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Thomas: Olokola, Brass LNG Hamstrung by over politicisation of economic decisions

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Dada Thomas

President, Nigerian Gas Association (NGA), Dada Thomas, in this interview with KINGSLEY JEREMIAH, said sloppy formulation and implementation of policies, as well as, failure to take swift economic decisions contributed to the comatose state of the Brass and Olokola Liquefied Natural Gas projects. Thomas, who is Founder/Chief Executive Officer of Frontier Oil Limited, also said the absence of good and competitive fiscal terms, was responsible for the country’s inability to get credible investors in the gas sector, just as he listed pricing, payment assurance, foreign exchange exposure risks and sanctity of contract as big problems plaguing the sector.

BRASS and Olokola LNG have remained pipedreams 15 years after they were conceived. What are the factors responsible for this unfortunate situation?
These projects have been on the drawing board for over 15 years.

In those 15 years, the world energy situation has changed dramatically.  We now have a situation where LNG prices have crashed globally.  

The United States that used to be a main importer of LNG has become an exporter because of the shale gas revolution.

The U.S. LNG is now competing in the same market that we are in.

The Australians have come up with serious LNG projects, which are feeding the far eastern market, which they are geographically close to, and have strong alliances with.

So, the market has become more competitive, and it is a shame that we missed the demand/supply gap windows because the LNG windows are cyclical.

The opportunities come and go, and if you miss a window, you might have to wait for another 10 to 15 years for the next opportunity window to open.

It is a pity that this country missed the Final Investment Decisions (FIDs) on these two projects, but it is a good thing that at least we are seeing progress on the FID for the Train Seven of the Bonny LNG.

If they take the FID by December 2018 as anticipated, the plant will be expanded from 22 million metric tonnes per annum to 30.

The addition of eight million metric tonnes per annum will put us back in the league of top four LNG producers and exporters in the world, and that would be very good for Train Seven and Nigeria.
  
Having said that, I would say that we missed Olokola LNG and Brass LNG because we over politicised economic decisions and have continuously failed to make decisions swiftly and properly in the overall interest of the nation because the speed of making decision in todays’ world is critical.

We cannot have a globally dynamic ecosystem in which we are not in control, yet we delay decision for 10 years, whereas other people make swift decisions and bring projects on stream in less than five years.  

As a result, they have ceased the market while we have lost out.

A good example of this is Ghana, which has gone from almost zero gas production to 150 million standard cubic feet /day and is now aiming to produce about half a billion standard cubic feet/day in five years time.

This means Ghana won’t need our gas, which is supplied through the West African gas pipeline, in the coming years.

From being a net importer of LNG, America has now become an exporter of LNG via the Cheniere LNG project on the East Coast of America, in the last two years.

It is really unfortunate that we played and dragged our feet in making economic decisions that would have been good for the entire nation.

So, it’s a sad situation now, and I am sad that we missed those market opportunity windows, but I am happy that at least the NLNG Train Seven may soon see the light of day.  

On who I blame, I blame all of us for our collective failure on this issue, but I particularly blame those who are in charge of formulating and implementing policies for not taking economic decisions fast enough to meet the dynamics of a rapidly changing world, which is not waiting for anybody. It’s either you join the train or you get left behind.

Is there still hope for these two important projects?

The hope for these projects will depend on the demand/supply gap window that will be available in the international LNG market, that hope is quite bleak because there are many LNG projects coming on stream, or in the pipeline that may have already captured the potential market opportunity.

Prices have also remained somewhat depressed because there is an oversupply, and the fact that the LNG market is changing dramatically, in other words, it is no longer the sellers’ market, and so we can no longer demand a 20-year contract because an LNG spot market has merged, similar to the oil spot market.

So, that window that would have allowed us to do Olokola and Brass is not readily there.

But the window exists for NLNG Train Seven because they have got 20 years of proven track record, as well as, existing customers who have confidence in them.

Train seven is a project that is cheaper to execute than a new Green Field project.

Therefore, the unit cost of development and production will be lower than starting afresh, which means the product must be competitively priced.

That is what the buyers are looking for along with reliability of supply.

Since the gas market appears bleak, what is the rationale behind the current administration’s strong country focus on gas?
 
The international gas market is challenging, not necessarily bleak.

