Nigeria LNG (NLNG) has begun talks with potential buyers on new contracts for gas supplies from trains 1-3 (Trains 1-3 are coming back to the market as they are out of contract by 2022) its first three production units at its liquefied natural gas (LNG) terminal, a senior official from the Nigerian company reportedly told Reuters.com.
In this piece I explain possible strategies NLNG may consider as it markets, the gas supply contracts for trains 1-3 that expire in 2022…
Long Term vs Spot Markets
The LNG market is rapidly evolving, from 20 year long term contracts to spot markets, the LNG market was dominated by sellers using take or pay contracts, often with stiff destination clauses. The LNG market has now switched to a buyer’s market, where buyers have been able to renegotiate the price of LNG shipments. The LNG spot market which has emerged is also making a strong showing as more buyers shun long term contracts in favor of spot contracts which are more flexible.
NLNG which was created to monetize Nigeria’s natural gas resources and produce LNG and the NGLs for export was reported to have had its revenues plunge to $4.723bn last year, the lowest in 7 years. The LNG export market is experiencing an oversupply which is dampening the price of LNG. However, the domestic market is experiencing severe energy shortage.
NLNG produces 22 million tonnes per annum (MTPA) of LNG from its six-train plant on Bonny Island. NLNG currently manages sixteen (16) long term LNG Sales Purchase Agreements (SPAs) executed with 11 buyers on a Delivered Ex-Ship (DES) basis. These buyers include Enel, Gas Natural, Botas, GDF Suez, GALP Gas Natural, BG LNG, Endesa, ENI, Iberdrola, Shell Western LNG BV and Total Gas and Power Ltd.
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.
Eia.gov reports that nearly half of all U.S. households heat primarily with natural gas. EIA expects households heating primarily with natural gas to spend $69 (12%) more this winter compared with last winter. The increase in forecast expenditures compared with last winter is driven by a 9% increase in consumption and a 2% increase in price. For the winter of 2017-18, residential natural gas prices are forecast to average $10.36 per thousand cubic feet (Mcf) and average consumption is forecast to total 62 Mcf per household.
China is a good market for NLNG to focus on.
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.
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. 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!
Analysts believe that Hebei province alone needs an extra 2 billion cubic meters (bcm) of natural gas for heating because of mandatory measures to switch industrial and residential boilers to use natural gas.
China may have underestimated the impact of the cold winter, to meet its heating need; China will need to turn to the spot market which NLNG will do well to play in.
Possible Long Term Strategy for NLNG
Nigeria can reposition herself by considering and taking action on this 7 (Seven) factors which may drive the LNG market in the next 10 (ten) years:
• Accessing new users
• Reaching new markets
• Lowering shipping costs
• Slow or Quick economic growth
• Increasing energy efficiency
• Excess LNG supply
• Development of indigenous LNG liquefaction technology
Lesson from Qatar Gas the market leader
LNG and IP
QatarGas engaged in intensive research and development leading to technology innovation backed by patents that enabled it to build Liquefied Natural Gas plants on a very large-scale. QatarGas has 20 trains thus it processes more gas at a cheaper rate and is able to sell at lower rate, thus selling more gas and making more profit despite the seeming downturn.
Provision of Floating terminals for developing countries
Qatar seeks to open new LNG markets with floating terminals; Qatar Gas Transport Company and Norwegian shipping business Hoegh LNG have embarked on a joint project to open new markets for Qatar to sell its liquefied natural gas (LNG) via the provision of floating import terminals. The terminals, which are also known as floating storage and regasification units, are useful for developing countries seeking access to cheap gas on tight budgets.
Qatargas pioneered the development of two new classes of Liquefied Natural Gas (LNG) tankers. Referred to as Q-Flex and Q-Max, the ships were designed by a team of engineers who have made a quantum leap in the capacities of LNG carriers. Each ship has a cargo capacity of between 210,000 and 266,000 cubic metres and is 80% larger than the Q-Fleet ships.
Qatari gas producers Qatargas and RasGas have co loaded their first LNG cargo for delivery to more than one port, having previously each loaded single cargoes for delivery to one location. This is pointing to the possibility of LNG shipping as a service for multiple LNG trains, thus outsourcing the cost of shipping to a third party.
With the rapid changes in the LNG market, innovation seems to be the name of the game, with the market naturally gravitating to the LNG sellers most adaptable to its ever changing needs.
Olufola Wusu Esq. © 2017
Olufola Wusu is a Commercial/Oil & Gas, I.P. Lawyer and Policy Consultant with Megathos Law
Practice based in Lagos