NLNG’s $7 billion dividend securitization: Opportunity or risk for Nigeria?

The Bola Ahmed Tinubu-led federal government will plan to use the dividends earned from the Nigeria Liquefied Natural Gas (NLNG) Limited to borrow money.

This money would help prevent the naira from losing its value compared to the dollar.

They aim to tackle the economic difficulties caused by the naira’s decrease in value.

The securitization of these dividends involves using them as a guarantee for borrowing money.

Essentially, the government plans to use the expected future income from NLNG to obtain immediate funds.

These funds would then be utilized to support the national economy and mitigate the adverse effects stemming from the devaluation of the naira.

The decline in the naira’s value against the dollar has led to various economic challenges, such as increased import costs, inflation (26.72% in September 2023), and other financial instabilities.

By leveraging the NLNG dividends in this manner, the government aims to access much-needed financial resources to help stabilize the economy and prevent further negative repercussions caused by the weakening currency.

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According to a recent report, the federal government is expecting to receive $7 billion, facilitated by a consortium led by Standard Chartered Bank.

The aim is to increase the availability of dollars by injecting them into the market, intending to influence the naira/dollar exchange rate to reach approximately N800 to a dollar.

The plan involves utilizing the entire $7 billion to fulfil existing foreign exchange (FX) forward obligations, which would alleviate strain on the naira, enhance liquidity, and potentially lead to an increase in the currency’s value.

The strategy here is to use this significant influx of dollars to clear old FX forward contracts, essentially reducing the existing burden on the naira.

By doing so, the government aims to enhance the availability of foreign currency, thereby supporting the local currency and allowing it to strengthen against the dollar.

This initiative seeks to create a more stable and balanced foreign exchange environment, potentially leading to an improvement in the country’s economic conditions.

The country is currently battling a 26.72% inflation rate amidst foreign exchange challenges, while the major source of forex in the country; ‘s revenues is drying up.

The oil sector is in dire straits as stakeholders try to take oil production to the 1.7 million barrels per day quota set by the Organization of Petroleum Exporting Countries (OPEC).

Note that some stakeholders including the NLNG have said that Nigeria’s oil and gas production decline is a result of crude oil theft which cuts across various levels of sabotage like illegal connections, and vandalized oil and gas assets.

Other stakeholders are accusing the Nigerian National Petroleum Company (NNPC) Limited of using crude oil theft to justify security contracts handed over to third-party agencies in the Niger Delta region.

Meanwhile, these stakeholders maintain that crude oil theft in Nigeria is a myth.

Boon or bane?

What happens if the $7 billion is not properly utilized? This has been an ongoing problem for Nigeria – the abuse of public funds.

Oil and gas analyst, Etulan Adu told NewsTimes that the $7 billion NL NG securitization plan carries both potential benefits and drawbacks. On the positive side, it could aid in stabilizing the currency and provide immediate financial aid to the economy.

However, there are also potential risks and important factors to consider:

  • The Nigeria Liquefied Natural Gas (NLNG) plays a significant role in the country’s gas industry. Implementing the securitization strategy might affect gas production if it interferes with the company’s operations or available resources.
  • Mismanagement of the borrowed funds by the Nigerian government could lead to a cash shortage for future projects and might diminish investor confidence.
  • The full impact on NLNG and the gas industry remains uncertain until the implementation of this strategy is clear. It’s essential to understand how this plan might affect NLNG’s operations and the gas sector before drawing definitive conclusions.

Meanwhile, the prudent use of the borrowed resources by the government is critical. If these funds are mismanaged, leading to a lack of available capital for future projects, it might adversely affect the overall economic development and also lower investor confidence.

This could, in turn, slow down the growth and progress of various sectors in the country.

Understanding the precise implications of this strategy on NLNG and the gas industry is crucial.

Until the plan’s implementation and its effects on the operations and resources of NLNG are fully understood, it remains challenging to accurately forecast the actual impact on the company and the gas industry as a whole.

Analyzing these potential consequences is essential to make informed decisions and assess the broader implications on the economy and energy sector.

It is crucial to remember that economic plans can be complicated and that a number of aspects, including good implementation, openness, and management, are necessary for them to be successful. Mr. Adu said:

  • “The key aspect is how the funds will be utilized. NLNG could end up not having further backing from its shareholders to spend more money on new expansion projects. Reduced investor confidence will be imminent for new gas projects in Nigeria. It seems to be a practice that the government would always seek bailouts from major companies.”

Meanwhile, oil and gas analyst, Mr. Dan D. Kunle told NewsTimes that the securitization plan by the federal government is called a low-hanging option because the country needs to use what it has to get what it urgently needs.

However, there are some key questions the NLNG and other stakeholders need to answer.

He said:

  • “The focus is on expanding Nigeria’s LNG production from 22 million to potentially 30 million tons annually by completing Train 8. This increase in volume is crucial for the business. While margins have been promising in recent years, uncertainties exist.
  • “The dividends for the Federal Government of Nigeria, heavily depend on these production scenarios. Any shortfall in dividends could worsen the national fiscal system, complicating the settling of backlogs and debts.”

Mr. Kunle emphasized that to address these issues, action steps should be taken to increase crude oil and gas production by 200%, but this will require meticulous management.

While NLNG operates transparently, concerns loom over the operations of NNPC Limited and the Nigerian Petroleum Development Company (NPDC).

Gas production is declining, and upstream exploration and development investments have been inadequate for over eight years. This situation has caused delays in investment plans by International Oil Companies (IOCs).

According to Mr. Kunle, there is an active call for a decisive approach to reinvigorate Nigeria’s oil and gas industry.

President Tinubu must display a firm commitment to IOCs and make critical changes in NNPCL’s structure and subsidiaries.

The urgency lies in the capital-intensive nature of the oil and gas sector, where investments take time to yield returns. The country must avoid potential future scenarios where it might need to import more affordable gas.

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