Nigeria LNG Limited, recently announced that it was making steady progress towards achieving Final Investment Decision (FID) on its Train 7 project in 2018.
This phase of the company’s growth programme will on completion increase NLNG’s annual production capacity from the current capacity of 22 mtpa to 30 mtpa and may generate additional 18,000 jobs in the country.
While the increased capacity is very good news, this piece advocates the need for balance and flexibility in marketing the increased LNG capacity.
Spot Market vs. Long Term agreements
LNG is a link between gas markets; LNG is a useful way to reduce exposure to ostensibly high
risk piped gas and the often rigid long-term contract structures of the average seller. Some
sellers own substantial parts of the gas export market and control of the pipeline system in
certain regions that they limit the emerging players there from exporting natural gas.
Long term contracts
The LNG market has long been dominated by oil-indexed prices and long-term contracts. Long
term contracts usually include take-or- pay obligations "by the buyer to either take-or- pay for a certain quantity, with such obligation typically being measured over the course of the relevant contract year." Long term contracts also specify the destination of the LNG, isolating markets and reducing the possibility of gas-on- gas competition. A long-term contract can last 15-25 years, but they can be renegotiated as market conditions change.
Pure LNG spot trading; trades where cargoes are delivered within three months of the transaction
date; made up 18% of total imported LNG volumes in 2016, an increase from 15% the year
before, industry group GIIGNL said in its annual review.
Cold winter = Stronger Spot Market
The Spot market is sure to make a strong showing this winter. Accuweather.com reports that the
2017/2018 winter is going to be very cold. The colder it is the more gas is consumed for heating
by homes trying to maintain their internal temperature.
Platts.com reports that strong demand for LNG spot cargoes amid the limited availability of
vessels is pushing up charter rates in both the Asia Pacific and Atlantic regions, providing a
boost to the long depressed shipping market, market sources said this week. The Asia Pacific day
rate was up almost 30% at $52,000/day Tuesday from $40,000/day in early October, according
to Platts assessments. Bullish sentiment was also reflected in the rise in the so-called ballast
bonus or positioning fee, often seen as a barometer of the health of the shipping market, the
For now, I see a continued mix of long term contracts and the spot market while domestic demand for LNG will continue to grow due to the emergence of Small Scale LNG.
Regardless of whether you favour long term contracts or the spot market, there will be a
convergence between the long term markets and the spot markets as long-term contracts will
feature shorter term options and more flexible options which can be negotiated by both parties.
The long vs. spot market paradigm is not material when applied to one contract, one supplier on
a single route. The paradigm is of significant interest when there are a number of sources of
supply; the market is saturated with sufficient gas and growing consumer flexibility that can
easily adapt to risk-rewards of short and long trade while balancing base and peak consumption.
The “spot instead of long term” paradigm without altering trading terms for market players, will
not amount to much.
China and India are good markets with strong demand for Spot LNG
Reports have it that gas consumption in China has risen 15 percent in the first half of the year,
including a 27 percent jump in June, as industrial customers shift toward the fuel and as
distributors add more residential users.
FT.com reports that strong Chinese and Indian demand propelled Asian liquefied natural gas
prices to an 10-month high, reflecting a scramble for supplies ahead of the northern hemisphere
winter. In India, schools in New Delhi were ordered closed this week due to smog. Breathing
New Delhi’s air right now is the equivalent of smoking 45 cigarettes a day!
(http://berkeleyearth.org/air-pollution- and-cigarette- equivalence/)
In addition, Chinese President Xi Jinping’s government has aggressively driven the switch by
households and industries from coal to natural gas in a bid to help clear the nation’s notoriously smoggy skies. This move is pushing up import demand amid an already tightening overall Asian market and will further heighten demand during the cold winter spell. China recently banned the use of diesel trucks to transport coal at northern ports in provinces like Hebei and Shandong, and in the city of Tianjin!
After years of not really talking about it, Nigeria needs to control its own energy future, (exporting most of the gas we produce is far from effective control).
While Nigeria strikes a balance between spot markets and long term agreements for the sale of additional capacity from NLNG train 7, Nigeria needs to supply enough gas to eliminate the severe “energy deficit” being experienced in Nigeria while it strives to produce and refine our gas into more valuable finished goods at home. Nigeria needs to consider getting its cars to switch to gas while shifting its focus to renewable energy, need to double/increase the amount of renewable energy Nigeria generates from the elements. The world is shifting its focus to gas as a transit fuel to renewable energy sources; Nigeria would do well to restructure its energy industry to begin to take advantage of the season of plenty by preparing and providing for future generations of Nigerians.
Olufola Wusu Esq. © 2017
Olufola Wusu is a Commercial/Oil & Gas, I.P. Lawyer and Policy Consultant with Megathos
Law Practice based in Lagos