New Incentives Under way for Gas Investors
By Funsho Kupolokun
I am delighted that we have achieved the Final Investment Decision (FID) for the NLNG Six Project. It is a milestone that has been achieved as a result of the hard work and close co- operation of NLNG Management and its staff and its Shareholders, NNPC, Shell, Total and ENI and the support and commitment of the Government of the Federal Republic of Nigeria.
Prior to 1999, Nigeria had no gas exports and was the largest flarer of gas in the world, releasing more than 2 million standard cubic feet per day of gas to the atmosphere, with adverse environmental consequences.
Consequently, the Federal Government's natural gas aspirations on assumption of power in 1999 included the following:
Eliminating gas flaring and addressing the attendant environmental issues
facilitating development of the domestic power sector
"levelling the playing field" between oil producers and other parties involved in the domestic gas business
Increasing private sector participation
Capturing economic value of gas thereby generating as much revenue from gas (as oil) within the decade
Since 1999, the flare ratio has been reducing steadily such that the ratio is currently less than 40% in comparison with 68% in 1999. This is due in part to the shift in policy from penalty to promotion of new gas projects.
The natural gas sector today is characterised by a flurry of activities such as:
The West African Gas Pipeline (WAGP) project which is a true landmark in West African co- operation.
Brass LNG.
Gas-to Liquids at Escravos.
Independent Power Plants (IPPs) - Afam, Kwale/Okpai and others at various stages of development.
We now process 1.500 million standard cubic feet per day of gas for export and with Trains 4/5 and 6, it will reach 3,500 million standard cubic feet per day (MMSCFD) of gas, much of which will be associated gas. That is about 600,000 barrels of oil per day equivalent. It is perhaps pertinent to inform this gathering that with the other ongoing projects, i.e. WAGP, Brass LNG, GTL, Afam and Kwale/Okpai IPPs as well as the substantial boost in domestic gas consumption as a result of the transformation going on in the power sector, the quantum of gas monetised at the end of these projects would be about 5,800 MMSCFD of gas representing a phenomenal 1 million barrels of oil per day equivalent.
From the above, it is obvious that Government's directive that gas be monetised rapidly with the objective of earning as much from same by the turn of the decade which seemed like a tall order to some commentators in 1999 is now turning out to be a pleasant reality for all stakeholders in the natural gas sector. Indeed, we make bold to say that we are on course.
At this point, we salute President Olusegun Obasanjo's vision, courage, leadership and determination that is generating this gas revolution that we all witnessing today.
It is not only for the economic benefit of our country but is also an important contribution of Nigeria to the shift towards more environmentally friendly fuels.
Since production started in 1999, the Nigerian LNG has been one of the fastest growing endeavors in the world. Among others:
� Train 3 was commissioned in November 2002
� Trains 4 & 5 FID was taken in March 2002 and first gas-in is expected for 2nd quarter 2005
� Upon start-up of Train 6 in October 2007, it would add 4.1 million tonnes per annum (mtpa) of LNG bringing total output of LNG from Nigeria to 22 Mtpa.
This growth of NLNG that I have described is the most rapid in the history of the LNG business. After the long and arduous struggle that finally resulted in the loading of our first cargo in October 1999, we now confidently look forward to NLNG becoming one of the largest LNG complexes in the world, when Train 6 comes on stream in October 2007.
Although the sixth train is of the same design as Trains 4&5 of the NLNGPlus Project and is being implemented as an extension of NLNGPlus, under what is called the 2+1 concept, the overall NLNGSix Project is large and complex and includes the addition of storage and loading facilities for LNG and its by- products, extensions to utilities systems, upgrading of the electrical infrastructure and control systems and some additional processing units. In addition, the Bonny Channel is to be deepened and widened to reduce the dependence of shipping on the tides. This will pave way for increased LNG export and also to maintain the highest industry standards. The Project also includes six new LNG tankers, which are to be built for the Project and chartered to NLNG by third parties.
We in NNPC have remained vigilant in the fulfilment of our Shareholder governance role, on behalf of the Government and people of Nigeria, to ensure probity and transparency in all the contracting activities and to ensure that the contracting strategies give the project and the nation the best value for money.
We are also committed to the highest international environmental and safety standards and Sustainable Development through Community Assistance and Development, Nigerianisation of the workforce and management and enhancing the utilisation of Nigerian equipment, materials and services i.e. Local Content. We shall exercise this governance on a continuous basis and we shall benchmark our performance against other countries in the business.
