A TO Z ABOUT LPG BUSINESS

BUSINESS PLAN

LPG MARKETING & DISTRIBUTION

for

Masters Energy OIL & GAS LTD

LAGOS, NIGERIA

March, 2013
             
CONTENTS
PAGE NO.
EXECUTIVE SUMMARY
1 INTRODUCTION
2 LPG-PRODUCT,  SOURCES  & SPECIFICATIONS
3 MARKET ANALYSIS
4 PROJECT DESCRIPTION
5 PROPOSED FUNDING MODEL / OPTIONS
6 REVENUE MODEL
7 FINANCIAL ANALYSIS
8 SWOT & RISK ANALYSIS
9 STATUTORY & REGULATORY FRAMEWORK
ANNEXURES
1 LAYOUT OF PROPOSED LPG PLANT & BULK STORAGE FACILITY
2.1 SUMMARY
2.2 FIXED ASSETS
2.3 MILESTONES
2.4 MANPOWER PROJECTIONS & COST
2.5 CASHFLOW PROJECTIONS
2.6 PROJECTED BALANCE SHEET
2.7 FEASIBILITY ANALYSIS
APPENDIX
1 TECHNICAL DETAILS OF CONTAINERISED LPG BOTTLING PLANT


EXECUTIVE SUMMARY


Masters Energy Oil & Gas Ltd, proposes to venture into the business of ‘LPG Marketing & Distribution’ in Nigeria.  This report  is a Business Plan – giving the details of the project and deliverables which are as under ::

 Overview of LP Gas Sector in Nigeria

 Review of business opportunities in LPG sector in Nigeria.

 ‘Business Plan’ for MEOGL’s entry into LPG sector.

 Revenue model and projected Cash Flow Statement including manpower deployment

 Financial feasibility of LPG business


Salient points, which need to be noted, are as listed below:

1. Nigeria is a gas-resource country with huge gas reserves. It has proven gas reserves of about 184 TCF.

2. The gas resources are largely unexploited with  total gas production estimated current daily production at 4.6 BCFD with nearly  55% or close to 2.5 BCFD being flared.

3. Gas resources can only be developed when the gas can be economically produced and transported to markets.

4. The federal government has been leading a spirited campaign to revive LPG business in Nigeria and asked the International Oil Companies (IOCs) to make cooking gas available and affordable in Nigeria.

5. Nigerian domestic gas market - the entire country of 140 million people is estimated to have about 500,000 cylinders only.

6. Potential market size of the LPG market in Nigeria – is based on the population of 150 million and the number of households in the country currently estimated at 9 million. The average home consumes one 12.5kg cylinder a month or 150 kg annually.  This translates to 1.35 million MT per annum.

7. Present total consumption in the country is about 120,000 MT, hence there is a market balance of about 1.230 million MT per annum awaiting potential investors. Nigeria’s LPG market is estimated to have a potential of over N37 billion per annum.

8. The market potential for LPG in Nigeria is huge considering the population size. Current per capita consumption is 0.5 kg per capita. Comparative figures for other African countries are -  Senegal consumes 8 kg per capita, South Africa 5 kg per capita, Cote d Ivoire 5kg per capita, Gabon 20 kg per capita. Tunisia, Libya and Morocco consume 45 kg per capita.

9. Masters Energy Oil & Gas Limited (MEOGL) is a wholly indigenous petroleum products marketing company registered in Nigeria, established in 2005.

10. Masters Energy City was commissioned in 2009 and houses its 158,000 MT petroleum products storage facility, reputed to be the biggest in sub-Saharan Africa and stores all refined products lines (i.e. PMS, AGO, DPK, ATK, LPFO and other chemicals). Other features of the Energy City include: Functional & Dedicated Jetty, Logistics Centre.

11. MEOGL has a functional and dedicated 8 m draft finger jetty with 300 m shoreline protection, approach channel of 9 m deep with a width of 40 m which allows 30,000 tonnage tankers to conveniently discharge at the jetty.

12. MEOGL plans to build a 17,000 MT (34000 M3) bulk LPG storage terminal for with a provision of future expansion to 25000 MT.

13. MEOGL also has a Transport Division that is very strong, robust and competitive, comprising of many long trucks and Peddler trucks; and a vibrant Marine and Shipping Subsidiary that renders shipping services.

14. MEOGL presently has over 60 retail outlets scattered all over Nigeria and presence in over 16 states of Nigeria.

15. Storage terminal will also have ‘mother bottling’ plant of 2400 bottle/day capacity (on single shift basis). Output from this plant will feed company’s own retail outlets as well as re-sellers. Filling capacity of this plant will be gradually ramped-up to three shift working as the market for domestic LPG cylinders develops.

16. Masters Energy City Gas Cylinder Filling Plant (Satellite Plant) - The company plans to set up 3nos such plants every year, for first six years of operations, in the six geographical zones in the country. Capacity of each plant will be 200 MT/month (640 cylinders/day).

17. MEOGL believes that the project will cover a minimum construction period of 2 years, while sales cash flow shows repayment capacity of 10 years.

18. Proximity to target market and to the source of supply in Bonny will give MEOGL an edge over our competitors.

19. MEOGL has already signed a SPA (Sales Purchase Agreement (SPA) with the NLNG- which ensures assured supply of LPG. This comes as a trade advantage to Masters Energy as it puts them in a position to control 30% of the market and gain monopoly control of the Eastern, Mid-Western and North Eastern segments of the Nigerian Gas Market.

20. There are significant barriers to entry for potential competitors due to the cost of building a storage terminal & jetty. Economy of Scale will be due to the size of MEOGL’s Terminal.

21. PROJECT COST

The total Project cost estimated for the project is about Eighty Six Million USD approx. as stated below:

Particulars Amount in Mio. USD
 
Cost of Land 9.375
Plant & Machinery
(including dedicated Jetty) 52.881
Factory construction (Civil & Structural) 9.112
Preliminary expenses 4.827
Total Fixed Capital 76.197
Add: Margin Money for Working Capital 15.000
Total Project Cost 91.197


22. PROJECT FINANCING

Project will be financed with promoter’s equity and long term financing from
lending institutions.

Loan Finance 72.506 Mio.USD
Equity Financing 18.692 Mio.USD
Debt:Equity Ratio 3.88

22. Financial Summary :

Returns and other financial aspects of the project are as mentioned below:

RETURN ON INVESTMENT (IRR) 25%
PAY-BACK PERIOD -INVESTMENT 4.54 YEARS
NPV (INVESTMENT) 43.44 Mio.USD
RETURN ON EQUITY (ROE) 57%
PAY-BACK PERIOD - EQUITY 2.62 YEARS
NPV (EQUITY) 66.63 Mio.USD



23. MEOGL’s Board and Management include highly skilled professionals with vast experience in petroleum sector as well as from a diverse range of industries.

