Asian market now next growth frontier for Nigeria, others

A market analysis by Fitch Ratings, a leading global ratings agency has found that growing gas demand from Asia, particularly from China, could swing the liquefied natural gas (LNG) market into a deficit by 2022-2025 providing opportunity producers including Nigeria.

Fitch arrived at this conclusion based on anticipated gas demand growth in the coming years driven by Asian markets that account for two-thirds of overall LNG demand.

“This is due a combination of healthy power demand growth in the region, natural gas being the fossil fuel of choice in pursuit of curbing air pollution, and the backlash against nuclear energy. Japan is currently the largest LNG importer, but China is catching up quickly and becoming the major market for LNG,” Fitch said in its report.

Also market expectations of oversupply and weak gas prices have curtailed new investment activity in the sector in the past two years. Limited capacity additions beyond 2020 should be positive for spot prices, especially in Asia and Europe, the report further said.

It is expected that this will benefit LNG projects with significant uncontracted volumes and those linked to gas spot prices. The ratings agency is confident about its forecast because unprecedented wave of new projects becoming operational in 2016-2019 has not resulted in, and is unlikely to result in a material surplus in the LNG market in the medium term as additional LNG volumes continue to find a home across a diverse array of countries and new buyers, and under more flexible contracts.

“The global LNG market is still in its formative stage. Pricing mechanisms, contract terms and financing structures continue to evolve. Long-term oil-linked contracts are giving way to increased trading activity, which represented around a quarter of all new contracts in 2017, according to IGU World Gas LNG Report, compared to just 1% in 2012.

New large LNG projects still rely on long-term contracts in order to secure financing. However, elsewhere contracts are becoming shorter, and the quality of counterparties is declining. Contract prices are increasingly de-linked from oil pricing with a growing focus on spot and hub-based gas pricing.

Implications for Nigeria

The NLNG is trying to remarket its expiring long term contracts increasingly relying on the traditional approach which in the evolving global LNG market may be quite inadequate.

The tested funding approach for new LNG capacity is often structured as non-recourse project finance and is dependent on sponsors’ ability to secure long-term offtake agreements, which buyers have been less willing to sign in anticipation of larger volumes of uncontracted LNG coming to the market.

Fitch recommends that “sponsors may need to commit a higher equity contribution to get funding for LNG projects, which will continue to delay final investment decisions (FIDs) for some time.” In the case of Nigeria, several factors hamper the completion of new projects including regulatory uncertainty and a market strategy that is unyieldingly skewed towards long-term funding contracts.

According to Fitch report, the LNG market could shift into deficit by 2022-2025. Gas pricing is expected to improve in the major importer markets, benefiting LNG projects relying on spot and hub pricing and entities with significant LNG trading portfolios. The NLNG has the option to intensify engagements with the market to win long-term contracts to remain profitable or to take advantage of rising enthusiasm for the spot market.

“We also expect oil companies to gradually return to their earlier LNG ambitions. This includes oil majors, like Shell, BP and Total, most of which emphasise the growing role of gas in the global energy mix,” says the report.

A rash of new gas discoveries by the oil majors indicates the growing interest in natural gas which represents the next investments growth area in the energy sector so smart governments are improving their fiscal environments to benefit. The diplomatic overtures from the East and China should include discussions about expanding the country’s gas market.

ISAAC ANYAOGU