Columnists
FLNGs as the future: Too soon to call?
Is it too early to make a call that FLNGs are the future of the natural gas market?
Only two weeks ago, the Department of Petroleum Resources (DPR) licensed UTM Offshore Limited, a Nigerian indigenous oil and gas company to establish a Floating Liquefied Natural Gas (FLNG) project- the first of its kind in Nigeria.
The facility will process 176 mmscf of gas per day and is expected to change the face of natural gas development in Nigeria. In lay terms, an FLNG is an LNG plant floated on water rather than onshore, usually for its comparative advantages – primarily its ability to access stranded gas volumes.
As the UTM deal could transform the face of Nigeria’s natural gas market, it is worth examining if FLNGs are the future and whether more companies – and indeed investors – should be looking this way, or not. The FLNG technology is relatively new, with the first FLNG launched in May 2011 by Shell. Shell’s Prelude in West Australia is the world’s largest offshore floating facility ever built, with enough steel to build 35 Eiffel Towers.
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While the project is ambitious, its failure to achieve first shipment of gas on schedule as well as the other challenges that plagued it did not do much to boost the confidence of prospective investors/operators. Regardless of these setbacks, it is interesting to see that various other FLNG projects took off shortly afterward. These include the Hilli Episeyo in Cameroon- Africa’s first FLNG, the PFLNG Satu operated by Petronas in Malaysia, Mozambique’s Coral South and the Fortuna moored at Equatorial Guinea.
The big question is, have FLNG’s come as the future of natural gas development? In deciding for an FLNG as against onshore LNG production or vice versa, various considerations arise. Perhaps an important one of these considerations is the novelty of the FLNG technology. As there are only few FLNGs currently operational and none which has operated for a ten-year stretch, it is difficult to adequately plan for risks that could occur on the high sea while an enormous vessel housing cryogenic liquefaction plants travels. Thus, having very few precedents presents a challenge.
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Furthermore, as technical designs of the FNLG have to match the weather, gas composition and metocean conditions for its contemplated routes, the extent of copycatting from prior constructions is restricted- instead a high level of specificity is required, for which no playbook may exist.
Additionally, FLNG projects might be subject to multiple safety certificates and requirements of several standardisation bodies across jurisdictions due to the high safety standards required for them. For instance, the Prelude’s offshore maintenance processes were condemned by the offshore regulator, NOPSEMA even after tens of billions of dollars were spent in its design.
However, reliance cannot solely be placed on the teething challenges faced by the Prelude, as subsequent FLNG projects have proved more successful, with shorter construction timelines and lower cost overruns. FLNG projects like the Coral South have been able to attract third-party financing (up to $4.7 billion) from a consortium of 15 international banks and 5 Export Credit Agencies (ECAs). This signifies that there is some benefit to be had in the FNLG business after all.
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We cannot also brush aside the numerous benefits and advantages FLNGs provide when compared with onshore production. Apart from the fact that FLNGs ensure that stranded gas is produced, they obliterate knotty issues of land rights and permits that have always been a challenge in developing oil and gas projects. Also, host community concerns which have often escalated to security threats are no longer a bother, since neither construction nor production takes place in any community.
FLNGs also eliminate the costs and concerns of decommissioning and abandonment of onshore installations as well as other forms of environmental pollution which affect host communities. Similarly, with no need for gas pipelines, breakwater and jetties, FLNGs reduce cost of construction. The extended FEED and EPC development phases are equally cut down as the regular delays from onshore construction are absent. The fact that it can also be moved to another field if production declines in one field is a big advantage.
READ: NCDMB says Nigerian Oil and Gas Park will be completed in Q4 of 2022
With pros and cons existing for these floating projects, it may be too early to make a call that they are the future of the natural gas market. With the Prelude just re-commencing shipment in January this year, stakeholders in the oil and gas industry are watching to see how this prodigy will prove naysayers wrong about FLNGs.
The technology and financing risks of FLNGs leave many grey areas, yet it is encouraging to see a Nigerian company wade into these waters – both literally and figuratively. It is hoped that the UTM project will take significant learning from the failings of the Prelude as well as the successes of the Hill Episeyo and Coral South in its neighbourhood which have secured financing and delivered on shipments so far.
Columnists
Traders’ Voice…Nigeria’s surprising Q4 2020 GDP growth
The fourth-quarter GDP performance was magical and unexpected, but there is still enough room for worry.
Let us do a quick exercise before diving into this week’s note. Need you to raise five fingers up.
- Put a finger down if you were not shocked by the Q4 GDP output.
- Put a finger down if you expect a FY GDP of -1.92% YoY or less.
- Put a finger down if you expected Nigeria to be out of a recession in Q4 2020.
- Put a finger down if you expected the agricultural sector to experience its strongest output in 16 Quarters.
- Put a finger down if you expected that the agricultural and service sector will outperform in Q4 2020.
If you still have all five or four fingers up, you are not alone in this as the Q4 2020 GDP figures came as a shock, beating consensus expectation of another decline in Q4 2020. If you have all your fingers down, I would like to know where you got your crystal ball. Nigeria’s Gross Domestic Product (GDP) grew by 0.11%(year-on-year) in real terms in the fourth quarter of 2020, representing the first positive quarterly growth in the last three quarters. Overall, in 2020, the annual growth of real GDP was estimated at –1.92%, (vs IMF’s -3.2% YoY). To avoid responses like, “it’s the Lord’s doing”, we will be diving into the sectors that were responsible for this growth.
