Liquidity ratios: Producing and selling natural gas in different forms

With the natural gas extracted from underground coming in a gaseous state, it is somewhat amazing that much of what is produced by Nigeria has so far left the country in liquid form. Interesting, too, that the form of gas with which the local consumer is most likely to come into direct contact is also liquid, and comes in bottles. The former is liquefied natural gas (LNG), and the latter liquefied petroleum gas (LPG).

BONNY PERFORMANCE: So far Nigeria has only one LNG plant, at Bonny in Rivers State. However, it is a big one, among the largest in the world. Comprising six trains – the first two commissioned in 1999, the last in 2007 – it has an annual capacity of 22m tonnes. And it has been operating pretty close to it, chalking up 21.2m tonnes in 2011, equivalent to around twothirds of Nigeria’s gas output, or at any rate such of it as is not flared or reinjected.

It is a lucrative business, too. Revenues for 2011 exceeded $10bn, while during the Bonny plant’s lifetime, dividends for the government from Nigerian Liquefied Natural Gas (NLNG) – the company that owns and operates Bonny – have amounted to about $9bn. This not a small amount, especially given that the government (represented by the national oil company, Nigerian National Petroleum Corporation, NNPC) only owns 49% of it, the rest being held by subsidiaries of Royal Dutch Shell (25.6%), France’s Total (15%) and Italy’s Eni (10.4%). The benefits do not stop with dividends: NLNG can justly claim credit for much of the reduction of the practice of flaring over recent years.

PROFUSION OF PROJECTS: Bonny is looking to expand. A proposed seventh train would bring annual capacity up to 30m tonnes. Being so profitable, it could raise the money itself and would not need to rely on public funding. Only government go-ahead and shareholder support are needed, declared Rivers State notable – and one time interim Nigerian head of state – Ernest Shonekan in May 2012.

In addition to an expansion at Bonny, new facilities are in the works, including a 10m-tonne-per-year plant in the offing at Brass in Bayelsa State. The largest shareholder in the project is NNPC (30%), while US-based ConocoPhillips, Total and Eni each hold 17%. After being delayed for some time, the project now seems to be moving forward.

Another planned facility is the 10m-tonnes-per-year Olokola LNG (OKLNG) plant, the proposed centrepiece of the Olokola Free Trade Zone. NNPC holds 46.75% of the project, with Shell and Chevron each owning 19.5% of the shares. However, the joint venture recently suffered a defection, with the UK-based BG Group, which holds a 14.25% stake, announcing in May 2012 its withdrawal in connection with a more general pull-out from Nigeria. However, there seems to be no shortage of possible takers for the share, with Britain’s Centrica and LNG Japan among those mentioned as interested. Also in May, Shell Global Solutions (the consulting arm of the oil giant) confirmed the project’s viability, provided that it proceeds quickly enough to come on-line in 2018.

However, some in the industry have doubts that these new facilities will be realised. “I feel that the discussed LNG projects will only materialise if the costs of getting them up and running are revised. Not only are the budgets for Brass LNG and OKLNG now much higher than they were when they were originally designed, shale gas developments in the US have adversely impacted on global demand for LNG, so the business case is no longer there, unless the cost of setting up these projects goes down,” Tein George, the chairman of Aveon Offshore, told OBG.

GLOBAL COMPETITORS: On the other hand, some say that time is running out and Nigeria should invest sooner rather than later. Once a world leader in LNG with a global market share of 10%, Nigeria has slipped down the table as global markets have expanded – with Qatar’s annual output now way ahead at nearly 80m tonnes. Gas companies are looking at East Africa, geographically handier for crucial Asian markets than West African Nigeria. And shale gas is turning the US from a net importer of LNG to a net exporter. Make haste, some conclude. Cut losses, say others: Nigeria really ought to be concentrating on its own needs instead of looking to an increasingly problematic international market. However, this is a minority view.

A BURNING ISSUE: Meanwhile, the humbler topic of LPG – or “cooking gas”, as it is known locally – is certainly on some people’s minds. It is something that NLNG makes quite a lot of, LPG being a by-product of gas processing on its sixth train.

However, the local market for it is remarkably limited. Annual consumption is around 100,000 tonnes a year, which translates into 0.4 kg per head of population. “That’s 10 times less than countries like Ghana and Senegal,” notes Nuhu Yakubu, the CEO of Banner Energy, a company with an interest in LPG.

This is unfortunate, since LPG is a versatile product. Use it for cooking, and it can replace kerosene, a product that is environmentally dangerous and in fitful supply in Nigeria. Or firewood, which is worse: it is reckoned that 95,000 Nigerians a year die from the effects of wood-burning stoves, not to mention the deforestation their use causes. It also has industrial applications – using LPG to fuel back-up generators at a factory can be cheaper than diesel. Or car engines can be converted to use LPG instead of petrol.

But there are obstacles. One, said Yakubu, is that petrol (which is subsidised), is cheaper than LPG (which is not), so there is little incentive for people to get those engine conversions. Another challenge is transport. With Nigeria’s railways dormant, getting LPG to places distant from production points – notably the north – involves trucking it over roads that are in poor shape. Another potential concern is safety. LPG is quite safe if you are using new bottles, but in Nigeria there is a tendency to make roadside transfers between bottles that are anything but new. So more regulation on use could be helpful, as could be a change to the subsidy system.

GRADUAL CHANGE: And yet, there is progress being made. Banner is installing its LPG tanks in the forecourts of the filling stations of petrol chain Oando and is also steadily rolling out its own distribution network in the north. Oando itself is being quite innovative, offering a “pay-as-you-gas” facility in those forecourts, allowing customers to put the desired amount into their own cylinders. It is also offering smaller 3-kg cylinders, which it reckons will put LPG within the reach of 5m low-income households.

And Oando’s rival Conoil – whose LPG brand is Congas – has a 5000-cylinder-per-day bottling plant in Lagos. The company also has plans to build additional facilities in Abuja, Port Harcourt, Kaduna and Kano. Moreover, the firm has a “new cylinders for old” scheme, which should contribute to safety.

On a governmental level, the three central processing facilities envisaged in the Gas Master Plan are to function as production and distribution nodes. All of this should help with a target that the government has in mind, raising annual consumption to a million tonnes by 2015, or 10 times higher than it was in 2011.

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The Report: Nigeria 2012

Energy chapter from The Report: Nigeria 2012

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