Based on the foregoing, the projected Cash Flow Statement, financial feasibility and understanding of Nigerian market requirements, prima facie MEOGL’s entry in LPG Sector in Nigeria makes sound business case.


1. INTRODUCTION

MASTERS ENERGY OIL & GAS LTD.  (MEOGL) is a Nigeria based, wholly indigenous petroleum products marketing company, established in the year 2005 and licensed by the Department of Petroleum Resources (DPR) to engage in trading of petroleum products and other services. Masters Energy is a full service energy company involved in the upstream and downstream arms of the Nigerian Energy Sector with business interests in Transport, Crude Oil, Processed wet Products, Petrochemical and Gas.  The company has been passionate & singularly dedicated to the cause of creating & enhancing value for the Nigerian Economy, Energy Sector apart from their own customers & stakeholders.

With a vision to become world’s bench mark in the oil and gas industry, MEOGL has been aggressive over the past 7 years.  The company has developed state-of-the-art infrastructure facility for Petroleum storage with a capacity of 158,000 MT in Rumuolumeni,  Port Harcourt, Rivers state which was completed and deployed in the year 2009.  In addition to this platform, the company has also invested in  transportation and setting up of distribution network of Retail outlets especially in the South & Eastern parts of Nigeria.  The company has about 57 retail outlets to date which ensure effective product distribution & contribute towards sustainable development of the region.  Over the years, the company has turned over 3.8million MT of wet products for third parties, having berthed over 150 vessels of 25,000 MT average at her storage facility in Port Harcourt, while they have done over half of this volume for their own customers within the same period.

With a high level of customer orientation running through the organization, MEOGL’s mission is to deliver world class services to their customers & other stakeholders through sound management, innovation and technology. By adopting fresh and innovative approaches to marketing of petroleum products, their goal is to exceed the expectations of every client by providing outstanding customer service, increased flexibility and greater value.

Having been recognized as the ‘Fastest growing Oil company’ in Nigeria, in 2010, MEOGL is now well positioned to meet the demands of an ever dynamic sector through investments in infrastructure for development of Oil & Gas Sector in Nigeria. Their long term objective is to become an active player in the mid and upstream sectors of oil and gas industry.

DOMESTIC LPG

Liquefied Petroleum Gas (LPG) – marketing & distribution, is another sector that offers tremendous investment opportunity within the petrochemical industry in Nigeria. Nigeria has about 186 trillion cubic feet of gas.  Large volume of this gas is produced as associated gas during crude oil production which was hitherto being

flared.  About 75% of the gas was being flared during the 1980s resulting in emission of about 70million MTs of CO2 in the atmosphere annually.  Thus it is ironical that despite the huge gas reserve, Nigeria is amongst the lowest LPG consuming countries in Africa with a current per capita consumption level of less than 0.5 kgs.  Millions of Nigerians who were using LPG as a cooking gas in the 1990s,  abandoned the use of LPG when it became scarce and the price of the 12.5kg cylinder shot past N8000, heading to N10,000,  due to epileptic supply and downtime of the nation’s 4 refineries causing recurrent scarcity of the product.

In September 2006,  the Board of Nigeria LNG,  worried about the scarcity of LPG in the midst of abundant gas,  decided to revive the market and reduce the dependence on firewood fuels for cooking by majority of Nigerians. The project christened ‘Domestic LPG (DLPG)’  by NLNG,  involves lifting gas from Bonny on board a mother vessel;  processing the gas for domestic consumption on the vessel, transfer of gas to a smaller ship called ‘shuttle vessel’  for discharge at the jetty & storage terminals.

Thus,  as part of Nigeria's efforts to develop her estimated 186 trillion standard cubic feet of gas (tscf) reserves,  re-invigoration of the use of cooking gas is an important aspect of Nigeria's gas master plan. Strategies are now being stimulated to make gas available to Nigerians at highly reduced prices while NLNG, prodded by the federal government has domiciled 150,000 metric tones of LPG for the domestic market.

The federal government has been leading this spirited campaign to revive LPG business in Nigeria. The Federal Government, through the former Minister of State for Petroleum Resources, Mrs. Dizieani  Madukue, at the last African Summit of the World LP Gas Association, made a pronouncement that Nigeria would develop cooking gas market from the current 100,000 metric tones to one million MT per annum by 2015.

The need to increase LPG consumption in Nigeria cannot be ignored by anyone because of the country’s large latent demand potential and population –  considering the following advantages it offers to all stakeholders :

People (Domestic consumers) (a) Clean & easy to use fuel; Reduce dependence on firewood, biomass & kerosene – which are less convenient & pose potential health hazards;
(b) Better availability would enable more Nigerians who had abandoned use of LPG in the 1990s when it became scarce & expensive - to switch back to LPG;
Hotels, catering outfits, restaurants and bakers all demand LPG as an alternative source of energy since the firewood and kerosene stove are fast becoming obsolete.

Government (a) Kerosene is currently heavily subsidized by the Govt;  Promoting Switch from Kerosene to LPG can eliminate / save on the huge subsidy burden incurred by Govt;
(b) Consistent with the ‘zero flare’ aspiration of the government, the associated gas from crude production – can be commercialized to earn more revenue to the exchequer;
Environment (a) Reduction in flaring of associated gas from crude production - which is now been brought down to 24% level; thus reducing CO2 emissions into the atmosphere;
(b) Save forests & greenery as switching to LPG will reduce dependence on wood & biomass – which are causing deforestation in the country
Industry Better availability would promote use of LPG as fuel in industry & also for power generation at competitive rates  - thereby also reducing the atmospheric emissions;

Employment Generate more employment opportunities due Industrial development as well as LPG distribution & marketing supply chain;

Investors (a) Presents a good opportunity for Investors to participate in the development of region & country at large;

(b) A sound business opportunity for investors with reasonable returns on Investment;


Thus promoting LPG market would be winning opportunity for all stakeholders.

Following the unprecedented demand for LPG in Nigeria and attendant scarcity of the product which has resulted in sharp and arbitrary price increases, the distribution of gas products has been deregulated. Consequently, private individuals and firms can now set up LPG plants.

Following this determination of the federal government to maximize the nation's gas potentials and get Nigerians to adopt LPG as their primary energy for cooking, a retinue of new players are now positioning and repositioning in the steadily returning Liquefied Petroleum Gas (LPG) market. Growing the LPG market in Nigeria is a critical component of the nation's Gas Master Plan and therefore presents a lot of emerging opportunities & challenges for investors in this sub-sector.  The market is currently fraught with decayed infrastructure and to achieve the five- year growth projection of the Federal Government, it will therefore need to attract massive investments across the LPG value chain from jetty, storage, logistics to filling plants and cylinders, among others.

