Global gas glut leaves Nigeria’s LNG unsold, threatens N80bn dividend

Dividend accruable to cash-strapped Nigeria from Liquefied Natural Gas (LNG) is under threat, a development that might adversely affect its Economic Sustainability Plan to improve crumbling infrastructure and poor services in Africa’s largest economy.

In Nigeria, the natural gas sector is oriented towards the export market, which is determined by economic fundamentals as against a regulated domestic regime, with LNG being the major revenue earner for the country in the gas industry.

However, the global LNG market is under threat due to the coronavirus pandemic that has forced demand to collapse. Due to the pandemic, buyers who are obligated to take cargoes under long-term contracts are postponing the delivery of the products they don’t have an immediate need for. This is compounded by the extremely low prices which have forced traders to keep the LNG in terminal tanks, thereby creating the highest inventories at European import facilities. This is going to further compound the fiscal crisis faced by Nigeria as the LNG has been a major source of revenue and foreign exchange earnings for the government.

The Federal Government earned $3.102 billion from its 49 percent stake in NLNG between 2015 and 2018 – other shareholders of NLNG include Shell (25.6 percent), Total (15 percent) and Eni (10.4 percent). A breakdown of the dividend earnings showed that the Federal Government pocketed $904.498 million in 2018 compared to $798.140 million in 2017. It earned $356.126 million in 2016 compared to $1.043 billion in 2015. Overall, the Federal Government has so far earned $17.407 billion as dividend from the company in the last 15 years beginning from 2004.

However, the slump in demand for LNG has come at a time when Nigeria, one of the world’s top LNG producers, sorely needs revenues to stimulate its struggling economy and increase its depleting foreign exchange reserves.

Nigeria LNG exports around 300 cargoes of liquefied natural gas annually from the Bonny plant, representing about 40 percent of global LNG supplies. NLNG’s 6-train LNG facility, which has been in operation since 1999, has delivered over 4,700 LNG cargoes around the world and has continued to send out tankers of the product.

But NLNG Ltd is reporting that it cannot sell its LNG while commodity tracking firm, Kpler, has also disclosed that about half of the world’s LNG vessels, currently deemed floating storage, are heavily loaded with Nigeria’s gas. Also, LNG prices at their lowest in years have forced traders to keep LNG on the tankers waiting for demand to improve.

“This means that dividends from LNG are also not forthcoming,” according to Nigeria’s Economic Sustainability Plan. “In effect, our major sources of foreign exchange have dried up. This means that our external reserves get little or nothing by way of augmentation.”

Ademuyiwa Adegun, an Abuja-based gas commercial advisor, said lower NLG prices and unsold oil cargoes pose risk to major gas exporting countries like Nigeria which might translate to lower revenue.
“Due to the sharp fall in oil prices, spread between oil-indexed long-term LNG contracts and spot contracts has considerably reduced which will make it challenging for most LNG producers to meet revenue targets,” Adegun said.

Already, the Federal Government has reduced expected revenue from its NLNG dividend by 35 percent to N80.3 billion ($207 million), according to an addendum to the 2020-2021 Medium Term Framework and Fiscal Strategy Paper (MTEF/FSP).

“A rapid decline in gas demand is affecting the financing of capital-intensive new liquefaction projects, leading to inordinate delays and capex reductions,” Adegun said.
But the potentials remain.

“Although they are making a loss now, the majority of the other partners are long-time investors in the gas market and are fully aware of the potentials and investments,” Niyi Awodeyi, CEO at Subterra Energy Resources Limited, said.

The energy crisis faced by Nigeria, one of the oldest and biggest suppliers of LNG to Europe, highlights the challenges that all other producers are facing in the pandemic era, which primarily have to do with lower prices and oversupply. Furthermore, the low prices and weaker demand caused buyers to take a wait-and-see approach to long-term supply contracts, according to analysts.

But prices are not set to improve in the summer, according to Manas Satapathy, managing director for energy at Accenture.

“The worst is yet to come, we will likely see super low prices in late June, July, August,” Satapathy told Bloomberg.

Yearly dividend NLNG pays the government has been a saving grace in difficult times. Insulated from Nigeria’s harsh business climate, unpredictable political games and unfavourable investments conditions, the company has been run profitably and has also raised funds for its projects from a combination of shareholders’ loans, internally generated revenue and third-party loans.

Not only has NLNG fully paid without default the $5.45 billion taken from its shareholders to build its six existing LNG trains, the firm has also paid as much as $36 billion to its shareholders as dividends over the years, in addition to paying joint venture (JV) gas suppliers $28 billion for feed gas.

In tweets to celebrate its 31st anniversary last month, NLNG said it has also paid $17 billion in dividends to the Federal Government through the NNPC and also generated $108 billion in revenue.
Last month, shareholders of Nigeria LNG Ltd signed the Engineering, Procurement and Construction (EPC) contract for Train 7, its major gas expansion plan.

The Train 7 project aims to increase the company’s production capacity from 22 mtpa to about 30 mtpa, and will form part of the investment of over $10 billion, including the upstream scope of the LNG value chain, according to the company.

Nigeria Liquefied Natural Gas Ltd is run in a unique way that is different from other public assets as it is owned partly by the government and partly by the private sector. It is, however, run exclusively by the latter, earning it plaudits along the way for its operational success. Nevertheless, there are challenges.
Despite being Africa’s biggest oil exporter, Nigeria is among the world’s poorest countries, with 87 million of its 200 million people living on less than $1.50 a day. Economic growth is stagnant at about 2 percent, below the country’s population growth rate of about 2.6 percent.

“Nigeria desperately needs its glory days of higher NLNG dividends to survive the economic implication of the coronavirus pandemic,” Awodeyi said.