Unstable Crude Oil Prices Push NLNG Revenue Down by 30 Per cent

Oil glut worsens as OPEC’s market share battle begins, says IEA

The General Manager, Commercial of the Nigeria Liquefied Natural Gas (NLNG) Limited, Mr. Patrick Olinma, yesterday disclosed that the average six months intake of the company from the sale of LNG to its customers at various destination markets has dropped by 30 per cent because of the current volatility in the global prices of crude oil.

Olinma at the 2015 ‘commercial week’ of the NLNG in Abuja stated that the volatility in price of Brent crude, which NLNG indexes its price for LNG, has ensured that the percentage drop in revenue was recorded within its six months average benchmark calculation.

He said that while Brent had recorded an average of 40 per cent price drop in the ongoing price fluctuation, the average intake of NLNG might as well dwindle further if the situation persists.

“Normally, our prices are not Brent of the day but an average of six months Brent. So we are still carrying over some of the high Brent prices but even at that we have lost 30 per cent of our revenue as at the end of April compared to 2014.

"So, when a lot of people look at the Nigerian economy and they only talk about oil, in terms of revenue we generate over $10 billion on the average. So, when you look at the fact that we are losing about 30 per cent, that is a lot of reduction in revenue for the country,” Olinma stated while making his presentation on the current dip in energy prices.

According to him, “Basically, our export product is indexed to Brent and so it is a percentage of Brent. For example, you sell and get paid 10 per cent of Brent, and if Brent sells for $100, you get paid $10. If it goes down to $50, then it is $5; that is exactly what has happened to our product sale.”

Speaking further, he said: “Because of the fall in Brent which our pricing is indexed to and if it goes down, our price goes down, if it goes up, our price goes up, that movement is what we are talking about.

"Brent has fallen by 40 per cent today, it went below that before but is at $60 now. Last year and in 2013 on the average, it was above $100 but today it is $60, that is 40 per cent drop, our revenue has gone down by 30 per cent because we have what is called the lag.”

“Our Brent pricing is that when I say 10 per cent of Brent, it is 10 per cent of the average Brent price for six months and because of that we then have a lag effect that will still come from the high Brent because if you are pricing today, you go back to six months and take the average.

"That is why ours have fallen by 30 per cent while Brent is 40 per cent but if it continues, then we will get to a point where it is exactly the same and if it is going up again, we will take time to go up again because we will continue to take the six months average and after a while again, it will catch up again,” Olinma added.

Olinma’s disclosures were also buttressed by the Deputy Managing Director of NLNG, Isa Mohammed Inuwa, who said that in addition to the pricing factor, the substitution of NLG with other fossil fuel by consumers has equally contributed to the revenue decline.

“The most important thing to understand is that our prices are indexed to crude, at least a significant portion of our portfolio. The price of our gas is indexed to Brent and therefore if there is a fall in Brent price, it necessarily means that we will sell for less but then the other thing that is good to look at is the demand side.

"LNG is a substitute fuel and there is a switch between LNG and other hydrocarbon products and these are the two sources of drop in revenue; crude price and of course as a substitute because in other words, anybody who is using LNG can move into other sources of energy and so yes, we’ve been affected,” Inuwa said.

He also informed the audience that the company was already making good efforts with its renewal of expiring supply contracts with its customers.

He said: “As you know, LNG contracts are long term and you don’t build plants until you have supply contracts that are at least equivalent to the life of that assets. Our contracts are normally between 20 to 25 years.

"The first three trains on the LNG, their contracts will begin to expire as from 2020-2021 and ordinarily as a matter of practice, you have to start re-marketing well before the expiry of the existing contracts.

“We have already developed a re-marketing strategy and we have a fairly good idea of how we are going to re-market those trains, what the market conditions may likely be, what levers we are going to employ in terms of our re-marketing strategy. So we have a very clear idea of what we are going to do."

The over $14 billion six-trains NLNG with the capacity to produce 22 million tonnes per annum (mtpa) of LNG, 5mtpa of Liquefied Petroleum Gas (LPG and condensate) and 3.5 billion standard cubic feet per day (bscf/d) of natural gas intake is owned by four shareholders — the federal government which is represented by the Nigerian National Petroleum Corporation (NNPC) with 49 per cent, Shell (25.6%), Total LNG Nigeria Limited (15%) and Eni (10.4%).

From its reported annual take-in of over $10 billion annually, the company in 2014 paid as much as N220 billion to Nigeria as corporate income tax.

Meanwhile, as crude oil exporters face declining revenues due to a drop in the prices as a result of excess supply in the international market, the global oil glut has worsened as Saudi Arabia, the largest exporter among the members of the Organisation of Petroleum Exporting Countries (OPEC), is pumping more crude into the market in an attempt to win a market share battle against US shale production.

The International Energy Agency (IEA), the West's energy watchdog, said in a monthly report that although higher-than-expected oil demand was helping to ease the glut, growth in global oil consumption was far from spectacular.

Reuters quoted IEA as saying that as a result, signs are emerging that the crude oil glut is shifting into refined product markets, which could make a recent rally in oil prices unsustainable.

“Despite tentatively bullish signals in the United States, and barring any unforeseen disruption elsewhere, the market's short-term fundamentals still look relatively loose," said the IEA, energy advisor to over 26 industrialised countries.

Global oil production exceeds demand by around 2 million barrels per day, or over two per cent, following spectacular growth in U.S. shale production and OPEC's decision last year not to curtail output in a bid to force higher-cost U.S. producers to cut theirs.

As a result, benchmark Brent oil prices more than halved from June 2014 to $46 per barrel in January.

They have since rebounded to around $65 per barrel, however, on fears of a steep slowdown in US production growth.

"In the supposed standoff between OPEC and US light tight oil (LTO), LTO appears to have blinked. Following months of cost cutting and a 60 per cent plunge in the US rig count, the relentless rise in U.S. supply seems to be finally abating," the IEA said.

But it added that the recent oil price rebound was giving US producers a new lease of life.

"Several large LTO producers have been boasting of achieving large reductions in production costs in recent weeks. At the same time, producer hedging has reportedly gone steeply up, as companies took advantage of the rally to lock in profits," the IEA said.

"It would thus be premature to suggest that OPEC has won the battle for market share. The battle, rather, has just started."

Despite a certain slowdown in US oil output growth, global crude supply was up by a staggering 3.2 million bpd in April year-on-year, the IEA said.

Beyond high OPEC production, the IEA cited strong performance of non-OPEC countries including Russia, Brazil, China, Vietnam and Malaysia.

The IEA lifted its 2015 forecast for non-OPEC supply growth by 200,000 bpd since last month's report, saying non-OPEC producers will contribute 830,000 bpd of additional supplies in 2015.

Despite calls by the poorer members of OPEC for the cartel to reduce the oil pumped into the market so as to stabilise the prices, Saudi and her Gulf allies have insisted on allowing the market forces to stabilise the prices to avoid losing market share to Shale producers.