With a resolve to strengthen government’s efforts in achieving the demand growth projections, MEOGL has evolved a Masterplan for their entry into LP Gas business.
In preparing its entrance into a market dominated by established players such as Oando, Total, Nipco, and Navgas, Masters Energy has taken stock of its strengths and weaknesses in crafting a winning strategy with a goal to gaining a market share of 30% over the next five years. This strategy takes into consideration an inventory of the cumulative assets deployed by other players, existing sales position, statutory controls and the future potentials of sales.

Accordingly, they have taken the following steps-

a. Signed a Sales Purchase Agreement (SPA) with the NLNG- Masters Energy has entered into an agreement for the storage of 25,000MT (17,000 MT in the first phase and 8,000 MT in the second phase) of Liquefied Petroleum Gas with the Nigerian Liquefied Natural Gas (NLNG), this agreement confirms the supply of this volume by the NLNG to Masters Energy on a regular basis. This comes as a trade advantage to Masters Energy as it puts us in a position to control 30% of the market and gain monopoly control of the Eastern, Mid-Western and North Eastern segments of the Nigerian Gas Market.

This agreement further supports cost savings in favor of Masters Energy, considering the NLNG supply position being at Bonny and Masters Energy storage at Rumuolumeni, both within Rivers State

b. Infrastructure- Masters Energy has made available, land mass of 120 Acres of Land in the Energy City for the development of 25,000MT Gas storage plant. With the agreement signed with NLNG, they have taken over a minimum of 30% of the future market and in comparison with the current market, this translates to 54%.

c. People- Ahead of this infrastructural development, Masters Energy has determined the staffing structure and training needs to the extent that key human capital have under-gone all necessary trainings and are ready to take on the challenges of the market. This puts us ahead of competition by the time the storage structure gets on-stream.

d. Market-  The Gas market is divided into North, west East and Southern zones, the existing players are focused on the Western zone of the market in terms of infrastructure, people and market, with our focus on the East, South and the North-Eastern parts of the market, this confirms that the market segmentation skews favorably to Masters Energy.

Further to the above, Masters Energy has invested in Energy Retail Outlets across the country, these outlets will support the distribution of the bottled Gas.

The Masters Energy City LPG plant is expected to capture all the value chain benefits from LPG storage facility right down to the final consumer dispenser business unit. This would enable the total business to conveniently edge against future negative effects of competition. The Company hopes to make a significant contribution to the social as well as economic development of  South, East and North-Eastern regions.


2.  LPG – PRODUCT, SOURCES & SPECIFICATIONS


2.1WHAT IS LPG?


LPG is a derivative of two large energy industries: natural gas processing and crude oil refining. When natural gas is extracted from the earth, it is a mixture of several gases and liquids. Methane, which is sold by gas utilities as ‘natural gas’ constitutes about 90 percent of this mixture. Of the remaining 10 percent, 5 percent is propane and 5 percent is other gases such as butane and ethane. Before natural gas can be transported or used, the LP Gases (which are slightly heavier than methane, the major component of natural gas) are separated out. Depending on the “wetness” of a producing gas field, gas liquids generally contain 1%-3% of the unprocessed gas stream. Some LP Gases are also trapped in crude oil. In order to stabilize the crude oil for pipeline or tanker distribution, these “associated” or “natural gases” are further processed into LP Gas. Worldwide, gas processing is a source of approximately 60% of LP Gas produced.

In crude oil refining, the LP Gases are the first products produced on the way to making the heavier fuels such as diesel, jet fuel, fuel oil, and gasoline. Roughly 3% of a typical barrel of crude oil is refined into LP Gas although as much as 40% of a barrel could be converted into LP Gas. Worldwide, crude oil refining is the source for the other 40% of LP Gas supplies although the ratio between gas processing and refining varies among Petroleum producing countries.

LP Gas production from these sources is a natural derivative. That means production of LP Gas is assured since the primary motive for gas processors and refiners is to produce fuels other than LP Gas but first the LP Gases are produced Although tied to the production of natural gas and crude oil, LP Gas has its own distinct marketing advantages and can perform nearly every fuel function of the primary fuels from which it is derived.

2.2 WHY LPG?

LPG represents a key phase in the transition to advanced modern fuels, replacing traditional fuels and kerosene. In most countries, this transition is virtually complete at per capita household incomes greater than US$2,000. When/if natural gas becomes available through the establishment of local distribution networks as the economy matures, LPG is itself usually displaced. However, LPG often remains the main fuel for residential/commercial heating and cooking in rural areas remote from the natural gas grid. In most developing countries, the distribution of natural gas to residential customers is unlikely to become widespread for many years, if ever at all.                                                              

LPG is well positioned to assist developing countries in the transition to modern fuels for the following reasons:                                                                   :

Availability. The transportation system that moves it is in place, the tanks to store it are available, and the appliances and equipment that provide heat and power are "on the shelf".

Portability. LPG can be stored, transported and used virtually anywhere from downtown urban areas to remote regions of the globe. It is not dependent on natural gas or electric grid systems.

Infinite shelf life. LPG does not deteriorate over time unlike some other liquid fuels that gel, stratify or evaporate. In the context of rural energy shelf life is critical, as traditional fuels can have a short shelf life and must be protected from the weather to prevent deterioration.

High energy density. Compared to traditional fuels in terms of weight equivalency, LPG has ten times the energy.                                                .

Flexible temperature control. LPG appliances and equipment allow easy and instantaneous adjustable flame temperatures to suit the needs of consumers. LPG refrigerators do not have temperature control limitations common to kerosene refrigerators, thus maintaining the "cold chain" essential for critical vaccines used in primary health care.

Environmentally friendly. It burns cleanly without smoke or residual ash, thus avoiding the health hazards associated with indoor use of traditional fuels. In the event of a leak, LPG does not contaminate the soil or aquifers.                                                     .

Compatible and flexible. LPG is not only compatible with renewable energies as discussed herein but also with new technologies such as fuel cells and micro turbines.


2.3 PRODUCTION PROCESS OF LPG


There are two methods for the production of LPG: 1) Extracted from natural gas: 2) By product of Oil refining process

However, it should be noted that from natural gas, LPG can only be extracted from the points where propane and butane is mixed with the natural gas in certain quantity. In the following lines production/extraction process of LPG from natural gas has been elaborated.

