Should NLNG model be gold standard for gas contracts in Nigeria?

At the executive roundtable discussion first Nigeria International Petroleum Summit (NIPS) in Abuja, last week, Sadeeq Mai-Bornu, deputy managing director of Nigeria LNG Limited (NLNG) said the NLNG business model needs to be replicated in order to generate opportunities for the power and gas sectors in the country.

“We sign a 20-year contract for the supply of molecules and we can actually go to the bank and get the funding we need.  When NLNG was set up, it had guarantees and incentives that safeguarded investments and returns. There was also the sanctity of contracts. That is what has helped NLNG. This model needs to be developed in the upstream and downstream,” was quoted as saying.

Mai-Bornu also said, “Moving forward, NLNG is investing in expansion with a Train 7 project. It involves a huge amount of money but because the markets are there, we are in the position to invest up to $5 to $10 billion both in the upstream for the gas supply and in the infrastructure to construct the Train. There is opportunity in that area.”

It is important to note certain critical factors that have helped the NLNG achieve success. The company operates in the mid-stream sector which means that the bulk of the risks of gas exploration have been taken by the upstream companies. Also, International Oil Companies (IOCs) have participated in the NLNG because of strong assurances and commitments from Nigeria which literally elevated the NLNG Act to the status of a treaty. This helped to insulate the contract from the vagaries of regulatory uncertainties until now.

Last year, the House of Representatives amended the NLNG Act compelling it to make contributions to government agencies including NDDC removing the assurance and guarantees it had hitherto enjoyed.

This occurred at a time the NNPC is negotiating Train 7 of the NLNG with various parties to the contract. The lawmakers did not care about the bigger picture: the need for the country to monetise its gas resources using the NLNG model which has proven effective, the possibility of Trains 7 and 8 adding  new 18,000 jobs.

The senate has not amended the NLNG Act as the lower house has done which remains the hope of the Act for now. Nigeria was willing to forego benefits of billions of dollars in taxes and dividends just to ensure the NLNG pays a 3 percent annual budget to NDDC. It did not matter that paying a 3 percent of NLNG budget to NDDC would not create the same amount of jobs and investments.

Nigeria’s LNG could not kick off after it was first proposed in 1968 because of the huge capital investment required which Nigeria did not have. Investors wanted assurances and guarantees that they will recoup their investments. In 1990 Nigeria granted the investors a ten year pioneer status as well as generous concessions that prohibited further taxation and levies.

ISAAC ANYAOGU