ikuku to respond to this report proved abortive as she did not respond to calls and messages.
The market for liquefied natural gas is split between the spot market and long-term contracts.
The spot market for gas refers to the trade of large physical cargoes or parcels in one-off transactions for near-term delivery while the long-term contract typically obligates the transaction to occur at an agreed price with further financing agreements for projects with high capital costs and long payback periods.
Ninety percent of the global LNG market including that of Nigeria is sold based on long-term deals, but around a tenth of the market is spot, with flexible prices.
A severe winter in Asia, which started in December, saw Japan, China and South Korea turn to the spot market and led to higher demand for LNG with price surging from an all-time low of $1.82 per million British Thermal Units (BTU), eight months ago to $6.90 as at Monday, February 15, with traders now booking cargoes for delivery in warmer months.
As a result, the development has seriously compromised investors’ appetite for spot market deals.
“Spot LNG in Asia is now like toilet paper rolls during the pandemic; you look at the empty shelves and you grab the last one at any price,” a global gas investor who pleaded anonymity said.
Although the price spike affects mostly spot LNG, while long-term deals are currently being priced at around $6-$7, most market analysts say the spike could also undermine the formation of a flexible spot LNG market as many buyers may prefer to stick to long-term contract deals.
For most investors, volatility is great when there is oversupply in the market but not that great when demand surges, just like recent events such as low stocks, a cold winter, global production outages and shipping delays.
“Exposing more to the spot this winter has been a terrible miscalculation so far. In the coming weeks and months, it will bring the value of long-term contracts back to light,” another investor said.
Another factor working in the advantage of long-term contracts is the issues surrounding limited storage space for the spot market.
“For spot term contracts, even if importers fill up all the available space in preparation for the winter, it may not be enough to secure the fuel they need for their thermal power plants,” Niyi Awodeyi, CEO at Subterra Energy Resources Limited, said.
He said, “With long-term contracts, on the other hand, traders don’t have to worry about storage space because the seller guarantees you deliveries.”
Brent-indexed long-term contracts have been called archaic, but it looks like they are here to stay, according to analysts.
Earlier this month, Qatar’s energy minister Saad al-Kaabi warned LNG importers that they would face more price spikes unless they bet on the certainty of long-term contracts.
Saad al-Kaabi in an interview in the Financial Times said new LNG supply was going to be tighter now, with US shale oil—and gas—production in survival rather than growth mode and with international energy companies shelving projects amid spending cuts.
“There isn’t a lot of money that will be helping oil and gas companies,” the al-Kaabi told the FT.
Data intelligence firm Kpler’s ship tracking data showed Shell and Total are already beginning to divert cargoes with Nigerian and US LNG to Asia, with several other cargoes also changing destination, though charterers were not clear.
And because Nigeria’s LNG is sold based on long-term contracts it helps provide the financial backbone for its projects, which are capital intensive and long payback periods as against the spot market that is very volatile. In September 2019, the $4 billion contract for the LNG Train 7 project at Bonny Island was approved.
Experts have said the solution to attracting sufficient amount of foreign investment in Nigeria could lie in replicating the winning ownership and management model of NLNG across sectors where the government has exclusive ownership, from rail to airports.
NLNG is run in a unique way that is different to other public assets, as it is owned partly by the government and the private sector. It is however run exclusively by the latter, earning it plaudits along the way for its operational success.
The Federal Government, represented by NNPC, owns 49 percent of NLNG while international oil companies such as Shell own 25.6 percent. French oil company, Total Gaz Electricite Holdings owns 15 percent and Eni owns 10.4 percent.
The ownership structure makes it an independent incorporated joint venture, guaranteeing an independent board of directors, effective decision making as well as funding for its projects.
While the NLNG model points way on how the government can attract investments, the Nigerian National Petroleum Corporation (NNPC) is the opposite. The government-owned and run oil company has served as a golden goose to different political regimes while NLNG, largely insulated from Nigeria’s harsh business climate, unpredictable politics and unfavourable investments conditions, has been a source of relief for Nigeria when faced with economic difficulties.