The  patented  AET  Process  LPG  Recovery  Unit  technology  utilizes  non-cryogenic absorption  to  recover  C2+  or  C3+  natural  gas  liquids  (LPG’s)  from  natural  gas streams.  The absorbed LPG is in the rich solvent from the bottom of the LPG absorber column  are  fractionated  in  the  solvent  regenerator  column  which  separates  LPG’s overhead  and lean solvent produced at the bottom.  After heat recuperation, the lean solvent is pre-saturated with absorber overhead gases.  The chilled solvent flows in the top of the absorber column. The separated gas from the presaturator separator forms the pipeline sales gas.

Depending upon the economics of ethane recovery, the operation of the AET LPG plant can be switched on-line from ethane plus recovery to propane plus recovery without affecting the propane recovery levels.  The AET LPG plant uses lighter lean oils.  For most applications, there are no solvent make-up requirements.  AET can design retrofits for heavy lean oil facilities.


Production Process Flow Diagram

LPG SPECIFICATIONS

LPG QUALITY DATA
Property Test Method Units Min Max
BUTANE

Composition liquid volume

Ethane
Propane
total Butane

C5+
Total olefins

ASTM D2163



Volume %
Volume %
Volume %

Volume %
Volume %


97.0

2.0

1.0
0.1
Corrosive compounds copper strip ASTM D1838 1
Total Sulphur ASTM D5534 PPM (wt) 30
Hydrogen Sulphide ISO 6326-4 PPM (wt) 5
Vapour pressure @100 F ASTM D2598 psig 70
Water content
% Residual matter ISO 13757 PPM (wt)

2.4  USES OF LPG

The initial stage of switching from traditional fuels or kerosene to LPG in developing countries typically involves the use of a cylinder attached to a simple burner. As familiarity with LPG grows and incomes rise, the user may install a modern cooker inside the home, possibly with the gas supplied by rubber pipe from a cylinder placed outdoors or in a separate room. Later, hot water and/or a refrigeration system may be added. In remote rural communities, LPG can also be used to power electric generators, although diesel is generally a more economic option. Further, LPG can be used in conjunction with renewable technologies for decentralized power generation, to meet loads that may be beyond the capacity of the renewable system or as back-up fuel where intermittence may be a problem.                                                             .

Internationally, LPG is being consumed as a fuel in the following sectors:
•  Domestic (household) sector as cooking, heating and in nominal quantities as lighting fuel.
•  Commercial sector such as cooking fuel in hotels and restaurants.
•  Automotive sector as fuel for taxis, vans and private cars.
•  Industrial sector as cutting and heating fuel.
•  Agriculture sector for crop drying, etc.
•  Other industrial uses such as manufacture of petrochemicals.



2.5 SECTOR CHARACTERISTICS AND OVERVIEW

LP Gas can be transported, stored, and used virtually anywhere in the world. It does not require a fixed network and does not deteriorate over time. LP Gas is very clean burning and has lower greenhouse gas emissions than any other fossil fuel when measured on a total fuel cycle. Originating mainly from natural gas production, it is also non-toxic and will not contaminate soil or aquifers in the event of a leak.

LP Gas is cost-effective, since a high proportion of its energy content is converted into heat. LP Gas can be up to five times more efficient than traditional fuels, resulting in less energy wastage and better use of energy resources. LP Gas is a multi-purpose energy. There are more than a thousand applications, from cooking, heating, air conditioning and transportation, to cigarette lighters.

Liquefied Petroleum Gas, more commonly known as LPG, is hydrocarbon fuel, lighter than petroleum, occurring naturally in oil and gas fields or extracted in the oil refining process. These high quality gases are very suitable for compact storage and transport in liquid form,
in pressurized bulk vessels or cylinders.                                .

LPG is the term widely used to describe a family of light hydrocarbons called “gas liquids”. The most prominent members of this family are propane (C3H8) and butane (C4H10). Other members of the LPG family are ethane and pentane.                        .                          

It is the unique character of LPG that makes it such a popular and widely used fuel. LPG at normal temperature and pressure is a gas, and changes to a liquid when subjected to modest pressure or cooling. In liquid form, the tank pressure is about twice the pressure in a normal truck tyre.                                                                 .

The reason LPG is liquefied is to make it easy and efficient to transport and store. One unit of liquid has the same energy content as 270 units of gas. Thus, LPG has density for storage and transportation, yet all the benefits of a clean vaporous fuel when used at the burner tip or engine.

For standard heating and cooking purposes, LPG usually consists of a mixture of propane and butane. Propane starts vaporizing above -45°C, so it is more versatile for general use. Butane starts vaporizing above -2°C and requires a propane/butane mixture in cold environments, as it will not vaporize as readily as propane.


3. MARKET ANALYSIS

Nigeria is a major crude oil producer. Large volume of gas is produced as associated gas. For many years, gas had little use in the Nigerian environment and was flared extensively.  About 75 % of the gas produced was flared in the 1980s. This resulted in the emission of about 70 million MT of CO2 into the atmosphere annually. The practice has declined and gas flare is currently at about 24 % level.

Consistent with the zero flare aspiration of government and the need to commercialize gas, it is currently used for LNG and fertilizer production thereby generating revenue. Wood, biomass and kerosene are largely used for cooking. Extensive use of wood and biomass is leading to deforestation in the country.

A major consequence is ozone layer depletion through carbon emission. On the other hand kerosene used in homes is highly subsided by the government. Government intends to eliminate the subsidy programme in view of the huge funding implications. The appropriate substitute fuel is LPG.

Nigeria is a gas-resource country with huge gas reserves. It has proven gas reserves of about 184 TCF divided into 95 TCF associated gas and 89 TCF non-associated gas (probable and possible reserve is 300 TCF) and estimated as the world’s 7th largest gas  reserves.  However, there has been no significant gas exploration to date and growth in the gas reserves are largely linked to oil exploration. The development of the gas sector in Nigeria has been constrained majorly by the absence of pricing, fiscal terms, institutional and infrastructural arrangements, legal and regulatory framework and financing. As a result, the development of a Natural Gas Policy and a Gas Master Plan was initiated to reposition the gas sector.

3.1 OVERVIEW OF NIGERIAN GAS SECTOR

The gas resources are largely unexploited with  total estimated daily gas production at 4.6 BCFD with nearly  55% or close to 2.5 BCFD being flared and the balance split between reinjection, NLNG feedstock, internal fuel usage and a small percentage marketed as LPG. The sector suffered an uncoordinated development by the government in harnessing the potentials in these resources. The evolution of the gas sector in Nigeria has three distinct phases, the Pre-1999 era considered  as the Demand Constrained  Era,  the  1999-2005  NLNG  Era  and  the  Post  2005 Demand  Boom/Supply  Constrained  Era.

