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Why Nigerian banks can’t fund $7bn NLNG Train 7 project

Why Nigerian banks can’t fund $7bn NLNG Train 7 project

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Adewale Sanyaolu

Stakeholders have continued to applaud the Nigerian Liquefied Natural Gas (NLNG) Limited over its decision to source about $7 billion from global financial markets for the construction of its Train 7.

The stakeholders, who spoke to Daily Sun in separate interviews, noted that the move by NLNG will further improve foreign exchange liquidity in the local market and create more opportunities for Small Medium Enterprises (SMEs) in the economy through access to funds from local banks while not putting the nation’s foreign reserves under threat.

They equally admitted that local banks do not have the capacity to fund a project of that magnitude requiring about $7 billion when the capital base of each Nigerian bank is N25 billion, a figure that is not in any way closer to the threshold of the fund required by NLNG.

On July 11, in London, as part of the build-up towards the Final Investment Decision (FID), later this year, NLNG announced it was seeking about $7 billion for the sustainability of its operations and expansion project, which will increase its production capacity from 22 Million Tonnes Per Annum (MTPA) to 30 MTPA.

Update on Trains 1-6

Managing Director and Chief Executive Officer of NLNG, Mr. Tony Attah, at a ceremony in London to commemorate the repayment of a $5.45 billion shareholder loan for its existing trains, revealed that funds being sought will cover the company’s expansion programme (construction of Train 7) and investment in the upstream gas sector in Nigeria that will ensure the sustainability of feed gas supply to its existing trains (Trains 1 to 6) and the new Train 7.

Explaining the modalities, Attah remarked: “Let’s get this clear. NLNG is a mid-stream company that has monetised over 5.96 trillion cubic feet (tcf) of Associated Gas (AG), which would have otherwise been flared thus helping to build a better Nigeria.

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“However, what we are doing is not just looking to fund the expansion of the plant but also to ensure sustainability of feed gas supply to the plant for the continued success of NLNG. All of these align with our belief that gas is a catalyst for industrial and economic transformation, which will position Nigeria to become a leading gas producing country.”

According to Attah, “the success story of the NLNG project is due to some key critical success factors, which include the shareholding and governance structure of the company that has made it an independent Incorporated Joint Venture, guaranteeing an independent Board of Directors, effective decision making as well as funding for its projects, which is critical for the sustenance of this successful project.

“The consolidated loan contributed towards funding the Base Project, Expansion Project, NLNG Plus Project and Train 6. The final repayment, which is a milestone for NLNG and Nigeria, thus sends a strong message to the world that NLNG has come of age and will build on this in its expansion programme, which will further increase our output and secure our position in the top quartile of LNG suppliers globally.”

What Train 7 seeks to achieve

A fortnight ago during a visit of the Minister of Finance, Mrs. Kemi Adeosun, to the Bonny Island Plant complex of NLNG in Rivers State, Attah stated that NLNG’s planned Train 7 Project will increase the level of inflow of Foreign Direct Investment (FDI). Besides, he noted that the project will increase production output of its plant from 22 MTPA to 30 MTPA.

“We are committed to our expansion goals of building an additional production train to our plant. We believe this will ensure our country becomes an economy that has been able to unleash its gas potential and one that is in a transitional state from an oil-based economy to a gas-based economy. We also hope that Train 7 will change the country’s revenue and foreign investment profile.”

He added that the economic impact of increased LNG production output will be significant, stating that since the start of its operations 19 years ago, NLNG has generated more than $90 billion in revenue and has paid over $16 billion dividends to the Federal Government.In addition, he said NLNG has paid some $13 billion to the Federal Government for feed gas purchases and $6.5 billion in taxes as well.

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“We take up about 50 per cent of Liquefied Petroleum Gas (LPG) supply in the country and we have committed about 350,000 tonnes to the domestic market.  We believe that with an increase in our production, these numbers will be impacted on positively and this will help with the country’s revenue generation profile,” he remarked.

Nigerian banks sit on the fence

In his contribution, Managing Director of Financial Derivatives Limited, Mr. Bismarck Rewane, said local banks do not have the capacity to fund such projects because they are restricting lending, adding that it was far much better for NLNG to raise the money overseas than from local banks. He said sourcing it locally means a depletion of the nation’s foreign reserves.

‘‘If our local banks are able to raise the $7 billion for NLNG, it will mean that it is part of our reserves that it will come from, which will not mean well for the economy because of its far reaching implications. For me, the decision of NLNG to source the fund externally is in the best interest of the country and I give kudos to them for that move.”

He equally explained that the high interest rates charged by Nigerian banks place them at a point of disadvantage, saying that borrowings from Nigerian banks for dollar is about 12 per cent, which he said NLNG cannot pay because it could have access to foreign loans at about 7 per cent.

Rewane said the choice of NLNG to look offshore will help boost liquidity in the economy without increasing credit exposure, adding that the project will employ people while Nigerian banks will also enjoy the benefit but not necessarily being confronted with the attendant risks involved.

For his part, Partner, Bloomfield Law Practice, Mr. Ayodele Oni, said he believes that Nigerian banks do not have sufficient financial base to provide such funding as the minimum capital base of banks is N25 billion and with issues such as obligor limits (sectorial and otherwise), it will be tough for Nigerian banks with such capital base to finance a $7 billion project, which is actually almost N3 trillion, as this even exceeds the minimum capital base of the total number of banks in Nigeria. ‘‘This is together with the fact that the interest rate will be much higher than what will be obtained from the international market.’’

Further to that, he noted that Nigerian banks also do not appear to be able to give long term loans because their high interest rates are likely to make it difficult to give long term loans. He added that in extreme cases, Nigerian banks may be able to do six years or push seven at the very most that will be in cases of consortia. He stated that what may  eventually happen is that Nigerian banks may provide 5 to 10 per cent of the loan at the very best.

Director, Centre for Petroleum Economics, University of Ibadan, Prof. Adeola Adenikinju, said the high cost of borrowing locally could have informed the decision of NLNG to resort to external funding, where access to fund is cheaper. He also explained that should Nigerian banks decide to fund the project, other players in the economy would have been denied access to loans because the size of the fund requirement by NLNG will crowd them out.

‘‘That decision would have been counterproductive because other players in the economy that are not as large as NLNG would be under threat of going extinct. Remember that these are operators that are equally contributing to the economy. So denying them access to fund could lead to unemployment,’’ he said.

Citing the case of MTN, Adenikinju expressed worry that the decision of MTN to source N200 billion from 12 local Bank to improve on its infrastructure was capable of affecting the operations of Small Medium Enterprises (SMEs).

He said such moves were some of the reasons that continuously pushes up interest rate out of the reach of SMEs and other players, warning that caution should applied by Banks in other not to kill the SME sector of the economy.








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