NLNG has a long history, almost a text-book case study of all the things that can go wrong and right if one is trying to get a massive LNG project off the ground in a developing country with a bad credit record.

Regime change and civil unrest, flaky customers and SPAs that take years to materialise, customers that change their minds, but also cheap tankers in the right place and at the right time, a rock-solid shareholder commitment, years of faithfully saving the proceeds of crude sales in an escrow account and the willingness of the host country to provide a very comfortable legal framework to the project company.

The first attempt to get it off the ground dates back to the 1960s, and even with robust economics and a shareholder commitment in 1989, NLNG failed to raise non-recourse debt in the mid-nineties for lack of political backing and a more uncertain outlook for gas prices than today. Its portfolio of off-takers, always strong, was nevertheless the subject of long speculative reviews in the oil & gas press for a decade. Thus the first development and expansion of the plant were financed solely on balance sheet. Only in the new millennium would NLNG (and LNG in general) find its momentum and receive the support of ECAs that would allow more than US$1 billion of debt to be raised in a country with a credit record like Nigeria.

NLNG+ involves the construction and financing of the fourth and fifth LNG process trains of the Bonny Island liquefaction plant, in the Federal Republic of Nigeria. Each new train is to have a capacity of 4 million tonnes. The new development will cost US$2 billion. It reached financial closure in December 2002, and is due to be operational in 2005. When the extension is completed, the plant should have an overall capacity of 16.8 million tonnes per year, as well as 2.3 million tonnes of liquefied petroleum gas.

These two new trains were the opportunity for shareholders to raise US$1,060 million of non-recourse debt, split into a US$800 million international tranche and US$160 million tranche from Nigerian domestic banks, together with US$100 million from the African Development Bank.

Part of the rationale for developing the NLNG+ (which uses gas otherwise flared offshore) is Nigeria’s commitment to turn out gas flares by 2008 under the Kyoto protocol; but in the context of present gas prices and demand, Nigerian gas reserves alone justify the development of this mammoth plant which was first envisaged 30 years ago.

Background: failing to project finance NLNG in the 90s

The idea of shipping LNG from Nigeria to Europe and the US was first dreamed up in 1969, around the time when British Gas and Gas de France were thinking of liquefying gas for sea transport. The Biaffra war would then stall the project for almost a decade. It was only revived in 1976 and after a couple of year of negotiations, a group of shareholder was put together comprising NNPC, BP, Shell, Philips, Agip and Elf. The project was meant to have six trains, the biggest in the world. Again, it proved almost impossible to strike a shareholder agreement, and by 1982, both BP and Phillips had dropped out. A source close to the sponsor recalls that it was proving very difficult to get a commitment from shareholders when the Nigerian Government was adamant it had to have a majority stake in the project.

Getting the conditions right

The project came back to life in June 1988 when five European gas importers agreed to enter into negotiations for detailed gas sales agreements. The project could finally take off with a target of delivering the first tanker in 1995. BEB, Enagas, Ruhrgas, SNAM and Thyssengas were the newly interested potential off-takers, with BG and Distrigas waiting in the wings. At the time NNPC held 60 per cent of the project, Shell 20 and Elf and Agip 10 each.

The same month, Shell Gas Nigeria BV stroke a deal to buy two LNG tankers from Zenit Shipping, a Swedish company which had received the ships from its government. LNG 559 and 564, never used, were sold to Bonny Gas Transport (BGT, the shipping company set up by NLNG – see figure 4) for US$100 million a piece, a bargain price compared to the standard US$250 million cost of brand new LNG tankers.

In May 1989, no SPA had been signed with any of the five potential off-takers, but negotiations were reportedly making good progress. GdF was made to queue on the SPA waiting list, suggesting that the whole output of the first two trains had been committed. Construction was not supposed to start for another 2 years. Finally in July 1989, NLNG could announce that 2.2 Bcm were committed to two unnamed US buyers and that 3.3 Bcm were committed to a consortium of five European companies from Germany, Spain and France. SPAs were to be signed at the end of the year and NLNG now possessed five LNG tankers. The time had come to raise funds for the project and the company was reportedly in touch with 56 banks for that purpose.

In November 1989, Technip and MW Kellog signed a US$13 million project plan specification contract.

In March 1990, the Nigerian government passed new laws ensuring that the project would operate ‘like any other autonomous joint venture anywhere in the world.’ (Minister of Petroleum) The project was granted a 10 year tax holiday and the capacity to operate off-shore accounts. Since 1984, an escrow account had also been set up to receive income from the sales of crude oil (20,000 barrels per day) and guarantee that NNPC would meet its level of total equity.

Delayed SPAs

It is now known that the two American off-takers that had expressed interest in the project are Cove Point Trading of Maryland and Distrigas of Boston. However, neither these SPAs nor the ones with Tyssengas, GdF, SNAM, Ruhrgas and Enagas had been signed by the summer of 1990. Regarding the financing, the experts of the time believed that 60 to 70 per cent of the project costs would be met by non-recourse finance.

Unfortunately, by 1991, the question of who exactly was going to buy gas from NLNG was still not resolved. The project was then at least a year late, with the first delivery expected for December 1996, and project costs had soared by 40 per cent, to a daunting US$3.5 billion.