The Post 2005 Demand Boom/Supply Constrained Era was precipitated by a sudden boom in demand from both domestic and export sectors. The major drivers of this phase was a rising and high gas  price  in  key  export  markets  as  reserves  declined  propelling  a vibrant export for LNG business in Nigeria and causing (a) relocation of gas based  industries  to  reserves  rich  and  low  gas  cost  countries  like Nigeria,  Egypt,  Trinidad  etc, (b) an  aggressive  domestic  power  sector reform and (c) a successful campaign by the Government to attract gas based investors. This sudden shift from demand to supply constrained birthed the Gas Master-plan initiative. The Gas Master-Plan was borne in response to the clamp down in emission levels and sudden boom in gas demand in Nigeria.

The Master Plan is hinged on harnessing the abundant gas resources for domestic utilization but this presented the challenge of guarantying gas supply. This is mainly governed by the practical issues of linking the upstream (exploration) and downstream (distribution and marketing) activities. These supply challenge issues are classified into Availability, Affordability and Commerciality of supply, Deliverability and its Cost Effectiveness, Legal and Regulatory Framework and Funding issues.

Gas resources can only be developed when the gas can be economically produced and transported to markets. The  form  and  complexity  of  the  process  of  gas production  and utilization is staggering and means that  the  resulting gas market is unlikely to conform to economic efficiency if left to its own devices. Thus, the most critical challenge to the Gas Master Plan is the varying capacities of the various sectors to afford gas. In particular, the power sector which is the singular largest buyer is least able to pay. At present,  the  total  grid  capacity  in  Nigeria,  a  population  of  about140 million is 5924.7MW and only 4586MW are available. This shows the huge appetite of the power sector for gas to stimulate the growth of the economy. Timely availability, affordability and commerciality of supply natural gas are critical preconditions for realizing the government’s aspiration for the domestic economy.

Nigeria has about 184 trillion cubic feet of gas but is ironically among the lowest consumers of LPG in Africa. The federal government has been leading a spirited campaign to revive LPG business in Nigeria and recently summoned the International Oil Companies (IOCs), and handed them a six month ultimatum to make cooking gas available and affordable in Nigeria.
Following this determination of the federal government to maximize the nation's gas potentials and get Nigerians to adopt LPG as their primary energy for cooking, a retinue of new players are now positioning and repositioning in the steadily returning Liquefied Petroleum Gas (LPG) market. Growing the LPG market in Nigeria is a critical component of the nation's Gas Master Plan and market watchers say government's efforts have begun to yield fruits. A lot of new investments are now coming into the domestic cooking gas market.

Market watchers say cylinders can be used to grow Nigerian gas market as the entire country of 140 million people is estimated to have about 500,000 cylinders only, most of them old, dilapidated and therefore dangerous.

Millions of Nigerians abandoned the use of cooking gas in the 1990s when it became scarce and the price of the 12.5kg cylinder shot past N8000, heading to N10,000, depending on where you were buying. But as part of Nigeria's efforts to develop her estimated 186 trillion standard cubic feet of gas (TSCF) reserves, re-invigoration of the use of cooking gas is an important aspect of Nigeria's gas master plan. Strategies are now being stimulated to make gas available to Nigerians at highly reduced prices while NLNG, prodded by the federal government has domiciled 150,000 MT of LPG for the domestic market.

3.2 INDUSTRY OVERVIEW:

Nigeria’s demand for LPG grew rapidly from 34,000 MT in 1980, to about 129,000 MT in 1990, however, due to epileptic supply and downtime of the nation’s 4 refineries there was recurrent scarcity of the product leading to the decline in consumption and subsequent adoption of kerosene and firewood as alternative domestic fuels.

With the entrance of the Nigerian Liquefied Natural Gas (NLNG) company there has been relative stability and guaranteed supply of LPG and this has led to a growth in consumption. Due to problems that plagued the industry prior to the intervention of NLNG there is a gap in the market in terms of cylinder/accessories, distribution infrastructure and coastal storage terminals to absorb the new supply.

Considering market potential, roughly 1.230 million MT of Liquefied Petroleum Gas (LPG) or cooking gas await investors in Nigeria. The market for LPG will continue to expand as a result of increased awareness of LPG as an efficient energy source.

To calculate the potential market size of the LPG market in Nigeria we considered the population of 150 million and the number of households in the country currently estimated at 9 million. The average home consumes one 12.5kg cylinder a month or 150 kg annually.  This translates to 1.35 million MT per annum (1MT = 1,000 Kg)

In view of the total consumption in the country of about 120,000 MT, there is a market balance of about 1.230 million MT per annum awaiting potential investors. Nigeria’s LPG market is estimated to have a potential of over N37 billion per annum, with 50 per cent rate of return on investment.

Further evidence of the untapped LPG market in Nigeria can be gleaned from a country by country comparison: Nigeria consumes 0.5 kilogram per capita per annum compared with Cameroon, Cote d’Ivoire, Ghana and Senegal with a combined average of 3.7 kilogram per capita per annum.

3.3 MARKET STRUCTURE AND FUNDAMENTALS FOR STORAGE FACILITIES IN NIGERIA

THE PAST

In the 1980s and 1990s, Nigerians consumed over a hundred  thousand MT of LPG and then the figures began to go down. The four refineries in the country were desultory and could not supply the market in spite of a combined installed LPG capacity of 360,000MT. The effects of this spiraled down to other things: wastage of primary and secondary storage capacity of about 37,000mt. The 2 storage tanks built and owned by NNPC were a hopeless situation for LPG at the only functioning artery of petroleum products in the country, the NOJ Jetty at Apapa; an abandoned jetty in Calabar; corroded and decrepit cylinders; deteriorating infrastructure; over 300 non-functional filling plants; downturn in business in supply; dwindling investments; all time high LPG prices; and an increase in the use of kerosene and firewood, endangering health and the environment.

This situation left in its wake the dereliction of facilities used for the supply of LPG to a nonetheless growing population, making it a bourgeois affair to use LPG as cooking fuel. The industry lost a major part of its market.

In September 2006, the Board of Nigeria LNG, worried about the scarcity of LPG in the midst of abundant gas, decided to revive the LPG market and reduce the dependence on firewood fuels for cooking by majority of Nigerians. The decision was the beginning of a fierce confrontation with infrastructural challenges that beset the industry.

