Why govt is unable to finance LNG project
Getting foreign direct investment (FDI) for Liquefied Natural Gas (LNG) trains is a problem confronting the gas sector. Trains are vehicles for processing and exporting gas to offshor markets. A former Managing Director, Nigerian Liquefied and Natural Gas (NLNG), Mr. Godswill Ihetu, says the government needs billions of dollars to do this. Ihetu, also Energy Resources Limited Chief Executive Officer, in this interview with AKINOLA AJIBADE, speaks on why Brass LNG and Olokola LNG have failed to take-off, despite the government’s avowed commitment to the two projects, collocation of oil and gas pipelines, shortage of gas, problems in the Liquefied Petroleum Gas (LPG) sub-sector, power problems and other sundry issues.
What is the global market share of Nigerian gas?
The country is controlling 10 per cent of the global gas market. The market size is growing, a development, which would encourage economic growth in the country. The more Nigerian gas exported the better for the country. Just as crude oil and its derivatives, such as Petroleum Motoring Spirit (PMS), Diesel, and Kerosene, are sold to customers from different segments of the economy so also is natural gas compressed for the use of automobiles, liquefied for domestic cooking, transfered into turbines for electricity generation and sent as exports to markets in Asia and other parts of the world. The gas that is produced in the Niger Delta region is piped all the way to Lagos for use in Omotoso Power Plant; Papalanto Power Plant; Geregu Power Plant, Ugbelli and other plants. While many of the power plants are government-owned, others are not. For instance, the Federal Government owns the Nigerian Gas Company (NGC), which sells gas to different companies. Also, we have Escravos gas pipeline, which is serving as a major artery into Lagos.
What are the factors responsible for the delay in using gas for domestic and exports in Nigeria?
They are many. They include funding, withdrawal of major parties from the Liquefied Gas Project, and inability of the Federal Government to decide on what to do with natural gas in time. It is on record that Nigeria discovered oil in Oloibiri in 1956, and exported it through Shell in 1958. By mid-60s, Shell started thinking about exporting gas to the United Kingdom (UK) and there came the issue of North Sea Gas. This eventually stopped the preparation by the government to export gas to the UK. Despite this, some International Oil Companies (IOCs) tried to resuscitate the idea of exporting gas in the 1970s. The firms are Chevron, formerly known as Gulf Oil, Mobil and others. To achieve this goal, the companies wanted to site a gas plant in Bonny. But the government, at that time, kicked against the idea. The government insisted that the gas plants must be two, instead of one. It suggested that a gas plant must be located on the side of Bonny River (also known as Peterside), while another one must be sited on the Bonny Island itself. That also delayed usage of gas for both domestic and export purposes. Another one is marketing. Gas processing is a project which requires huge marketing efforts. It is a business that once a company starts it, it cannot stop halfway. The company must continue to process gas. In the gas business, there is what we called “Take and Pay scheme”. This means that the company must pay for gas, once it is taken. Even, when a firm refuses to take the gas, it still has to pay for the product. A firm must be able to produce gas, re-gasfied it and market it. This is aside the fact that it requires a longer period of time to consolidate the gas market.
What are the other factors hindering development of natural gas?
The inability of the government to get the required funding has hindered investment in gas. Gas project is ambitious and, therefore, requires proper funding. The first gas project is Bonny Liquefied Natural Gas (BLNG). The project needs six trains at a goal, 18 big ships. The vessels are huge and cost several millions of dollars. Phillips, an American company, was appointed as the operator of Bonny LNG, while the Federal Government has participation in the project. A lot of marketing efforts have gone into the project. But there was no funding. The then administration of President Shehu Shagari said it does not have money to fund such a multi-billion dollars project. Oil price dropped during the period. The government was dilly-dallying on the project. This made Phillips, the project’s coordinator and other firms to pull out. That marked the end of Bonny LNG.
How was the idea of NLNG Plant resuscitated in Nigeria?
The regime of Major-General Muham-madu Buhari (rtd) played a key role in reviving the idea of establishing the Nigerian Liquefied and Natural Gas (NLNG). The regime set up the LNG Working Committee between 1983 and 1985. The Committee later transformed in May 1989 into NLNG, of which I became its second Managing Director. The NLNG’s pioneer Managing Director, Dr Onya, retired two months after, due to some disputes between the firm and the Federal Government. Thereafter, Shell provided an acting Managing Director for the firm, and I later came in April 1990, as the firm’s substantive Managing Director.
