Keynote addressEnabling Investment in Gas Projects in Africa - LNG

(17th March 2016 – Abuja, Nigeria)

By Babs Omotowa (MD/CEO, Nigeria LNG Limited)

Babs Omotowa Managing Director/CEO, Nigeria LNG Limited Vice President of Bonny Gas Transport Limited

Protocol

Good afternoon distinguished ladies and gentlemen.

It is a great pleasure to be here in Abuja, Nigeria’s beautiful capital city.

I welcome all our visitors and hope you have taken out time to visit some of the monuments such as the Millennium Park, Aso Rock, and have also tasted some of Nigeria delicacies including pepper soup, suya, etc.

I would like to thank the organisers of this Conference for the kind invitation to participate and speak at this Africa conference.

His Excellency, the Vice President in the opening speech on Monday alluded to the critical role of energy security for Africa and set an excellent tone for these sessions.

Occasions like these provides the platform for critical thinking on how to unleash Africa’s locked potential for sustained and rapid socio-economic development.

Truth be told, we cannot be proud as Africans that after 50+ years of independence of most African Countries, we still have 75% of the world’s poorest countries in Africa, and 49% African are living in extreme poverty according to the World Bank.

On reflecting on the theme of this conference, one thing that came to my mind was why do we need to be bothered about repositioning Africa petroleum?

Of course where we are today in the industry is simply not good enough. Some have said that oil and gas have not been the blessing expected for the citizens. However this has not been the case in many other countries outside Africa with similar resources such as Qatar, United Arab Emirate, Saudi Arabia, Oman, Brunei, etc.

Question then is what is the root cause and why are they not been fixed? Without distinguishing between a symptom and a cause, the underlying problem cannot be resolved.

For example, inadequate power supply is not the problem but a symptom of an underlying cause, which for example could be the lack of investment in the sector or poor institutions or unstable government policies, etc.

If we do not answer these questions and understand why we are where we are, we may never be able to position Africa to achieve meaningful development.

I will therefore be sharing my thoughts on some of what needs to be done for Africa oil and gas to be able to add more value to the continent.

Permit me to digress a bit; it is a fact that globally, higher energy intensity levels corresponds to higher GDP per capital. Take a look at the world at night, courtesy of NASA and you can see that the level of illumination of various countries. This picture provides the insight that those countries with much higher energy intensity tend to have higher GDP per capital and are the more developed countries.

Looking at how the African continent compares, clearly the picture is not rosy. Sadly more than 70% of Africa is still in darkness and correspondingly have very low GDP below $3,000 per capita. Compared for example to France with a GDP of $43,000/capita, it generates 177GW of power about same size as 50 African countries

In addition, a vast majority of Africa countries have more than 50% of their population without access to electricity and which also affects manufacturing levels.

There is therefore no denying the fact that there is an energy crisis in Africa, which global analyst have indicated is one of the major drawback in moving the continent forward and addressing the issues of poverty, unemployment, industrialisation, etc.

There are various sources of energy but the world is seeing a shift towards gas in the energy mix as it is cheaper, cleaner, available, affordable and reliable. Therefore Gas is now the fastest growing energy source at 2.7%/year, substituting coal and nuclear. It is forecast to outstrip coal by 2035. LNG demand is even growing faster at 7.6%/yr.

Meanwhile Africa’s natural resources are significant, both in conventional and unconventional oil and gas.

With Africa being endowed with 9% of the world’s proven oil reserves and 8% of the world’s natural gas reserves, we cannot afford not to join the world in the direction of gas utilisation to meet our energy needs.

However the importance of oil and gas in Africa is still down to its foreign exchange earnings from exports which has huge contribution to the GDP of those countries and provides needed revenue required for the development of those countries. However, despite the abundance of natural gas resources and production, Africa for example consumes less than 50% of gas that it produces with the balance exported.

With energy demand in Africa projected to increase in the next 20 years, it is clear that there is huge opportunity in Gas projects that can invariably help Africa not only to have sustainable revenue but also help address the power problem in Africa, grow the economy, grow GDP and essentially reduce the widespread poverty level.

Once explored and produced, natural gas can either be transported through Pipelines or as LNG through ships.

At distances greater than 1,500km, LNG is cheaper, faster to build, less prone to sabotage and with limited environment issues.

