US embassy cable - 04LAGOS2470

UNCLAS SECTION 01 OF 03 LAGOS 002470 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/W 
STATE FOR EB/ESC/IEC/ENR/BLEVINE 
STATE FOR DS/IP/AF 
STATE FOR INR/AA 
STATE PASS DOE FOR DAS JBRODMAN AND CGAY 
STATE PASS TREASURY FOR ASEVERENS AND SRENANDER 
STATE PASS DOC PHUEPER 
STATE PASS TRANSPORTATION MARAD 
STATE PASS EX-IM FOR JRICHTER 
STATE PASS OPIC FOR CDUFFY 
STATE PASS TDA FOR BTERNET 
 
E.O. 12958: N/A 
TAGS: EPET, EINV, NI, ENERG 
SUBJECT: Brass LNG Project Overview 
 
 
Summary 
-------- 
 
1. (SBU)  This cable provides an overview of a major new 
liquefied natural gas (LNG) project in Nigeria.   ..Brass 
LNG is planned as a world class, greenfield facility to be 
located in Brass, Bayelsa State.  Brass LNG will be a two- 
train facility for liquefaction and shipping, with an 
initial production capacity of 10 million tons LNG, 2.4 
million LPG, and 0.2 million tons condensate annually. 
Brass LNG shareholders include the Nigerian National 
Petroleum Corporation (NNPC), Chevron Texaco, 
ConocoPhillips, and ENI International.  The Final Investment 
Decision for Brass LNG is projected for mid-2006.  Proposed 
downstream gas legislation and new gas fiscal terms could 
significantly impact the financial viability of the Brass 
project.  End summary. 
 
Project Overview 
----------------- 
 
2.  (U)  Brass Liquefied Natural Gas is planned as a world 
class, greenfield LNG facility to be located in Brass, 
Bayelsa State.  Brass LNG Limited incorporated in Nigeria on 
December 9, 2003.  The site will include a two-train 
facility for liquefaction, and shipping facilities.  Brass 
LNG's products will include 10 million metric tons of LNG, 
2.4 million metric tons of LPG, and 0.2 million metric tons 
of condensate per annum. 
 
Capital Structure and Financial Details 
----------------------------------------- 
 
3.  (U)  Shareholders for the Brass LNG plant include the 
Nigerian National Petroleum Corporation (NNPC) with a 49 
percent stake, and Chevron Texaco, ConocoPhillips, and ENI 
International, each with a 17 percent stake.  The notional 
budget for Brass LNG is about $3 billion, but more precise 
figures await completion of the Front End Engineering 
Design. 
 
4.  (SBU)  Additional investment for a possible expansion of 
Brass LNG might bring the total investment as high as $10 
billion.  Brass management does not endorse press reports of 
projected income of $10 billion annually for the project. 
 
Nigeria's Drive to End Gas Flaring 
----------------------------------- 
 
5.  (U)  Nigeria was chosen as the proposed site for the LNG 
plant due to its abundant supplies of natural gas (estimated 
at more than 170 to 180 trillion cubic feet, the seventh 
largest in the world), and because of the GON's campaign to 
end gas flaring by 2008. Natural gas projects such as Brass 
will play a significant role in developing an export market 
for gas that might  otherwise be flared. 
 
Proposed Brass Facilities 
--------------------------- 
 
 
6.  (U)  The conceptual design for Brass LNG involves 
locating an LNG processing facility on-shore, next to the 
existing Nigerian AGIP Oil Company (NAOC, the joint venture 
between parastatal NNPC and Italian ENI) oil terminal on 
Brass Island, Bayelsa State.  The waters off of Brass Island 
are quite shallow, so berthing ships is  problematic.  The 
proposed solution involves a 6-kilometer long trestle, with 
a jetty for LNG and LPG ships, turning basin and breakwater, 
and a 9-kilometer dredged channel to allow ships to 
approach. 
Gas Sourcing 
------------- 
 
7.  (U)  Once operations are underway, the various 
shareholders will each contribute approximately 850 million 
cubic feet/day of gas as feedstock from their existing 
fields. 
 
 
 
Project Milestones: FEED Contract Recently Signed 
--------------------------------------------- ------ 
 
8.  (U)  A number of significant project milestones have 
taken place.  Shareholders signed the Heads of Agreement 
(HOA) for Brass LNG in October 2003.  Brass LNG awarded the 
contract for the Front End Engineering Design (FEED) of the 
facility to Overseas Bechtel Incorporated on 10 November 
2004.  Completion of the FEED is expected within 12 months, 
and includes provisions for a subsidiary of NNPC, the 
National Engineering and Technical Company Limited, to 
participate in the contract.  The project will then move to 
the Engineering, Procurement, and Construction phase, 
expected to begin in the third quarter of 2006.  The project 
is planned for completion by the second half of 2009. 
 
End Market 
----------- 
 
9.  (SBU)  According to Martin Hutchison, Managing Director 
for Brass LNG, the facility's first LNG sales will likely be 
to the U.S., but consideration will also be given to the EU. 
Domestic sales are not currently planned, given the 
existence of price regulation in Nigeria's downstream 
market. 
 
Final Investment Decision 
------------------------- 
 
10.  (SBU)  The Final Investment Decision (FID) for Brass 
LNG is expected in mid 2006.  According to MD Hutchison, 
steps to the FID include satisfactory conclusions on a range 
of issues, including: 
 
--Completion of the FEED and resolution of all technical 
issues 
--Competitive EPC environment 
--Community and other stakeholder engagement 
--Environmental considerations 
--Satisfactory security arrangements 
--Price and timing with respect to market entry 
--Impact of new legislation 
 
Policy Considerations 
----------------------- 
 
11.  (SBU)  Proposed GON downstream gas legislation and new 
gas fiscal terms could significantly impact the Brass 
project.  The Brass management team is carefully watching 
the evolution of these policies and conducting economic 
analysis to determine the impact of current and proposed 
fiscal terms on the project's viability. 
 
 
 
Comment 
--------- 
 
12.  (SBU)  There is a growing call in Nigeria for revival 
of the domestic gas market, particularly the domestic LPG 
for cooking.  Nigeria, despite its immense gas reserves, has 
the lowest per capita gas consumption in West Africa.  The 
domestic LPG market collapsed a few years ago, largely due 
to the imposition of a number of tariffs and taxes on 
imported LPG, including a 30 per cent import duty, 7 per 
cent port surcharge, and 5 per cent value added tax. 
Additionally, the country lacks a backbone gas pipeline 
system for domestic distribution, so LNG cannot easily be 
harnessed for power generation.  International investors 
have not been willing to consider investments in the 
domestic gas sector, as prices remain regulated and below 
international levels.  MD Hutchison frequently speaks on the 
need for realistic price signals in the Nigerian gas market 
before international investors will be tempted to invest in 
this area.  Unfortunately, as new export gas projects are 
approved and move ahead, the tension within country over the 
lack of gas for domestic use becomes ever more acute.