Africa oil giant needs US$12 billion to avoid missing LNG boat

Operator Nigeria LNG Ltd. says it will decide later this year whether to invest more than US$10 billion to boost capacity by 40%. That would allow the Bonny Island terminal – an hour’s ferry ride from the oil hub of Port Harcourt – to export as much as 66 million m³ (30 million t) a year to markets in Europe and Asia.

NLNG’s shareholders – Royal Dutch Shell Plc, Total SA, Eni SpA and state-controlled Nigerian National Petroleum Corp. – must weigh the benefits of expanding their profitable LNG venture against the threat of higher taxes, pipeline vandalism in the Niger River delta and volatile gas prices. Those concerns have already delayed the project first mooted in 2012. Any further interruptions will increase the risk that Africa’s biggest oil producer misses the global transition to cleaner fuels and a chance to reduce its stuttering economy’s reliance on crude.

“Nigeria needs to take the opportunity,” said Maggie Kuang, an analyst with Bloomberg New Energy Finance in Singapore. “The next few years are critical for investment decisions. If Nigeria does not take any action, it will fall behind.”

Last year, the West African nation shipped 46 million m³ of LNG, making it the world’s fourth-biggest exporter behind Qatar, Australia and Malaysia. It also faces increasing competition from the US, Russia and Mozambique in an LNG market where demand is set to double to about 1.28 billion m3 by 2030, according to Sanford C. Bernstein & Co. Long-term contracts are being secured in order to guarantee supply for decades.

Boosting capacity at Bonny Island will require investment of about US$12 billion, according to New York-based Teneo Intelligence. That will fund the construction of two new processing units. The terminal currently has six smaller trains.

Nigeria has no shortage of gas. Its almost 5.7 trillion m³ of proven reserves are the biggest in Africa, but supply to NLNG can be erratic.

Flows were reduced by 10% at one point last year amid shutdowns at oil and gas fields in the Delta region as thieves tapped into pipelines. Shell said that attacks, ranging from piracy and theft to vandalism and kidnapping, continue to put a brake on output.

Guaranteeing enough throughput for the new, larger trains at Bonny Island will require investment from gas producers to increase supply and improve security, according to NLNG.

There are also fiscal concerns, with some Nigerian politicians wanting to remove tax breaks enjoyed by the venture. President Muhammadu Buhari’s government is against such a move, which NLNG says would kill off its expansion plans.

Should that threat be averted, the business case for the LNG project is good, according to Gail Anderson, research director for sub-Saharan Africa upstream oil and gas at Wood Mackenzie in Edinburgh.

“The economics of NLNG have always been pretty robust,” she said. “It has been a tremendously successful project that accounts for a large chunk of the international oil companies’ value in Nigeria.”

Nigeria’s 49% stake in the venture has proved lucrative, earning the government US$16 billion of dividends from 2004 to 2016, according to statements on NLNG’s website. Buhari used those payouts to bail out several states in 2015, after the oil-price crash battered the economy, and this month Nigeria transferred US$650 million of NLNG proceeds to its sovereign wealth fund for infrastructure development.

Crucially, the oil majors have retained a majority stake, said Malte Liewerscheidt, a West Africa analyst at Teneo.

“That has allowed the company to operate successfully thanks to limited political interference,” he said. “NLNG is widely regarded as the most efficiently run company with major government involvement, much unlike the entirely state-owned NNPC.”

To maintain that position and Nigeria’s clout among global energy giants, the new trains must be built, NLNG Managing Director Tony Attah said in February. The cleaner fossil fuel offers a better long-term option than crude, he said.

“Nigeria has to begin to think about the relevance of oil in the future,” Attah said. “The energy mix is fast-changing and Nigeria has to come to terms with that. The best bet is for gas.”

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