Olufola Wusu

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Mixed reactions have trailed the exit of ConocoPhillips, from the multi-billion Dollar Brass Liquefied Natural Gas (LNG) project through a divestment of its 17 per cent shareholding. Chairman of Brass LNG, Dr. Jackson Gaius-Obaseki, was reported to have said that the company’s departure will not affect the feasibility of achieving early Final Investment Decision (FID) on the project sometime this year. Brass LNG is one Nigeria’s growing LNG projects. It has been reported that a certain Nigerian company will probably replace Conoco.
If all goes as planned, that will be refreshing, and innovative. History…

The first commercial liquefaction plant was reportedly built in Cleveland Ohio in 1941. In January 1959, the world’s first LNG tanker “MEHTANE PIONEER” carried its LNG cargo from Lake Charles Louisiana to Canvey Island, United Kingdom. This event established the fact that large quantities of LNG could be transported across the sea safely and possibly established LNG as an “Energy Transportation Industry” that makes gas available to markets near or far.

What Is NLNG About? NLNG makes make “liquefied natural gas” available to the international market and when our local markets begin to consume LNG they probably will be willing to meet that need too. Transportation of gas has always been an issue; the cost of laying the pipelines alone was a major issue then came in LNG which reduces the size of the gas volume by a factor of 600. I know that the West African Pipeline project comes to mind; however, I am unaware of the feasibility and practicality of laying a pipeline from Nigeria all the way to America, Australia, Japan or even China.

What Does FID Mean? FID means Final Investment Decision.

This is the point where the shareholders, usually in a joint venture have come together, after reviewing technologies, economics, and the market, and are satisfied with all the details and have decided to proceed with a pending project by putting pen to paper and committing their funds, usually into an escrow account. The decision may be effected by signing a contract with a company that they will collaborate with to ensure its implementation. Why Do We Still Flare Gas? The Final Investment Decision requires adequate feed gas to its LNG plants to form the basis of sales contracts. The projects have to be sold before the plants are built and issues like source and price of feed gas for the LNG plant must have been sorted out. That is just one of the many issues that determine FID. Yes, the length of the contractual cycle can be a bother too. Need for Gas Utilization There is growing evidence of the assertion that Nigeria is a gas province with a drop of oil. What makes our equation sweeter is that our gas is not trapped; much of it is associated and comes out while we drill for crude oil.

How LNG Works… LNG companies buy natural gas, purify the gas to remove impurities such as hydrogen sulphide (which can be refined and sold as sulphur), other gases, sand, other compounds, and water (so the water does not become ice during refrigeration), then you refrigerate the gas at (-160) degrees Celsius so that the gas can turn into liquid. LNG (Liquefied Natural Gas) is simply gas in a liquid form. The LNG is shipped to the buyers, who on receipt of the LNG either use it like that (trucks, ships and other vehicles run on LNG) or turn the LNG back into gas and then pipe to their consumers.

Who Owns the LNG Patents Being Used?

Conoco Phillips is reported to own the patents and processes being used for LNG production in Nigeria, patents are negative rights in favour of the owner. In the absence of a patent a license is needed, this brings to mind a similar issue that occurred with the Polymer Naira notes.

There is a glaring need for proper contract review of Nigeria’s LNG transactions to cover assets contributed towards a Joint Venture; our review should cover issues like who owns the Intellectual Property contributed towards a JV? Who manages the said IP? What happens when a Partner contributing crucial (patents covering the LNG process) IP leaves?
If there are improvements on the IP (the LNG patent) contributed towards the Joint Venture who owns them? Is it the joint Venture parties or a Special Purpose Vehicle?

LNG Contracts Are “Take Or Pay” Take-or-Pay Contract are written agreements between a buyer and seller that obligate the buyer to pay regardless of whether or not the seller delivers the good or service. Generally, the obligation to pay does not involve the full amount due for the product, and protects the seller in the event that the buyer refuses to accept the good or service when delivery is attempted.

Take Or Pay Contracts The Take-or-Pay contract was mostly used in the sale of food commodities. A farmer may contract with a buyer to purchase the entire batch of a harvested crop during a given season. Where the buyer refuse to purchase the entire crop, he or she will still owe the farmer some form of reduced payment as compensation on the transaction, while allowing the farmer to look for buyers for the crop.

Region Specific Nuances
There are three major pricing systems in LNG contracts:
Oil indexed contract, the JCC (Japan Crude Cocktail )Contracts, used primarily in Japan, Korea, Taiwan and China, and Take-or- Pay Contracts based on a combination of oil products and other energies used primarily in Continental Europe and Market indexed contracts used in the USA and the UK.; Japan’s Nuclear reactors are coming back online. There was an earthquake in Japan in March 2010 this led to 50 reactors being taken offline, triggering off a shortfall in energy supply birthing a scramble that made Japan became the biggest consumer of LNG.

LNG Storage Tanks
Japan has some massive LNG storage tanks as part of its energy strategy; it buys the LNG and stores it away for a rainy day to cushion the possible effects of high LNG prices.

Emerging Trends…
Fixed LNG vs. Floating LNG
Fixed LNG basic advantages include sizeable creation of employment opportunities from construction to actual production and eventual transportation.

Floating LNG like Shell’s Prelude FLNG project coming on stream soon on the other hand carries with it the lure of lower production costs. Conclusion LNG Business is cutting edge. Unlike other business, in LNG as you sell the project, you sell the LNG product ahead of building the plants that will make the products. Some reports say it takes on average 50 to 60 months to build an LNG plant, which makes it fairly needful for us to get the FID wrapped up shortly so we can commence construction of the LNG plants to meet up with the LNG contract window that opens up in 2017.

LNG contracts are long term, usually with 20 (twenty) year duration, some of the contracts are expiring in 2017, thus all things being equal this will be a very good opportunity for Nigeria to expand its LNG market.

Olufola Wusu is a Commercial, Oil and Gas and I.P. Lawyer based in Lagos

Olufola Wusu Esq. © 2013

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