US embassy cable - 03ABUJA380

UNCLAS SECTION 01 OF 03 ABUJA 000380 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR AF/W AND EB 
STATE PASS EX-IM, TDA AND OPIC 
STATE PASS USTR AND DOE 
 
 
E.O. 12958: N/A 
TAGS: EPET, EINV, OPEC 
SUBJECT: NIGERIA COMPLETES FINANCING PACT FOR BILLION 
DOLLAR NATURAL GAS PROJECT 
 
 
Summary 
------- 
1. (U) On January 23, Nigeria LNG (NLNG) held a signing 
ceremony for the six Nigerian banks providing $160 million of 
the $1.06 billion financing for Nigeria's fourth and fifth 
liquefied natural gas production trains. State-owned Nigerian 
National Petroleum Corporation (NNPC) holds 49 percent of 
Nigeria LNG. (Other partners are Shell 25.6 percent, Elf 15 
percent and Agip 10.4 percent.) NLNG also announced it was 
seeking financing for $460 million to construct four LNG 
tankers, and NNPC announced a possible new venture with Shell 
Oil and Norway's StatOil for a $1 billion floating natural 
gas plant off Akwa Ibom's coast. 
 
 
2. (U) NLNG's successful financing contrasts with recent 
financing difficulties that threatened privatization of 
NITEL, the national telephone company, and shipbuilder 
NIGERDOCK. Banking executives said the key this time was the 
nature of the business. Financing for this project posed 
little risk as NLNG already has sufficient guarantees for 
future sales. 
 
 
3. (U) The GON predicts LNG will provide 20 percent of 
Nigeria's GDP when the first five trains are on line in late 
2005. Natural gas eventually may surpass oil income, 
providing Nigeria another bonanza similar to the oil boom of 
the 1970s. This would offer Nigeria a second chance to use a 
natural resource windfall to catalyze development. End 
Summary. 
 
 
Initial Snags in the Signing 
---------------------------- 
4. (SBU) Only a week to a preliminary signing in London on 
December 17, 2002, the Ambassador was contacted separately by 
Nigeria LNG Managing Director Andrew Jamieson and Ex-Im Bank 
officials concerning the wording of a GON letter of 
assurances to the Export Credit Agencies (ECAs). Ex-Im and 
the British, Italian, and Dutch ECAs are guaranteeing $600 
million of the loans for the fourth and fifth liquefied 
natural gas trains. Ex-Im asked the Embassy to coordinate 
with the British High Commission to help resolve the impasse. 
The ECAs feared that hesitance by the Minister of Finance and 
the Attorney General to sign the letter meant the GON was 
wavering in its support for the NLNG. The ECAs also wanted an 
explicit commitment that loans would be repaid directly 
through NLNG's foreign bank accounts and not through the 
GON's federation account, thus protecting payments from 
budgetary and bureaucratic delays as well as exchange rate 
losses that sometimes affect oil joint ventures. 
 
 
5. (SBU) Meanwhile, Jamieson approached the Ambassador and 
British High Commissioner for their assistance in 
communicating with the ECAs. The Minister of Finance opposed 
the Central Bank of Nigeria (which ultimately might have a 
say in payment) signing the letter of assurance. Finance 
Minister Ciroma believed this would signal that the NLNG debt 
was sovereign debt, and not that of a private company. The 
Ministry of Justice, for its part, argued that the proposed 
letter of assurances went beyond the decrees of 1990 and 1993 
that created NLNG and established new obligations beyond the 
scope of the law. 
 
 
6. (SBU) While the Embassy and High Commission coordinated 
messages between London, Washington and Abuja, NNPC Group 
Managing Director Jackson Gaius-Obaseki spoke with the 
Ministers. The result was a letter of assurances that managed 
to address the concerns of the Ministries, while also 
satisfying the ECAs and the international lending community 
at large. The Ministers of Justice and Finance appreciated 
the personal assistance of Ambassador Jeter and High 
Commissioner Phillip Thomas, singling them out for 
recognition at the signing. 
 
 
A Good Time Was Had By All--Almost All 
-------------------------------------- 
7. (SBU) The mood of the bankers at the January 23 signing 
was very upbeat. Numbering approximately 30, the group 
included representatives from the six local banks as well as 
the NLNG's own London-based financing team and African 
Development Banks officials. All were optimistic there would 
be no problem in financing the next $460 million for the four 
tankers, with one calling natural gas projects, "the best and 
safest financing projects going." 
 
 
8. (U) Just a week after the signing, the Nigerian press 
reported progress on a feasibility study undertaken with 
Norway's StatOil for the $1 billion Nnwa/Doro Floating LNG 
plant off the coast of Akwa Ibom. That LNG plant is one of 
the three new plants the Federal Government hopes will raise 
income from natural gas to at least 50 percent of crude oil 
earnings by 2005. The other two are the Brass LNG project and 
the Niger Delta LNG project. 
 