A major challenge was the NOJ jetty in Apapa which was over-burdened with mass importation of petroleum products. Unfortunately for the LPG businesses, LPG was down the pecking order of petroleum products that could run down the storage tanks owned by PPMC. It was the case of inertia in Calabar where the second jetty sat. In addition to the daunting challenges, the low draught at the jetty did not make it possible for very large vessels to berth, the kind that would uplift from the Bonny terminal where NLNG exports gas. And so a major town hall meeting in 2006 was organized by the company to forge a way out of the quagmire. This led to a dedication of 150,000mt annually by the NLNG Board, selection of six lifters (off-takers) and an ingenious idea of a Ship-to-Ship(STS) supply of LPG to the domestic market on a Free-on-board basis (FOB). The project, christened Domestic LPG (DLPG) by NLNG, involved lifting gas from Bonny on board a mother vessel; processing the gas for domestic consumption on the vessel; transfer of gas to a smaller ship called the Shuttle Vessel; and discharge at the jetty in Apapa. It was a brilliant idea.

NLNG picked part of the cost for the mother vessel with a commitment from the lifters that they will invest on infrastructural development to make robust the supply chain.

THE PRESENT

With as little as 150,000 MT, the market began to open up. Even though consumption per capita remained low at about 0.5 kilograms per capita (Ghana is 3 kg per capita while Morroco is 44.40 kg per capita) and the market could only take about 60,000 MT from NLNG annually, the market commenced with a slow awakening. To start with, the off-takers came to surmount operational problems and infrastructural challenges. That included chartering the shuttle ship and using the PPMC facility in Apapa together. They also contributed enormously to bring back to life the PPMC terminal and improve load-out.

NLNG’s contribution of about 80% to LPG supplies led to millions of dollars spent to move the volume to consumers. NLNG spent over $7million a year on the supply vessel; more upstream players are investing in gas processing plants and more gas producers are coming into the game; more investments in through-put facilities, for example, NAVGAS facility costing $50million; NIPCO worth N7billion and millions of dollars of off-takers investments in the development of their supply chain.

As part of plans to develop a formidable chain of supply, many of the off-takers invested in cylinders; not only revitalizing the market with new cylinders, but bringing smaller cylinders as a palliative to those who could not afford the popular 12.5kg cylinders. Currently, more off-takers are participating in the DLPG and the program is beginning another cycle of contract with these off-takers. Masters Energy is one of the new off-takers. The increasing demand for LPG outgrew the STS model of supplying gas to the domestic market.


THE FUTURE

In the Nigerian population lies a goldmine. Another 150,000 MT to be dedicated by NLNG and more volumes from the convalescing refineries will push the supply volumes up in the coming five years but the extant challenges will become more profound.

These challenges can become opportunities for investment; gateways for investors into an undermined industry and a long term plan to accommodate future growth in demand. It is a myriad of opportunities along the value chain of the LPG market.

More volumes would mean the need for additional coastal storage. This bit is capital intensive nevertheless necessary. These storages, with dedicated terminals, will increase capacity for lifters to be able to bring LPG onshore and distribute to inland storages and filling plants. They become a fundamental part of a robust LPG circulation system. Dropping a notch down the value chain are inland storages (storage tanks) that will ensure consistent supply in the regions across the country.

Further down the chain are filling plants. A consumption level up to 750,000 MT per annum will translate into 250 LPG plants and 74,970 retailing outlets. Initiatives are underway to introduce mobile filling plants (distribution vans) that can take LPG to end-user’s doorsteps, make it more accessible. There is need for more of such initiatives.

Another link in the chain is trucks. The trucks transport LPG from coastal storages and /or inland storages to filling plants. Setting up a truck company would be good business. Presently, the, market is being underserved with an estimate of 150 trucks. The market needs about 2,000 trucks.

The next link in the chain is the cylinders, the vessels used to deliver LPG to homes from all the storages and filling plants. A shortage of cylinders translates into inaccessibility; and that and other safety issues arising from circulation of decrepit cylinders accounts for slow growth in the market. Investments are needed in the manufacturing of cylinders either by way of importation of steel plates for cylinder manufacturing in the country. This is an investment area requiring investors’ attention. Cylinder refurbishing plants, cylinder accessories’ manufacturing plants can be set up that will also stimulate industrial and commercial activities in the market. Finding a way out of the initial entry investment gridlock can open a vista of opportunities in manufacturing, distribution and warehousing.

Masters Energy has established relationships with Standards Organization of Nigeria (SON) approved cylinder manufacturers in Turkey, India and China.

3.4 DEMAND ANALYSIS

Domestic demand for gas grew from below 40,000 MT per annum in 1980 to 130,000 MT per annum in 1990 due to improved refinery capacity in Nigeria. Between 1992 and 2002 domestic demand dropped to 40,000. In 2007, NLNG intervened by devoting 150,000 MT to the domestic market and this boosted utilization to 120,000 MT per annum. It is projected that domestic utilization will grow to 300,000 MT in 2013 and up to 1 million MT by year 2019.



The market potential for LPG in Nigeria is huge considering the population size. Current consumption is 0.5 kg per capita. Senegal consumes 8 kg per capita, South Africa 5 kg per capita, Cote d Ivoire 5kg per capita, Gabon 20 kg per capita. Tunisia, Libya and Morocco consume 45 kg per capita.

Present demand of LPG in Nigeria is estimated to be ~ 300,000 MT per annum. This is expected to reach up to 1,000,000 MT in 2019. This translates into CAGR of 22.2 % which is quite robust. Any further positive change in CAGR on account of change in government policies (e.g. shifting of HHK subsidy to LPG) will increase dramatically the LPG consumption / usage in domestic sector.

LPG demand in Nigeria is largely dependent on the price on HHK (House Hold Kerosene)

PROJECTED IMPACT OF HHK SUBSIDIES ON THE LPG SUBSECTOR AND THE ECONOMY

YEAR (A) HHK SUBSIDY IN
BILLION NAIRA
(B) 10 %  OF
HHK
SUBSID Y TO BE
USED
(C) ACTUAL
12.5KG FIGURES
(D) ADDITIONAL NO. OF12.5KG TO BE GENERATED
BY SUBSIDY
(E) TOTAL
(F)=
D + E %
INCREASE

(G)
2006 88.456 8.8456 4,640,000 5,897,066 10,537,066 127.0
2007 90.814 9.0814 4,800,000 5,342,000 10,142,000 111.0
2008 188.554 18.8554 8,000,000 9,427,700 17,427,700 118.0

This table assumes 10% of HHK subsidy expended on LPG from 2006-2008.
The result translates to over 100% increase in LPG utilisation for each of the 3 years

Currently out of 150 million households in Nigeria, only 7 million rely on LPG, and the rest on conventional fuels like coal, firewood, kerosene, dung cake etc, which indicate the strong demand for Liquefied Petroleum Gas (LPG) sector.

Liquefied Petroleum Gas (LPG) is used as fuel for cooking and heating in the manufacturing industry. It is also used for power generation.