However, the Federal Government is now very focused on the potentially huge Domestic Gas market (DomGas) because we have 192 million people who need power, transportation, shelter, clothes on their backs, and food  on their tables. 

There is a need to use gas to generate power, to produce fertilisers, produce petro-chemicals and clean fuel for cars so that we don’t have to be spending billions of dollars of our oil money importing petrol, diesel, LPG and petro-chemicals.

There is a need to generate gas to produce LPG so that our women and children don’t have to walk 10 to 20 kilometres to look for firewood, thereby wasting up to six hours of their days.

So, the domestic market is huge, but for that domestic market to be truly viable and actualised, several obstacles must be removed.

And what are these obstacles?
 
The two biggest obstacles to the development of the domestic market has always been the price of gas and non-payment by consumers. 

Historically, gas price has always been regulated by the Federal Government and because of this, International Oil Companies (IOCs) do not want to develop domestic gas.

Why would they want to spend dollars only to be paid in naira, or not event get paid at all.

For many years in this country, DomGas was primarily consumed by the now defunct NEPA, which took the gas from the IOCs, used it and never paid for it.

So, NEPA accumulated huge legacy debts going as far back as 30 years, some of which have only just been recently paid by the government.

Can you imagine doing a business in which you invested plenty money, and somebody takes your product and doesn’t pay you for 30 years. 

Now, the pricing matter is being addressed gradually. It started over eight years ago.  

Gas prices were increased from about 10 kobo per thousand cubic feet many years ago, to the minimum price of $2.50 per thousand cubic feet, which it is today, excluding transportation tariff, for the power sector, which is the largest consumer of DomGas.

The price is not bad as it stands, but it is not necessarily the optimal or the highest price.

The real solution to pricing and payment is a fully deregulated gas market, with market reflective pricing, based on willing buyer and seller framework.

This means if you have a factory or you are planning to build a fertiliser plant and I produce and or sell gas, government should leave us alone and allow us to have a commercial discussion between ourselves.

I’m sure that somehow, we will come to an agreement that is good for both of us.

It is called willing buyer and seller. The government should not be regulating the price of gas; it should limit itself to technical regulation in order to ensure safety of the environment

The third obstacle, which is related also to pricing is that the infrastructure to move gas from where it is produced in the Niger Delta to the consumers who are all over the country is not adequate.

Why isn’t it adequate? Gas prices have been low traditionally and inadequate to pay the cost of transportation. 

Nobody wants to invest in the transportation infrastructure without being able to recover his investment and make profit.

Because gas prices were stifled for so long, it was only government via the Nigerian Gas Company that built the major infrastructure that exist in Nigeria today.

Why would any private sector entity invest in infrastructure knowing up front that the project would lose money?

So, we don’t have enough distribution infrastructure to move the molecules from where they are produced, to where they would be turned into value added products for local consumption.

We need to increase the infrastructure for moving gas from the production point to the consumers.

It will cost a huge amount of money and requires external investment.

Thus, investment will only come if investors are assured of making decent returns on their investment.

Beyond these enumerated factors, are there other reasons why investment in the sector is happening at snail speed?
 
The major reasons why investors are not coming into the Nigerian gas space to invest is that nobody wants to invest in a project in which they don’t get their money back and, for external investors, they can’t get their money out of the country.

Also, the nature of gas projects in Nigeria is challenging.

As I mentioned earlier, customers, especially the power sector, has been taking gas and not paying for it as at when invoices are due.

This ruins an investor’s project, economics and financial projections.

It means that when you borrow money from the bank and your customers are not paying your invoices as at when due, or paying you piecemeal, you cannot repay your loans or even the interest on them.

It also means that whether you like it or not, you are on the slippery road to certain bankruptcy.

It is just a matter of calculating how long it will take to bust.

The power sector owes a huge amount of money to the gas sector because gas producers are not being paid their invoices as at when due.

That is bad for cash flow and for the economics of gas projects.

Investment in gas is mostly in U.S. dollar because we are not a manufacturing or technological country.

We import the equipment and materials to develop gas project from abroad and we pay for these in U.S. dollar.

It is only a tiny bit of the labour components for installing the gas plants locally that is done in naira.

It would be equitable if gas invoices are paid in U.S. dollar, so that you could easily repay your U.S. dollar loan.


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