Why is it that Nigeria is not leveraging its huge gas potential to cushion the effects of the fall in the international prices of oil?
The government wanted to capitalise on the huge gas reserves to record some economic gains, but it was unable to do so, due to lack of enough funds. For instance, the government has set up two gas projects – the Brass Liquefied Natural Gas (BLNG) and Olokola Liquefied Natural Gas (OkLNG) – but funds stalled the take-off of the two projects. The projects have not been able to come on stream, due to poor funding. The government does not have money to invest in the projects. The funds are not just there. The projects are unable to take off, due to absence of Final Investment Decision (FIDs). Neither Brass nor Olokola LNG has reached the level of signing Final Investment Decisions. Final Investment Destinations can only be in place after the two firms have started selling gas, signed Special Agreements to support them, and are awarding contracts. When this happens, they would need money to pay the contractors, as the work on the projects progresses. Until those three elements are present, there cannot be FIDs. However, for some reasons, I do not want to go into details of having FIDs on the Olokola and Brass LNG.
But will the government make up for the money spent on the project?
Two factors should be considered, when siting a plant for the processing of Liquefied Natural Gas. The investment is huge and also needs a long gestation. It is not the kind of investment one does today and expects dividends tomorrow. One has to wait for some time for the investment to mature. Mind you the government has other projects in its sleeve and may not want to wait for long, before it recoups its investment on gas.
Is NLNG not strong enough to support economic growth?
The firm has been playing a role in this regard. It has demonstrated the capacity to grow the economy. The company has the opportunities, experience and infrastructure to grow gas both at the domestic and exports levels. This is the major reason the company is planning to expand its investment frontiers, by building Train 7 & 8. The firm is strategically planning for the projects. NLNG cannot do it alone. The company needs the approval of the Federal Government on the project, since its owns 49 per cent shareholdings in NLNG, through the Nigerian National Petroleum Corporation (NNPC), while the International Oil Companies, such as Shell, Agip and Total own the remaining 51 per cent stakes. NLNG must carry all the Joint Venture partners along to achieve its desire results of boosting gas exports in the country. The firm impresses it on the Federal Government to give it approval and allow Trains 7 and 8 get to the level of Final Investment Decision (FIDs) first. Once Trains 7 and 8 get to that level, the partners would be able to access enough funds, as they must have gone to the International Financial Markets for the fund or explore other sources for money.
The Federal Government seems to have got the biggest chunk of $32 billion dividends, which NLNG has declared so far, despite its limited stakes. Why?
The answer is simple. The government has 49 per cent stakes in NLNG, implying that the government is the single largest investor in the company. As a result, the government is able to get the huge dividends. The other partners; that is, Shell, Agip and Total have fragmented shares, which when they add them together, give a total of 51 per cent. Each firm gets its own dividends as well, and there is no way it can equal that of the government. Mind you, the firms are investors in NLNG and not a consortium, a development, which made it difficult to get dividends higher than that of the Federal Government. Prior to this period, we proposed that the government through NNPC should have 60 per cent, while the three oil majors have a combined shares of 40 per cent, when I was the Managing Director of NLNG. The idea worked. But the fears that the government may not be able to borrow from the international financial markets, if that happens, resulted in reduction of its shares to 49 per cent. Another reason is that the idea would confer more powers on the government, which means that the government would not only be calling the shot, but can also sack any of its partners, whose conduct runs contrary to the goals and the objectives of the organisations.
A lot has been said and done on the amendment of the Act that set up NLNG. What is your take on it?
The Petroleum Club (PC) of which I’m the chairman has written a letter to the committees on Gas in the Senate; The club, also sent copies of the letter to the Senate President, Dr Bukola Saraki; the Speaker, House of Representatives, Hon. Yakubu Dogara and the Vice President, Prof Yemi Osinbajo. In the letter, we stated that the issue of amendment of NLNG’s Act will be sending a wrong signal to the foreign investors, that the parliament can wake up one day and change the law, after they have signed a Memorandum of Understanding (MoU) to do business in Nigeria. What we are saying is that if there is any need to amend the Article of Association of a normal company, the Senate can do it. Our argument in the case of NLNG is that it was set up under a special arrangement. It was during my tenure that a decree was promulgated; it was not just left for the company. It was the Inter-Ministerial Committee that drafted that Guarantees and Assurances of NLNG. Those guarantees and assurances say that we are going to give you pioneer status; that NLNG would not be paying tax for many years. But the company has started paying taxes, which implies that the pioneer status given to NLNG has changed.
