How slump in oil prices cut over $2bn in NLNG revenue

Tony Attah, managing director and chief executive officer of the Nigeria LNG, at the official presentation of Nigeria LNG operations report on April 19 said fall in oil prices led to drop in 2016 earnings.

The company’s 2017 facts and figures publication, a record of its operational activities for 2016, states that a total of $4.723 billion was earned last year, the lowest in five years.

Nigeria LNG reported earnings of $11.5 billion in 2012, $9.6 billion in 2013 and $10.7 billion in 2014. Revenue fell in 2015 to $6.8 billion and further slumped to $4.7 billion in 2016.

However, the company’s market model involves selling gas in long term contracts, some as far ahead as a decade. Also, excess production from the company’s plants in the Niger Delta was shipped to markets in Asia last year.

BusinessDay sought clarification of how oil prices affected the company’s revenue.

“Gas production happens with oil production for the most part, and prices are also linked so a fall in oil prices affected gas prices,” explains Tony Okonedo, Manager, Corporate Communication and Public Affairs of NLNG.

Okonedo further said, “Prices were not what they were in 2014 and 2015 and as we all know, 2016 was a bad year for the industry globally, that is the general explanation,”

Our correspondent further sought explanation to clarify the correlation between how gas prices are indexed with oil prices when long term contracts are the norm.

Henry Biose, a petroleum economist, with the University of Port Harcourt says that “the fundamental principle of gas pricing indexed to crude oil price is based on the fact that gas is seen as a close substitute to oil and this is the basis of the gas to oil linkage in natural gas pricing. In the United Kingdom, It is called the Netback Market Principle (NBP Pricing).”

Biose further said, “If the gas prices continue to be tied to crude oil price, then already existing long term gas contract would definitely experience a drop in revenue with the current oil price. There is need to have distinctive market for gas like what happens in North America,” explains Henry Biose,

But that may be changing with new developments in the sector. Unlike in the past, where Nigeria drilled exclusively for oil and abandoned wells with large swaths of gas, Nigeria now drills deliberately for gas and most wells are now equipped with reservoir to store gas indicating a possibility that indexing gas prices to oil may give way to a situation where the commodity packaged and sold separately from oil.

NLNG is currently looking to renew contracts up for review in six years time. The company’s report also says it is expanding markets, moving more cargoes that it previously did to the spot market on account of supply dearth in Japan following the Fukushima nuclear disaster.

“NLNG has also executed over 48 Spot FOB LNG MSAs with various companies located across major LNG markets, enabling the sales of excess production volumes to the spot market,” the report says.

It adds, “Our LNG volumes were sold into Europe and North America. However, the Fukushima incident in Japan resulted in a high demand for LNG in Asia which created differences in LNG prices between Asia and other regions (Arbitrage). The arbitrage necessitated the movement of gas trade from regions of lower prices to those of higher prices.”

NLNG currently operates six trains at its Bonny Island location in Rivers State, from which it produces 22 million tonnes per annum of LNG, and 5mtpa of natural gas liquids from 3.5 billion standard cubic feet per day of natural gas intake.

ISAAC ANYAOGU