The state of SPA affairs at that point in time also looked less rosy and coherent than a year before: Enel has been allocated 1.4 billion tonnes of LNG per year, Cove Point Trading one million, SNAM, Enagas and Distrigas 350,000 tonnes each. Other off-takers have changed their minds, with Ruhrgas and Tyssengas pulling out in mid-1990. GdF and Enagas are also still in the running. In March 1991, SPAs were yet to be signed.

Finally, in September 1991, NLNG confirmed that it had concluded all major commercial terms (MoU) for sale of the entire output of the plant to four buyers and over 22.5 years. The company would now embark on raising US$2.3 billion of debt for the US$4 billion project. Enel would get 3.5 Bcm/yr, Enagas 1 Bcm/yr, GdF 0.5 Bcm/yr and Distrigas 0.7 Bcm/yr. The actual SPAs would be signed in the course of the next year. Cove Point never made a deal for Nigerian LNG. It would subsequently be shut down as the US lost interest in LNG in the early 1990s.

The group was still planning to go ahead with a 60/40 debt/equity ratio, which meant raising US$2.3billion in debt and for NNPC to contribute in excess of a billion dollars in equity. NLNG was confident it would get ECA coverage and international support by the IFC and others.

However, in October 1992, the Nigerian government suddenly sacked all its representatives on the board of NLNG. The move took most lenders and multilaterals by surprise, coming just two months ahead of the financing deadline. Bids submitted by two consortia (Kellog and Technip, Bechtel and Chiyoda) risked becoming invalid. On the 11 December 1992, the Nigerian government had made up its mind and was calling for a ‘thorough re-examination’ of the project. The financing deadline was set for 22 December. Arguing that Nigerian national interests were not well represented, the Government demanded greater involvement in the project.

Meanwhile in Europe, Enel was going through a cost-cutting period and the NLNG import scheme had been seriously called into question by the board. Enel, at the time NLNG’s biggest customer, was paying the highest price. Without the Italian power company, NLNG was not going to be viable. Furthermore, because of the dismissal of the Nigerian board members and the missed deadline, NLNG looked set to deliver its first cargo only in mid-1998.

Radical uncertainty

Mid 1993, fresh political instability was about to disrupt projects in Nigeria a bit more. In September, the new government had sacked the whole board of NNPC, albeit leaving intact the Nigerian representatives within NLNG. Moreover, the company remained committed to the project, considering putting US$1 billion in a trust account to demonstrate such commitment, and starting to get financiers on board. The IFC was thought to be interested in funding the plant, and was scheduled to take a 2 per cent share of the project, while some US$300 million requested from the US Export-Import Bank was being withheld due to Eximbank's fears over Nigerian political instability.

At the insistence of the Nigerian authorities, part of the deal for the sponsors to deliver the project was that NNPC would reduce its former 60 per cent share of NLNG to 49 per cent, with Elf taking an additional 5 per cent and Shell an additional 4 per cent. Holdings were expected to change to NNPC 49 owning per cent, Shell 24 per cent, Elf 15 per cent, Agip 10 per cent, and IFC 2 per cent when terms were finalised. All off-takers remained committed to their original shares of the plant’s output.

In September 1994, the Kellog/Technip consortium was finally awarded the contract for the plant. Not before both bidding consortia were invited to re-bid using the Air Products liquefaction process after the Nigerian government overturned the decision by technical advisers Shell to award the contract to Kellogg using a process designed by Technip. As much as US$1.3 billion was now sitting in escrow accounts, while Shroders was advising the company to get the necessary loan. When everything seemed to be going ahead, a cloud still hung over the project. Indeed, the construction of the Montaldo di Castro LNG receiving terminal that Enel needed to get its gas to Italy was being blocked on environmental grounds.

In 1995, more problems were revealed. While Turkey seemed interested in buying some LNG from Nigeria, in March, Enel started negotiating with NLNG to put back the date of delivery of its own gas. In April, shareholders announced that they might finance the whole project on balance sheet after all. Project financing was taking too much time and the absence of political support due to the decertification of the country by the US for its implication in narco-traffic made the support of ECAs and multilaterals waver, starting with Ex-Im Bank. Moreover, giving a completion guarantee with such a high proportion of the project in Nigerian hands was still going to prove very difficult, and off-takers were sounding unconvinced again.

NLNG also argued that interest charges would cost too much (as much as US$600 million.) Of course funding through 100 per cent equity was not free from difficulty either. In May 1995, NNPC was still missing US$585 million of its share. First deliveries were now scheduled for 1999.

In the summer of that year, the Enel deal eventually came through. NLNG could finally go ahead[1].

Still on board as a shareholder, the IFC finally pulled out in September 1995, after the Nigerian regime executed human-rights activist Ken Saro-Wiwa. Its two per cent share was redistributed among private shareholders. NNPC would now stay a minority shareholder in the project.

Before the first two trains were completed, it was agreed to go forward with train 3, thanks to more equity from shareholders and the prospective cash flow from trains one and two. From then on, and until 2000, the development of NLNG would be the shareholders’ affair only.IJ

Frédéric Blanc-Brude

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[1] Enel would try and exit the scheme again in 1997, until an arbitration procedure forced the company to ‘take or pay’ the liquefied gas from Nigeria