What is the main thrust of the amendment of NLNG Act?
The main thrust of the amendment is the payment of the per- centage of the NLNG’s revenue to the Niger Delta Development Commission (NDDC). That three per cent would come from no other source than the dividends that would have gone to the Federal Government and other owners of NLNG. In fact, the larger percentage would be coming from the government. That is why we are saying that the issue of amendment of the Act that set up NLNG is wrong. It does not make sense if the three percentages is coming from one government’s agency to another government’s agency. If NLNG gives three per cent of its dividends to NDDC, that is a huge sum of money. The law guiding the operation of NDDC says oil and gas producing companies in the Niger Delta, must pay NDCC three per cent of their earnings. Mind you, NLNG is a gas processing company, and not a gas producing company. Already, the IOCs, namely Shell, Agip, Total and NNPC, are producing the gas and selling it to NLNG, of which they are owners. Now, the law is saying that the owners of NLNG, which incidentally are producers of gas in the country, should be paying three per cent to NNDC. This is wrong. That is the reason the matter is being delayed in the Court.
If NLNG is paying three per cent of its dividends to NDDC, coupled with the fact that the firm is allocating huge sums of money for Corporate Social Responsibility (CSR) for the area.
Cuts in: From all indications that idea amounts to a duplication of efforts. Besides, such an idea would reduce the contributions of the NLNG to Nigeria. Already, NLNG is funding projects in six of the Federal universities in the country. The company is spending a lot of money on engineering projects in those schools, coupled with other projects it is financing in the region.
What is the level of LPG consumption in Nigeria?
The usage of Liquefied Petroleum Gas (LPG) is growing in Nigeria, though still very low compared to countries, such as Benin Republic, and Ghana . For instance, LPG per capita income is higher in Ghana, Benin Republic and Ivory Coast, when compared to Nigeria. Though NLNG has increased the supply of LPG, also known as cooking gas from 150,000 metric tonnes per year in 2007 to 250,000 metric tonnes and later 350,000 metric tonnes in 2016, the figure is still far. NLNG has the right to provide enough gas for the country and I believe the firm is looking in that direction. But there are bottlenecks. First, is the issue of lack of enough reception facility. The jetties for the supply of LPG are not enough; so also the farm tanks and other facilities needed to ensure seamless distribution of the product in the country.
What role can the government play in this?
I understand that NLNG is providing some form of supports to the operators, to make LPG accessible to users. Also, associations that operate under the umbrella of LPG in the country should help in providing infrastructure in the sub-sector. The downstream operators such as Oando, Conoil, Nipco, Techno Oil and others are also trying to improve the operation of the sub-sector.
But cylinders manufacturing companies in Nigeria are moribound?
Though I do not have detailed information about the LPG sub-sector, I know for sure that Nigerians have started manufacturing cylinders. For instance, Techno Oil has invested a lot in cylinder manufacturing. The company is producing small cylinders to make the product affordable in the country. The company produces cylinders of 5 kilogramme, 10 kilogrammes and others, which most Nigerians can afford. The cleanest fuel in the country now is cooking fuel. It is friendly, because it’s reduces environmental and health hazards such as smoke unlike firewood and kerosene.
What is your take on collocation, known as citing of oil and gas pipelines close to areas where they are needed in the industry?
Collocation is good and come with its own merits of providing seamless distribution of oil and gas in the country. But the idea cannot check pipeline vandalism and its dire consequence on the nation’s oil and gas and electricity sector. We saw what happened in Ibafo, Ogun State weeks ago, when militants, who claimed to be guiding the pipelines are allegedly breaking the facility in order to steal fuel. NLNG cannot collocate, in view of its corporate responsibility of processing gas. There is a limit to the supervision or monitoring of collocated pipelines, by the security agencies, such as army, navy and the police.
What does Energy Resources Limited do?
The firm is a privately owned company. It was set up to promote the growth of the oil and gas sector, by advocating proper utilisation of the products to move the sector forward.