NIGERIA COMPLETES FINANCING PACT FOR BILLION

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