The opportunity for pipeline gas transportation in Africa is obviously constrained by geographical and investment reasons. There are only few cross-national pipelines in Africa which includes between Mozambique and South Africa, as well as the West Africa Gas Pipeline which supplies gas from Nigeria to Benin, Togo and Ghana.

For LNG, 6 African countries namely Algeria, Libya, Egypt, Nigeria, Equatorial Guinea, Angola have LNG plants whilst

Tanzania and Mozambique have made progress with LNG projects. The current production capacity is about 70MT (about 15% of global capacity) and nearly all is exported to Europe and Asia, with very limited export between Africa countries, as regasification facilities are limited.

The bottom line is that Africa needs energy to develop and Africa has huge reserves of oil and especially gas, so one question then is; why are we not utilizing these well?

African Development Bank reported that the continent needs to invest $42 billion per year in energy infrastructure over the next decade to catch up with developed world.

Oil and gas projects runs into several billions of dollars of investment, and as many Africa countries either do not have such levels of funds and even where they do, there are other competing social and infrastructural needs, it is important for Africa to keep attracting foreign and local investment to accelerate the development and unlock the potentials not only in its natural resources but also in its human capacity.

A McKinsey report highlights that the rate of return on foreign investment has been higher in Africa than in any other developing region in recent times. Real GDP rose by 4.9 percent

a year from 2000 through 2008, more than twice its pace in the 1980s and ’90s. However, despite the high Returns of Investments of Oil and Gas projects in Africa, unfortunately Africa has only been able to attract a meagre 4 to 5% of total global investments in the last few years.

In absolute terms over the last 40 years, there has been a growth of FDI from $1.26b to $54b in 2015 and the key reasons behind this growth included many governments action to end armed conflicts and improve democracy, security, macroeconomic conditions, and undertake microeconomic reforms to create a better business climate.

Furthermore, African governments increasingly adopted policies to energize the markets. They privatized state-owned enterprises, increased the openness of trade, lowered corporate taxes, strengthened regulatory and legal systems, and provided critical physical and social infrastructure. Although the policies of many governments have a long way to go, these first steps have enabled private business sector to grow.

So the question is why has Africa only been able to attract so little investments?

Compared to other continents, Africa does not offer the simplest or most straightforward working environment for investors, be it

local or foreign. A study conducted by PwC in 2014 revealed that the top three challenges in delivering capital projects in Africa were the unavailability of requisite skills, lack of state capacity and political risk i.e. government interference and business environment.

It is therefore imperative that we address these challenges and attract investment and I am happy to share with you, an inspiring example of a Nigerian success story – the Nigeria LNG Limited – an embodiment of achievement beyond boundaries.

Nigeria LNG Limited (NLNG) started operations in 1999 to help end gas flaring and monetize Nigeria's vast natural gas resources. It is owned by the Federal Government of Nigeria, through NNPC (49%); Shell (25.6%); Total (15%) and Eni (10.4%). It has the 4th largest LNG Plant in the world supplying 7% of the global LNG trade and has converted over 4.2 Tcf of Associated Gas (AG) that would have otherwise being flared. From initial $7billion Foreign Direct Investment, this Company has in 16 years generated over $90billion in revenue with $33billion going directly to the Government who invested $2.5billion, and more than $5billion going to the local economy

in terms of goods, services, etc, whilst it now has Assets valued at $19billion.

The company also supplies more than 50% of cooking gas (LPG) in Nigeria and provides for its host community in Bonny, an Island with a population of 250,000, with 24hrs electricity supply, pipe borne water, roads, hospitals, vocation centres, etc.

Putting together an LNG value chain anywhere in the world is a major challenge. From finding the gas, funding, constructing, operating and shipping to customers are no easy feats. Launching a project of this complex dimension in a business environment like Nigeria would even be more difficult if not near impossible and many critics initially believed that the NLNG project would never happen.

So one can then ask, what has made such high investment in a difficult environment a success? Permit me to mention six (6) of what I consider as critical success factors

1. Stability: Uncertainty in regulatory policies is a big political risk in Africa and a challenge for investors and businesses. The enactment of an NLNG legislation and the Assurance letters from the Government to international investors provided clear legal framework, stabilisation and incentive for the Company to operate. This certainty and

stabilisation is critical and one of the main reasons that enabled the huge investments to flow and the company to be successful.