3.5 PRODUCTION

LOCAL PRODUCTION OF LPG


Current production of LPG is about 2 Million Tons per year. Nigeria's LPG production is expected to increase to 4 Million Tons by 2015.

While over 2 million tons of LPG is exported annually by NLNG (Shell/NNPC), Exxon Mobil and Chevron, no one has taken much interest in the domestic market. Not even NNPC - which should normally be the face of the public

Export of LPG from major producers is as mentioned below:

• Exxon Mobil- OsoBrt - 600,000 Tons per year

• NLNG - Bonny Island - 700,000 Tons per year

• Chevron - Escravos - 500,000 Tons per year

• Warri / PH  Refinery- 100,000 Tons per year

LIQUEFIED PETROLEUM GAS PRODUCERS IN NIGERIA

Total LPG Production Capacity (2.5 Million MT) as per details below :

COMPANY LPG PRODUCTION PER ANNUM DOMESTIC SUPPLY OBLIGATION
REFINERIES
PH Refinery 130,000 MT 130,000 MT
Warri Refinery 70,000 MT 70,000 MT
Kaduna Refinery 160,000 MT 160,000 MT
SUB-TOTAL(1) 360,000 MT 360,000 MT

ExxonMobil 1,040,000 MT NIL
NLNG 830,000 MT 150,000 MT
Chevron Escravos 280,000 MT NIL
SUB-TOTAL(2) 2,150,000 MT 150,000 MT

TOTAL 2,510,000 MT 510,000 MT

The demand of LPG in Nigeria is consistent over the years, supply of LPG from producers (or extractors) to distributors and marketing companies has been limited due to infrastructure deficit, which often creates scarcity. Besides that, LPG producers are also limited in numbers and LPG marketing companies need to have a quota of gas to be allocated by the producer.
This factor makes LPG business vulnerable in the hands of LPG producers.
In Nigeria, distribution of LPG began with NNPC & other private players. It started as an alternative to the then popular fuels of Nigeria - Coal, Kerosene, Biomass/wood and Dried Dung Cake. As per its prices, it was not feasible even to the then middle class to shift to LPG.

In Nigeria, LPG finds is prime usage in Domestic sector with - consumption in households, in commercial sector, Auto LPG and in Industry.
Currently, the LPG business is fragmented in two parts: Industrial & Commercial LPG and Domestic LPG. Both businesses run on base of understanding & regulation. Industrial & Commercial LPG is a more competitive business segment than the Domestic LPG. In Domestic LPG competition is largely limited by dividing boundaries of area for distribution of LPG.


3.6 PRODUCT  PRICING

 Until the year 2000, all domestic LPG was provided by the refineries. This  LPG was largely butane rich LPG (>90%).Butane LPG prices ex-refinery was in the region of N 40,000 per ton. Domestic cooking gas sold at Naira 400 per 12.5 kg cylinder.

 From year 2000 onwards, because the refineries were epileptic, prices of refinery LPG gradually shot up to N 90,000 per ton. Domestic cooking gas sold at Naira 1,500 per 12.5 kg cylinder

 By 2006, refineries were almost shutdown. Consequently LPG prices shot up further to Naira 150,000 per ton. Hyson and Lee Global started LPG importation. Imported LPG attracts 40 % duty.

 By 2007, prices became astronomical- up to Naira 250,000 per ton. LPG for cooking gas retailed at more than Naira 3,000 per 12.5 kg cylinder. Domestic LPG consumption dropped dramatically.

 In 2008, NLNG butane LPG was available through 6 off takers at a price of around Naira 150,000 per ton ex Lagos PPMC depot.

 Present pricing of LPG is taken @ 950 US $ per MT.

3.7 SUPPLY-CHAIN
In Nigeria, LPG is either produced as a by-product in Crude oil production or from refineries.  
From both, the ports and the refineries, LPG is brought to the large storage facilities with the use of ships/ vessels / barges. Here the LPG is stored under highly refrigerated and pressurised condition. Bulk storage tankfarm therefore forms a key element in LPG distribution & logistics.
                                               
                             Oil Refinery

A list of selected depot owners in Nigeria with their estimated yearly capacity & turnover is given below:
COMPANY NAME ESTIMATED CAP. OF TANK FARM ESTIMATED
TURNOVER  in BILL. NAIRA LOCATION
TOTAL GAS 1,000 MT N 4.32 B LAGOS
PPMC 4,000 MT N 17.28 B APAPA
NAVGAS 8,000 MT N 36 B LAGOS
NIPCO PLC 4,500 MT N 19.4 B LAGOS
AP PLC 500 MT N 2.16 B LAGOS
CONOIL 500 MT N 2.16 B LAGOS
SAHARA ENERGY 1,000 MT N 4.32 B CALABAR
VITOL 8,000 N 36B LAGOS
TOTAL EXISTING CAPACITY 27,500 MT N 121.64
Assumptions:
• Each  storage facility turns over full capacity twice a month;  thus max. monthly throughput can be 55,000 MT/month =660,000MT/A;
• Sales price per ton is N180,000 (based on cost of 20 ton truck in the market)

It can be seen from the above mentioned figures that present installed LPG Bulk storage capacity is very much inadequate, considering the projected demand for LPG in domestic sector. Present LPG bulk storage capacity is mainly concentrated in Lagos and around (i.e. West Nigeria). Port Apapa facility is very much congested and normally preference is given to unloading of ‘white’ petroleum products. This make the LPG bulk unloading very time consuming and cumbersome.
Hence creating a bulk LPG storage capacity of 34,000 M3 with dedicated jetty for LPG will be a distinct advantage to MEOGL.

Barriers to LPG market growth in Nigeria

Nigeria has the potential to produce 2.5m MT/yr. of LPG. The capacity is not effectively utilised due to barriers namely:

• Poor infrastructure (receiving jetty facilities, poor road conditions)
• Low house hold income
• Kerosene subsidy
• High cost of cylinders and accessories
• Low public awareness of LPG as a suitable fuel
• Cost of LPG.

3.8 EXPORT MARKET POTENTIAL

3.9 DISTRIBUTION & RETAILING
Typical  distribution  process  and  supply  chain  of  LPG  and LPG cylinders is as illustrated  in  the following diagram:


Petroleum Products Distribution zones in Nigeria are as shown below:

Marketing  and  distribution  companies  uplift  LPG  from  the  production  site  using own/rented tankers and store it at their storage site. Marketing/distribution companies which are also known  as   bottling  companies  fill  gas  cylinders  with  LPG  and  store  them  for distribution.  Appointed Distributors/Sub-distributors bring their gas cylinders on their own vehicles to the marketing company site, get them filled (or exchange them with the filled cylinders), make payment and carry their cylinders to the distribution point. From their distribution points cylinders are supplied to the retailers or agents from where it is provided to the end user. In case of household or commercial use small capacity cylinders (normally 6 kg to 12.5 kg) are further filled and supplied to the users directly by the sub-distributor. This filling process also be carried out at marketing company site and sub-distributors uplift cylinders from the site and store them at their location, from where they are distributed among households and commercial users.

