• Sunday, June 23, 2024
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Explainer: Why NLNG Train 7 is going ahead despite gas glut

NLNG Train 7

Despite a world awash in liquefied natural gas and lower prices, shareholders of Nigeria LNG Ltd proceeded with the signing of the Engineering, Procurement and Construction (EPC) contract for Train 7, the company’s major gas expansion plan.

This announcement comes at a difficult time just as LNG prices in Asia and gas prices in Europe have hit record lows as the coronavirus pandemic worsened already weak demand.

The decision is also coming after commodity tracking firm, Kpler, disclosed that about half of the world’s LNG vessels currently deemed floating storage are heavily loaded with Nigeria’s gas.

Why contracts for Train 7 proceed

Notwithstanding the concerns about the coronavirus pandemic, the Federal Government hopes to conclude the $4.2 billion project by 2025, noting that the project will survive the pandemic.

One major reason why all contractors involved are progressing with the deal is the positive outlook for LNG demand which, according to Global-LNG, is expected to double to 700 million tonnes by 2040 as gas will continue to play an important role in a lower-carbon energy system.

“Their focus is on the future cash flows derivable from the project. As production activities commence in different countries post-COVID, there will be a surge in natural gas demand, thereby leading to the rise in natural gas prices,” Emmanuel Afimia, petroleum economist at Afimia Consulting, told BusinessDay.

Another reason is the contract obligation by the participating oil majors who had signed a letter of intent in September last year after the deal for the grand project was brokered after 12 years of negotiation and delay.

NLNG announced in September 2019 it had issued a Letter of Intent to a consortium made up of Saipem of Italy, Daewoo Engineering & Construction of Korea and Chiyoda of Japan.

“Not proceeding with the execution of the project will portray NLNG as an institution that does not keep to agreement,” Afimia said.

With the signing of the letter of intent, Nigeria LNG Limited and the members of SCD JV committed to finalising the EPC Contract based upon the proposals submitted by SCD JV on an exclusive basis.

NLNG is run in a unique way that is different from 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 company, Shell, owns 25.6 percent. French oil company, Total Gaz Electricite Holdings, owns 15 percent and Eni owns 10.4 percent.

“While remaining mindful of prevailing macro-economic challenges, Shell continues to see NLNG as a great resource that can deliver value to the people of Nigeria and investors alike,” Maarten Wetselaar, director of Shell Integrated Gas & New Energies, said.

Why the project matters
The project, upon completion, will support the Federal Government’s drive to generate more revenue from Nigeria’s proven gas reserves of about 200 Trillion Cubic Feet (Tcf) and further reduce gas flaring in the country’s upstream oil and gas industry.

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

The project hopes to offer 40,000 jobs with 55 percent of procurement going to Nigerian vendors and 55 percent of engineering work to be executed in the country, a development expected to increase fiscal and FOREX revenue, thereby boosting industrialisation which will drive economic activity and growth.

Also, it is expected to improve electricity distribution and kick-start Nigeria’s power industry as sporadic power supply continues to persist due to constant gas constraints.

The project, which was first initiated in 2007, is estimated to generate 12,000 jobs as a result of local involvement in construction, production of cables, welding, valves, scaffolding, furniture, painting and medical.