GDP
The 2020 fourth-quarter GDP numbers were a sort of “wow moment” for most people, as the real GDP growth rate surprisingly climbed back into the growth region. Had anyone posited an expectation of a GDP recovery in the final quarter of 2020, many would have causally likened such an outlook to a futile attempt to build castles in the sky. Especially with all the events that took place in 2020, ranging from the Covid-19 pandemic, EndSars protest and, not to forget, the level of insecurity witnessed in the country. Nevertheless, it can be observed that the growth recorded was largely hinged on the non-oil sector recovery, as it rode on the back of improved economic activities to record a growth rate of 1.69%. This number represents an improvement when compared to the preceding quarter’s performance, which stood at -2.51%.
We will resist the temptation to lean into unproven narratives of statistical manipulation but rather attempt to demystify the GDP numbers by identifying the activity sectors that spurred the reported growth. An examination of the performance of the sectoral trinity, consisting of Agriculture, Industrial, and Service, helps provide a sense of meaning to the reported growth. In the review quarter, the Agriculture and Services sectors grew by 3.42% and 1.31%, respectively, and these two sectors jointly contribute 81.23% to the GDP of the country, hence, driving the overall GDP growth.
The growth recorded in the agricultural sector is the highest seen in sixteen quarters, but we unfortunately, cannot attribute the improved performance to the huge influx of funds that the fiscal and monetary authorities have been pumping into the sector through schemes like the Anchor Borrowers’ Programme. Rather, the lid placed on food importation via the border closure and the limitations on FX access for certain categories of food importers tipped the scales of demand and supply in favor of domestic agricultural players. Also, agricultural growth was underpinned by a 3.68% and 2.38% improvement in crop production and livestock subsectors, respectively. So, you can seek solace in the agricultural sector growth when next you go food shopping and are faced with soaring prices. For the service sector, the improvement was driven by the growth in the Information and Communication (14.70%) and Real Estate (2.81%) sectors, both of which jointly account for 40% of the service sector. The real estate performance marked the end of a six-quarter decline.
The GDP recovery offers no thanks to the oil sector, as it only deepened its downtrend. The oil sector in the fourth quarter of 2020 recorded a real growth rate of -19.76%, which makes the -13.89% recorded in the second quarter of the year look somewhat good. The blame for this poor oil performance can be largely attributed to lower production levels, as we recorded a YoY production decline of 22.00%, with oil production averaging 1.56mbpd in the review quarter as against 2.00mbpd recorded in the corresponding quarter of 2019. The explanation for the drop in production can be traced to domestic production disruptions, as well as output limitation by OPEC+. Back in 2017, a recovery in the oil sector was instrumental to the emergence of the country from the recession, but over the years, the non-oil GDP contribution has gradually encroached into the oil sector’s quotient, increasing from 91.21% in the second quarter of 2017 to 94.13% in the fourth quarter of 2020. This helps provide more meaning to the recent GDP growth seen, as a non-oil recovery weighs more on the performance of the overall GDP, while the oil sector’s impact gradually diminishes.
The fourth-quarter GDP performance was magical and unexpected, but there is still enough room for worry. The weak recovery recorded is expected to be the first of many tepid growth rates, and such economic sluggishness should last through 2021. The structural problems of the economy remain, hence, the chances of the economy recording sustainable growth seem bleak.
All Yields are heading north…
It seems we are not the only country experiencing a rise in fixed income yields. The yield on the United States benchmark 10-year Treasury notes climbed to a one-year high of 1.36% on Monday. Since the beginning of February 10-year yields have risen about 26 basis points, on track for their largest monthly gain in three years. Unlike the Nigerian fixed income yields which have been on the upward trajectory largely due to a sharp decline in the market liquidity chasing excess supply of securities. The rise in US Treasury yield has been hinged on inflation expectations as the vaccination programme gains momentum while stimulus expectations continue to drive a positive outlook for the economy in the near to medium term. The stock market also felt the brunt of the fast rise in yields as the S&P 500 was down 0.22%, while the Nasdaq Composite slumped 1.53% on Monday. However, the Dow Jones Industrial Average rose 0.39% or 144 points.
US 10-Year Treasury vs S&P 500
Looking at the chart above, it seems the United States defied the theory that states that there is an inverse relationship between the yields in the fixed income market and the equities market, as yields in the fixed income markets and equities market had a positive correlation between the period of August 2020 to January 2021. (One word, Reflation Trade)
Reflationary trades involve buying assets exposed to faster economic growth, price pressures, and higher yields. Riskier equities tend to benefit at the expense of haven assets such as the U.S. Treasury. Equities that benefits are small caps and cyclical sectors such as banks and energy producers. It also includes cruise operators, airlines, and other travel and leisure companies that will benefit from an end to lockdowns. It’s the go-to trade when economies emerge from a recession. This begets the question, “would we see reflationary trades in Nigeria given that we just came out of a recession?”
Spread Analysis (US 10-year yield, NIGERIA 31 and NIGERIA 49)
If U.S. Treasury yields continue to rise, central banks in emerging markets may need to hike rates to sustain foreign inflow. We might be looking at an end to the global central bank dovish stance sooner than expected. From the Eurobond perspective, the NIGERIA 31, NIGERIA 47, and NIGERIA 49 have traded at a three 3-year average spread of 670 bps, 650 bps, and 720 bps of the U.S. 10-year yield in the past 3 years.
Given the U.S. 10-Year yield current spread differential of 600 bps, 520 bps, and 650 bps between the NIGERIA 31, NIGERIA 47, and NIGERIA 49s, we expect a further rise in yields across the Nigeria sovereign papers.
Columnists
Real estate sector GDP positive in Q4 2020, but still in the woods
The real estate sector like many other sectors of the economy suffers deeply from a dip in macro economic conditions of the country.