2. Independence: The Company, an independent joint venture was set up with an independent Board that is empowered and takes decisions without having to go through bureaucratic structures of government interference and as such the speed of decision making is consistent with world class organisation. The integration of Nigeria and the International shareholder representatives in the Board provides an excellent framework to achieve both objectives of helping to build a better Nigeria whilst achieving world class standards.

3. Technical Depth: At the heart of NLNG’s success over the years is the technical partnership formed with shareholders and technology owners. This leverages on their deep and diverse global expertise and requisite skills/competences which has also enabled knowledge transfer with the workforce growing from 40% Nigerian staff in 1999 to 95% to date and a 100% Management Team.

4. Governance: Company operates to world class standard irrespective of operating in a developing country. As our customers are global, likewise our competitors, it is

imperative for us to drive for world class performance and promote global best practice. This includes an excellent capacity to plan and execute efficiently with a strong merit driven culture, high ethics and integrity.

5. Financial Capacity: Being a Company with a track record of performance and a strong balance sheet, NLNG is able to attract financing for its activities relatively easily and at very low cost as recently demonstrated in the $1.5billion financing for the construction of 6 LNG ships. No doubt the ownership structure offers support and the company is not dependent on government funding which normally comes through a complex appropriation process.

6. Market Driven Pricing: The pricing of the company’s products are negotiated under commercial terms and driven by demand and supply rather than any arbitrary fixed pricing. Subsidized fixed pricing of products in Africa have been one of the banes of inefficiencies and the breakdown of the value chains.

One other aspect that I would like to quickly share some thoughts is about the timing for such multi billion dollars gas projects. In Nigeria LNG, we are currently working to build

additional Trains which will add 40% capacity to our production, but one question that many have asked is whether at today’s oil prices of $40/barrel is a time for considering such multi billion dollars investment?.

In answering this question, the first thing to note is that the world had witnessed oil prices quadrupling to $140/b in the last decade and we have in parallel seen a very strong correlation between capital cost per liquefaction and crude oil price. Thus, at high oil prices periods we have seen project construction costs in the industry rise by over 400%, very similar proportion as the oil prices have risen.

However, with the recent rapid decline in oil prices to levels below $40/b, we are also now witnessing the prices of iron ore and steel fall back to levels prior to 2003.

This is good news as iron and steel constitute major cost element of construction. It is on record that in NLNG, FIDs was taken on oil price level of $20, and cost of iron ore and steel are now at same level it was 13 years ago when e.g. T3 FID was taken.

With the cyclic movement of oil prices, there is no better time to invest in oil and gas projects as construction periods takes the best part of 4-5 years and it is the forecast oil price during

production phase that goes into the economics, but the lower prices for input materials and lower construction costs now means that now is the better time to attract needed foreign and local investments and build the oil and gas projects that will enable us solve Africa’s energy crisis and bring Africa from darkness to light.

We need to build not just the gas projects but also more cross national pipelines to transport gas across countries within the continent and also put together the commercial agreements and infrastructures to have more LNG supplies to Africa as well, so that we can change the NASA picture of Africa before the end of 2030.

Conclusion

Distinguished ladies and gentlemen, there is no doubt that Africa has huge potentials in terms of its natural and human resources which sadly, we have barely utilised after so many years. Rather we are a primary source to power other continents. Gas is a part of the future and Africa must not be left behind. Africa’s energy crisis can be addressed by attracting investments and addressing challenges affecting businesses.

NLNG is a great example of how to build a successful model to overcome the unique challenges of doing business in Africa. We need similar type of intervention for our gas projects and power generation so we can light up the continent, improve our GDP per capital and take African’s teeming population out of extreme poverty.

This outcome of this conference can provide momentum to leverage on our strength in the continent and be a force for good. However we have also seen several conferences held in Africa with little follow up or traction on the outcome. It gives an impression that conferences are an end in themselves in Africa rather than the start or part of a process. I look forward to this conference being one of the exceptions, where the critical outcomes are taken forward with concrete actions and next steps.

I do hope we can continue to inspire the next generation of leaders to be the game changers in delivering value to the continent and leveraging on our strength.

The world cannot wait indefinitely for Africa. Thank you for listening!