Innovation and Gas Infrastructure Financing

Early in the last decade, AFC was privileged to serve as one of several Financial Advisers who assisted in the raising of more than a billion dollars in financing for the most important gas export project in Africa. Our client was a company known as Bonny Gas Transport, a wholly owned subsidiary of the hugely successful Nigeria Liquified Natural Gas (NLNG) Limited. Our assignment at the time was to support the financing of specialized transport vessels used in ferrying the precious liquid cargo from Bonny Island to delivery points in Europe and Asia for regasification.

So, it was with a sense of extra pride in their latest accomplishment that I received the news of the parent company and its shareholders finally achieving attaining so-called Final Investment Decision (FID) on their huge (more than US$10bn) expansion plan. For the uninitiated, FID essentially describes the point when definitive capital commitments are made by the sponsors of a large project. In normal circumstances, getting across the FID line is a big deal for everyone involved. In this particular instance (for reasons I will get into presently) it was an even more remarkable achievement.

Thanks to technical and financial innovations, the international market for liquified natural gas has been radically transformed in the last decade. Global average unit prices (typically expressed in dollars per standard cubic feet or British term units) for this increasingly plentiful commodity have nearly halved between January 2017 and today. In simple terms, there is a global glut in sea-borne gas, because multiple new sources of supply have flooded the market. Not the least important of these sources is of course the gigantic United States of America shale export trade. But several other geographically advantageous supply sources (relative to major demand centres) have also emerged. In these conditions, new capacity additions targeted at the global market are subject to even more intense scrutiny and due diligence than usual. This is the difficult context within which the folks at NLNG and their shareholders managed to secure the committed export contracts and investment capital to add about eight million tonnes per annum in capacity (or more than 35% of their current nameplate).

Through their work, another chapter in the impressive success story of NLNG is being written, and as always, it is important to learn a few lessons. Firstly, a buoyant long-term price environment for gas exports can no longer be taken for granted by producing countries. In fact, my preceding sentence may prove to be a ridiculous understatement of the future price trajectory for sea-borne natural gas. What does this mean for African countries like Nigeria (alongside Mozambique, Senegal and Equatorial Guinea) in possession of world-class proved gas reserves, but located at a distinct geographic disadvantage from the major energy consuming markets? Secondly, what message can be gleaned from the curious coincidence that the most successful historical attempts to monetize Nigerian gas (whether via piping, liquefaction, or conversion to fertilizer and industrial chemicals) have been export-oriented, private sector-led, and beneficiaries of limited pricing regulations? You may have observed that my second query is in fact a trick question which contains its own answers, which I will return to shortly. Finally, what lessons can be taken by policy makers interested in stimulating a similar supply glut (and consequential price collapse) in the domestic gas market, as we have seen internationally?

One interesting and worth-reading document which does a quite good job of presaging these difficult questions is the Nigerian National Gas Policy, approved by the country’s Federal Executive Council in 2017. It suggests that a good amount of thinking has gone into the issue, and into possible solutions. From the perspective of someone engaged in providing infrastructure financing solutions, a few implications are immediately clear. To start with, it is important to accept that (barring changes in market conditions) the opportunities for additional large scale, sea-borne gas export projects from Africa may be limited. On the contrary, several gas derivatives like ammonia, urea, poly-olefins, industrial chemicals and other petrochemicals are affected by very different global market characteristics and remain rich with potential (and AFC remains very active with several sponsors in this regard). Apart from global market conditions, the key requirements for success with such projects however are (as always) industrial expertise, a favorable local business and legislative environment, attractive investment incentives and ultimately, international capital. Nigeria and its sister gas provinces in Africa will need to work harder at creating these conditions for success, with the structural characteristics of investments like NLNG being near-perfect case studies available for emulation.

Beyond export markets (important as they are), domestic gas consumption within Africa remains an obvious opportunity for growth. Driven by Algeria, Egypt and Nigeria, the decade from 2010 saw a nearly twofold increase in local gas utilization (according to data from the U.S. Energy Information Administration), with Africa-wide local consumption exceeding exports for the first time in 2011. But the growth is not nearly fast enough relative to the development needs of the continent. Nigeria in particular (with its large population and crippling electricity deficit) should ideally be positioned to create a leading domestic gas sales market. There are a number of reasons why this has not happened. For one thing, the insolvent grid-based electricity market is patently unable to serve (by itself) as a credible basis for major upstream investments in gas infrastructure. Clearly, other more attractive gas utilization options within the local market are needed. Yet (and perhaps most importantly), the governments good-intentioned attempts to maintain tight policy-based control of domestic gas prices at every stage (from well-head to plant gate) might be perversely serving to limit innovation into alternative use cases that can motivate the needed infrastructure investment.

Ultimately, (as we have seen globally) technical and financial innovations are critical to rapid market growth. Therefore, my free advice to policy makers interested to replicate the international gas glut and price collapse in their domestic markets would be to err on the side of flexibility in all economic regulatory matters, particularly pricing. Human enterprise and initiative are the greatest forces available for development, and very little can be achieved when these are prematurely limited.