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NLNG still faces challenges

Financial Times: NLNG still faces challenges

“Investors in the $12bn project – the Nigerian government and oil companies Royal Dutch/Shell, Total and Eni – are hoping the optimism surrounding the project will survive challenges presented by Nigeria and the world gas market.”

By Michael Peel

Published: September 20 2004

Badewa Adewumi, a plant operator at the Nigeria Liquefied Natural Gas (NLNG) production facility at Bonny Island, shows off its immense domed storage tanks and a cooling system. The scale shows how the facility has progressed from shipping its first cargo five years ago to becoming one of the world’s most ambitious natural gas projects.

“When I got the job, I said at the interview: ‘I hope it’s going to last’,” Mr Adewumi says. “They said: ‘Yeah, sure’. It’s been worth it.”

Investors in the $12bn project – the Nigerian government and oil companies Royal Dutch/Shell, Total and Eni – are hoping the optimism surrounding the project will survive challenges presented by Nigeria and the world gas market.

Big questions of supply, demand and competition swirl round one of the energy sector’s most fluid industries, adding to local issues such as community unrest and corruption allegations against the project’s main building contractor.

NLNG reckons Nigeria will have the world’s second or third largest liquefied natural gas output by the time the company has completed a $1.6bn expansion plan, announced in July, to build its sixth production facility or “train” by 2007.

The country is estimated to have one of the world’s largest gas reserves and oil companies have come under pressure from the Nigerian government to stop the environmentally-damaging practice of “flaring”, or burning waste gas.

NLNG sells the gas from its three existing trains to European countries; it has already signed agreements to send almost two-thirds of the gas from trains four, five and six to the US. The company, which enjoys tax breaks until 2006, made a pre-tax profit of $909m last year on turnover of $1.93bn.

Many oil companies talk of the fast-growing US enthusiasm for natural gas, though analysts warn of a shortage of import terminals designed to receive and process a product cooled to below minus 160 degrees centigrade and condensed to 1/600th of its normal volume.

Deutsche Bank estimates the global LNG market is growing at 15 per cent a year and says demand during the first half of the year was equivalent to 4m barrels of oil a day – or twice Nigeria’s current output of crude.

NLNG will face competition from many existing and planned projects in western Africa and elsewhere around the world. The company claims its distance to the US gives it a geographical head-start over rivals in Oman, Malaysia and Australia.

For all NLNG’s apparent advantages, one problem could be access to raw materials. A continuing lack of Nigerian government investment in joint ventures with oil multinationals is delay ing complicated and expensive projects to exploit oilfields that have gas reserves associated with them.

“Our real challenge, our major threat, is one of gas supply,” admits one NLNG manager. “We need the upstream companies to complete their own projects.”

The legal threat to TSKJ, the consortium that builds NLNG’s facilities, is equally unpredictable in its effects.

The group, comprising four engineering companies, including a Halliburton subsidiary, is being probed by authorities in the US, France and Nigeria over allegations that it paid $180m in bribes between 1995 and 2002.

Nigeria this month recommended that Halliburton, the consortium and all companies in it be barred from work in the country until the investigations are over.

A further possible vulnerability for NLNG stems from the long history in Nigeria of protests against the energy industry by people living close to companies’ operations: at the Bonny project, a small shrine in the tropical vegetation is a reminder of the Finima community who moved off the land to make way for the development.

NLNG claims it has learnt from mistakes made by the oil companies, although some social activists dispute this. René de Nier, operations manager, says people have drilled into NLNG pipelines three times in the past two years, compared with no incidents before: one breakage meant the company was unable to send a US-bound cargo, which analysts estimate could be worth $10m.

For now, the company is celebrating its latest building deal and there is already talk about the expansion after the next. For investors and employees, whose initial fear was of becoming involved in another failed Nigerian industrial project, the ambition is for NLNG to become the pioneer that confounds outsiders who are still sceptical. Even Mr de Nier, who describes NLNG as a “big success story”, concedes: “We still have to pay a high insurance premium.”

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