Nigeria has the opportunity to do something that can improve the country’s position in the supply of energy. Doing so should enhance the amount of money Nigeria receives for its products as it can charge a direct customer more than it can charge a middleman/off-taker…
I recently ran into a group of foreign investors who have been trying all they could to break into Nigeria’s energy market without success so far. Their story is as pathetic as it is shameful for a country that has now grounded itself only to start contemplating selling off its national asset in order to survive a self-inflicted economic meltdown.
As the story goes, these investors have been working to create a business that will enhance Nigeria’s position in the energy market and which should result in greater revenue coming to Nigeria for the products it sells. They have focused their efforts on two of the energy sector’s markets – Natural Gas – primarily Liquefied Natural Gas (LNG), and crude oil. They had chosen to focus on these markets because, according to them, Nigeria is already active in them. For the time being, they are avoiding the refined energy products as Nigeria does not currently participate in that business.
To date, what they have discovered in LNG and perhaps, to a lesser extent, in crude oil, is that Nigeria has been selling its output solely to middlemen/off-taker companies and not directly to end-user customers. The challenge in this to the investors is to convince the decision makers who control and can influence the Nigerian energy company executives, to change its business model from one that is selling primarily through middlemen and off-takers, to one that sells directly to end-user customers. To achieve this, they decided to approach NLNG with a customer that requires the LNG for its business.
The company they presented is an end-user customer listed on the Hong Kong Stock Exchange, and there is ample information available for the NLNG people to review and approve them as a potential customer. The company, the largest shareholder in Chinese energy outfit, Beijing Gas, with 40 percent ownership, is the largest authorised importer of gas into China. Its second largest shareholder remains either the wealthiest or second wealthiest family in Hong Kong. Besides, the company has its own LNG port receiving facility. With the investment by Beijing Gas, the company has access to Beijing Gas’s receiving port facilities. I believe there are three, thereby increasing its ability to purchase and receive product.
The company received a cargo of Nigerian LNG in September/October 2015, purchased and delivered through a middleman/off-taker company. That is not the actual goal of the company. The company is interested in creating a true business relationship with NLNG starting with a spot cargo of 60,000 metric tons for delivery in October 2016 and has given a forecast need of 60,000 metric tons monthly for a long-term contract beginning in January 2017 and continuing for the length of the agreement to be entered with NLNG for a number of years – five to 15 years if possible.
The company’s second consideration in the desire to establish them as a customer of NLNG, receiving not just this first cargo, but the monthly shipments under the hoped-for long-term contract is that the group with whom they work is a consortium interested in financing the Seventh Production Train Project which NLNG is interested in constructing. This project is currently estimated to have a cost of $6.5 to $7 Billion (U.S. Dollars). This project would greatly expand Nigeria’s LNG supply potential with the resultant increased revenue that would come to Nigeria from the sale of its product.
A third reason for choosing the company as the investors’ initial customer to present to Nigeria for direct purchase is the company’s ownership by Beijing Gas. Beijing Gas is the largest importer of LNG to China. If it is proved that Nigeria is a reliable supply partner, it may be possible to sell more fuel to Beijing Gas or use the company and the investors as a reference to win other Chinese customers.
Furthermore, once the investors have worked out the direct supply logistics, they can use this as a reference as they approach other potential customers in other parts of the world where pricing may be higher, thus giving Nigeria a greater revenue yield. Right now, the investors are working on developing a potential customer in the Caribbean. This customer purchases both LNG and LPG, products that NLNG sells. This customer has indicated monthly supply needs a bit larger than the earlier company. This customer is also a public company that has a long history of conducting business and is a Shell distributor, hence it has demonstrable strong financial capability.
You may think that all of these should be important to Nigeria. It certainly is to the investors! But it may interest Nigerians to know that while the investors are very enthusiastic about sealing a deal with NLNG, the NLNG officials have been foot-dragging and very lukewarm about going into business with the investors. And what is the reason? Some vested interests are erecting artificial barriers and obstacles in the way of progress which would have seen the realisation of this lofty dream.
The world LNG market is undergoing great change. Several new suppliers are entering the market – the United States and Australia are the first two. Australia undertook the simultaneous development of eight (8) export terminal facilities which have come on to the market only recently. The U.S. has several export terminal facilities under development, the first of which has just opened and received export permit approval.
What these new supply sources mean is a large amount of new product coming to market which is having the effect of lowering prices. For example, the U.S. domestic price for LNG is approximately $2.65 per MMBTU today. The glut of product availability has driven the world price down from $12 to $14 per MMBTU from only two to three years ago to current spot prices that are 60 per cent to 70 per cent lower. These developments have caused a change in world markets.
In the past, most LNG was sold under long-term contract with only about 20 percent of the LNG market being sold via spot cargos. The increase in supply has changed this model and most likely has, and will continue to, put pressure on spot prices and suppliers. One has to wonder if the off-taker/middlemen with whom Nigeria has contracted to sell its product will continue to take product if they are unable to resell it at the traditional profit margins to which they are accustomed.
For all of these reasons, I believe it may be in Nigeria’s best interest to change its go-to-market approach and move towards direct selling and relationships with true end-user customers. That is why I have brought forward this argument. It is good if the authorities of the NLNG can make this business strategy shift.
Nigeria has the opportunity to do something that can improve the country’s position in the supply of energy. Doing so should enhance the amount of money Nigeria receives for its products as it can charge a direct customer more than it can charge a middleman/off-taker who must purchase it at a price low enough to allow for resale at a profit to the same end-user customers that are now struggling to enter the Nigerian market.
The market should be allowed to establish the price rather than middlemen and off-takers dictating to Nigeria. Bringing customers interested in long-term supply arrangements with Nigeria will give Nigeria stability in the forecast of its revenue from this energy product, allowing the country some greater understanding of its monetary generation.
Also of great importance is getting Nigerian decision makers to change their go-to-market strategy because of the impact this will have on the development of the LNG business.
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