 
Background on NLNG 
------------------ 
9. (U) The Nigeria LNG Limited was incorporated as a limited 
liability company on May 17, 1989 to harness Nigeria's vast 
natural gas resources and produce Liquefied Natural Gas (LNG) 
for export. At incorporation, the NLNG had a shareholding 
structure of NNPC (60 percent), Shell Gas BV (20 percent), 
Cleag Limited, now Total/Fina/Elf (10 percent) and Agip 
International (10 percent). In 1993, the shareholding 
structure changed to NNPC (49 percent), Shell (25.6 percent), 
Total/Fina/Elf (15 percent), and Agip (10.4 percent). The 
company has a wholly owned subsidiary, the Bonny Gas 
Transport Limited (BGT), established in December 1989. BGT 
provides shipping services for the NLNG. 
 
 
10. (U) Nigeria currently has massive reserves of associated 
and non-associated gas. An estimated 120 trillion cubic feet 
ranks its proven reserves as the world's tenth largest. 
Geologists believe more gas will be discovered when companies 
deliberately explore for it, as opposed to inadvertently 
finding it while looking for oil. Geologically speaking, many 
believe the Niger Delta is a gas province with oil rims. 
 
 
11. (U) The LNG plants are called trains. The base project 
(trains 1 and 2) commenced production on September 15, 1999 
and exported the first cargo on 9th October 1999. The two 
trains are currently producing at full capacity. The Final 
Investment Decision (FID) on train 3 was signed in February 
1999. It was ready for start-up by November 7, 2002. 
Production commenced on 28 November, with first shipment on 
December 17, 2002. Train 3 was completed on budget, ahead of 
schedule. 
 
 
12. (U) Also referred to as the NLNG Plus, the Final 
Investment Decision (FID) on the 4th and 5th trains was 
signed on March 20, 2002. Each train has a LNG capacity of 4 
million tons per annum and up to 0.5 million tons per annum 
of LPG. Train 4 will be ready for start-up in June 2005 and 
Train 5 in November 2005. Trains 4 and 5 will bring the 
overall production capacity of the NLNG Limited to 17 million 
tons per annum of LNG, one million tons of condensate and 2.3 
million tons of LPG per annum. 
 
 
13. (U) Nine ships with individual cargo capacity of between 
120,000 and 135,000 cubic meters are used for transporting 
LNG from Bonny Island to buyers, mainly in Europe and the 
United States. Eight are owned by the NLNG through its wholly 
owned subsidiary--Bonny Gas Transport Limited (BGT)--while 
the ninth, LNG Delta, is chartered on a long-term basis from 
Shell Bermuda Overseas Limited. A tenth, the newly-built LNG 
Bayelsa is scheduled to join the fleet this month. 
 
 
14. (U) Eight additional ships are required to meet the 
distribution needs of the project's increased capacity 
including trains 4 and 5. In December 2001, NLNG signed a 
ship building agreement with Hyundai Heavy Industries, South 
Korea for the construction of four new ships. Delivery will 
begin in November 2004. The other four ships will be 
chartered from Bergesen A.Y.A SAU of Norway, which will build 
the ships at Daewoo Shipyard in South Korea. With 18 vessels, 
BGT will be the single largest LNG fleet owner in the world. 
 
 
Comment 
------- 
15. (SBU) Nigeria LNG is the most recent and biggest economic 
success story for the GON. The importance of NLNG and natural 
gas production to the Nigerian economy will continue to grow. 
There are many reasons: strong support from President 
Obasanjo; the recent success of similar projects in Asia and 
other places; a drastic reduction in gas flaring and severe 
environmental pollution; and the fact that, unlike oil, 
natural gas production will not be constrained by the OPEC 
quota system. NLNG's private sector status also means that 
the industry can continue to incur heavy debts without 
Nigeria becoming further buried in politically unpopular 
sovereign debt. Perhaps most importantly, LNG will be a 
critical new source of revenue as the GON has seen its civil 
service salaries and other recurrent expenditures grow to 
take up more than 80 percent of present oil revenues. 
 
 
16. (SBU) But NLNG's very success is seen by some as a 
potential problem. World Bank Country Director Mark Tomlinson 
believes that for Nigeria to get its house in order it needs 
an intense economic crisis, such as the one it has barely 
skirted for the last two years. Only under such dire pressure 
will the government and ruling elite implement the necessary 
reforms. Large-scale infusions of LNG money will encourage 
Nigerian politicians and the GON to postpone the day of 
reckoning and continue policies that fritter away the 
nation's wealth--just as these same people and policies have 
wasted much of the income from oil resources over the last 25 
years, Tomlinson believes. 
 
 
17. (SBU) Despite high capital costs, the GON, NNPC and 
foreign partners seem to have a deep thirst for LNG plants. 
There are limits, however. Work on new plants will not 
proceed without guaranteed markets. The GON will have to 
decide if the timing is right for Nnwa/Dora and its two 
companions to move forward, especially without evidence of a 
stronger worldwide economic recovery. NLNG may be reaching 
the end of its first growth year. End Comment. 
JETER