Prior to the major third party financing exercise for NLNGPlus in 2002, all the LNG Plant financing of more than $ 4 billion was provided directly by shareholders. 49% of the funding was by NNPC and 51% by the private Shareholders, Shell (25.6%), Total (15.0%) and ENI (10.4%). Upstream gas supply by joint ventures of NNPC with the Nigerian affiliates of the NLNG Shareholders and Phillips Petroleum were also multi-billion dollar investments.
I must commend these multinational oil companies for the confidence that they have shown in Nigeria by making these large investments. I am pleased to note that the investments are now yielding good returns, for the Upstream through gas sales to the plant and for the Shareholders in the plant, through accelerated repayment of Shareholders' Loans and through dividends, the first of which was paid in June 2004. The expansion of the plant to six trains significantly improves the economics of the Venture and it is my prayer and confident expectation that all the Project's investors will reap substantially larger rewards over the coming years.
LNG is the linchpin of government's strategy of the development of its gas industry. None of the impressive LNG achievements that we have had in recent years, including the FID for NLNGSix that we have taken today, would have been possible without the support and commitment of Government.
Government provided an enabling fiscal and legal environment for the project, provided NNPC with its share of project funding and directly, or through NNPC, removed many obstacles which would otherwise have been unsurmountable. We are beholden to Government and its agencies for the following:
The special enabling legislation of Decree No. 39 of 1989, including Government Guarantees and Assurances and providing a generous tax holiday, exemption from import duties and many importation regulations, foreign currency accounting, etc. The legislation was amended by Decree No. 1 13 of 1993 to give further concessions.
The Escrow Agreements signed in 1994, under which all the funds for the Base Project were lodged in offshore accounts. There have been subsequent Escrow Agreements for all additional projects, including NLNGSix.
Support for the $1.06 billion financing in 2002 for the NLNGPlus Project arranged by Citibank and involving the Export Credit Agencies of the UK, the USA, Italy and The Netherlands and with the participation of the African Development Bank and Nigerian commercial banks. Although the loan is without recourse to Government, letters of support were granted by the Special Adviser to the President on Petroleum, the Federal Minister of Finance, the Federal Attorney General and the Governor of the Central Bank.
There has been favourable consideration of NLNG's expatriate quota applications and the provisions of the Nigerianisation Plan were recently relaxed to take account of the rapid expansion to six trains. I expect the Management of the company to express its appreciation of this gesture by intensifying and accelerating its training programmes. I want to see Nigerians speedily achieving high levels of competence and moving swiftly into higher positions in the organisation. As I have already stated, NNPC will effectively play its Shareholder governance role on this all important matter.
High priority and special privileges have been granted to the Upstream gas supply projects.
The six trains of NLNG will take us much closer towards our goal of eliminating gas flaring by 2008. However, other projects are required since, even with NLNG, existing domestic gas projects and the Escravos Gas Integrated Project, no more than 15% of Nigeria's gas reserves of about 187 TCF is committed.
There will soon be a well articulated Gas Policy, with fiscal terms that will encouraged rapid development of the industry, prepared after extensive consultation with all the stakeholders. The policy will improve the prospects of the large number of gas projects waiting to be sanctioned.
Our efforts will include the encouragement and facilitation of indigenous industrial capacity for greater local involvement in the oil and gas industry which, at present, is largely external to the Nigerian economy.
On the subject of Local Content, I should state that the NLNGSix Project, like the NLNGPlus and Train 3 Expansion Projects before it, has a Nigerian Content Plan approved by the Shareholders. I commend NLNG for putting the plan in place and I challenge them to exceed all the targets in the plan and also to give us ambitious local Content plans for continuous and increasing local content after the completion of each phase of the Project.
Today's FID for NLNGSix is another step forward in Nigeria's industrial and economic development. It is a complex project with many technical, commercial, contractual and financial elements. It has been achieved by the good work and professional excellence of NLNG staff and its Technical Adviser, Shell Gas Nigeria B.V., The Hague, and as a result of the support and commitment of its Shareholders, the Nigerian Government and the host communities.
There are still challenges ahead. The plant must be built and commissioned on schedule and all the Upstream gas supply projects have to be implemented. The upstream facilities, the plant and the ships must then all be well operated and managed. If we continue with the professionalism, co-operation and commitment that has brought us to this point, we shall overcome all difficulties and continue to go from strength to strength.
Being an an address delivered by Engr. Kupolokun, NNPC GMD, at a dinner to mark the signing of the FID for LNG Train 6.
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