From the storage facilities, LPG is directly distributed to bulk industrial purchasers via large bulk road tankers. For the domestic customers, LPG is distributed in packed form through dealers. Dealer holds the stock of filled cylinders. When the customer’s LPG cylinder is emptied, it is replaced by the local operating dealer. The dealer recovers the cost of transporting cylinders from commission on a per refill basis. A group of dealers in a given area receive the filled cylinders from the designated bottling plant. A dealer sends the empty cylinders to the required bottling stations via truck. These bottling plants take back the empty cylinders and load the truck with the filled ones. The filled cylinders are then sent back to the dealer. The various bottling plants in turn receive the LPG from storage facilities with the use of tankers. The tankers are dedicated to transporting LPG, and hence, the company pays the transporters for both delivery and return trips to the storage facilities.

3.9.1 Market Segments
The LPG market is segmented according to the purpose of the use of LPG as a fuel, i.e. for domestic, commercial and industrial use. Accordingly the weight of the cylinder varies (standard weights), as the usage depends on the type of consumer and to lessen the transportation cost. In the industrial category, there are bulk users too, who are served in bullets (huge tanks).

3.9.2 Brand Positioning
One of the important features is that neither the business persons nor the consumers are able to see the product, therefore building the perception of trust and importance in the minds of the consumers makes a difference. Deliverability assurance and Safety measures is one of the key distinguishing features of the company providing the service.
As mentioned before that LPG business is mostly self-propelled. Demand, in absence of any other substitute fuel as of now, implies that it overshoots the Supply. Thus some direct marketing measures can be implemented in the form of pamphlets etc. and through some customer awareness programs in mass media.

3.9.3 Customer Retention Techniques
The LPG business is mostly self propelled and doesn’t need much marketing measures. In the domestic category, the distributor represents the company and mostly the consumer chooses the distributor who is closest to his/her locality. Though there are a few factors which improve the service level of the business viz.
a) For the industrial and consumers the reliability of providing the LPG cylinders in normal as well as emergency times is of utmost priority, as the opportunity cost is huge in industry.
b) Another important aspect is the price of LPG, as the prices charged by the company is not regulated and hence can be tinkered with.

3.9.4 Challenges to Extending LPG for Domestic Use

3.9.4.1 Supply & accessibility
In order to meet the increasing demand of LPG by domestic as well as auto fuelling sectors the country needs additional LPG production capacity, adequate transportation and distribution network.

3.9.4.2 Supply of reliable cylinders
Another challenge pertaining to LPG distribution is assuring the reliable supply of refill cylinders. For small and remote markets, refills may be delivered once a week or once every other week. For those users that do not keep a second cylinder, this could mean going without fuel for as long as two weeks. Signing up for two cylinders to avoid running out of cooking fuel would further increase the start-up cost of LPG service. Again, this infrequent delivery of refill cylinders serves as a disincentive against switching entirely to LPG.

3.9.4.3 Cylinder management
As we know that LPG has to be stored under pressure, metal cylinders are required. To cover the cost of cylinder manufacture, an initial deposit fee is required. The combination of the start-up cost and the cash outlay at each refill (which typically cannot be broken up into smaller installments) presents a serious barrier to the uptake and regular use of LPG by low-income households.

3.9.4.4 Affordability
The economically disadvantaged, face the problems of high first costs of LPG (connection and equipment) and the lumpiness of relatively high refilling bills and loans are difficult to service without financial returns from the investment.




3.9.4.5 LPG Promotion Programs
3.9.4.5.1 LPG scheme
A scheme can be implemented for the expansion of domestic LPG use in target areas. Under this scheme, one can distribute domestic connections to women of below the poverty line (BPL) families in the rural areas of the state. Each connection can be accompanied by a one-off subsidy to the extent of the initial cost, to overcome the barrier to fuel switching. It is meant to reduce dependence on firewood, reduce the drudgery of collection of/cooking on firewood, reduce pollution and improve the health of women.
• Suggestions from local self help groups (SHGs) for improvement include the credit for refills and reduction in cylinder size.

3.9.4.5.2 Village LPG Distributor (VLD)

This scheme envisages the increase in LPG population coverage from 10% to almost 50% by 2015. The scheme is primarily to reach LPG in villages, so that dependence on conventional fuels like biomass/ wood, coal etc. is reduced. This will not only help in conservation of forests but will also have positive impact on environment as well as on the health of our rural womenfolk.
This Scheme can be implemented by the LPG Marketing Companies in addition to their Marketing Plan for setting up regular LPG distributorships. Identification of locations would be finalized by the Marketing Company (MC) based on the present penetration/coverage, minimum refill/sale potential for sustaining the VLD.
According to the program, the program will be sustainable for cluster of villages having about 2000 families and consumption of 6 kg per month, out of which half may go for LPG. Contrary to 1000 cylinders (6 kg/cylinder), VLD will be set up with the potential of 500 cylinders. The net income for the proprietor expected is N 50,000 per month. VLD will be setup by Marketing Companies who have its bottling plant nearest to the identified cluster of villages.

3.10 COMPETITION SCENARIO

Marketing companies in Nigeria are seen as facilitator to the nation’s development. Hence, apart from churning profit for sustainable existence and growth, it has to operate in accordance with the nation’s interest.
In domestic segment, MC has to sell its product at a price decided by the market. So, there exists scope of price war, which leaves the MCs to compete on market share. But, to avoid unwanted friction and hence deadweight loss to the society, the regulatory body can maintain the optimum number of dealers in an area. The number of dealerships of a company can be decided by the committee in accordance to their market share and presence in the region. Hence, chances of competition for market share in domestic segment can be limited.



Though, in industrial segment, with lack of price regulation and hence better scope for margin there is an intense competition in the form of:
1. Price
2. Service
3. Promptness in delivery
4. Hours of catering or working hours

3.11 WAY FORWARD FOR NIGERIA

Nigeria, through the NLNG, international oil companies (I0Cs) and refineries, has the potential of producing about 2.5mm MT of LPG annually.  NNPC in collaboration with the government can successfully substitute LPG for kerosene. In order to achieve the kerosene to LPG conversion objectives, the following steps are necessary:

• Corporate and government adoption of the kerosene to LPG program as a means of reducing the huge subsidy on kerosene.
•. Clear definition of program objectives and deliverables.

Pilot scheme
• Initiation of a pilot kerosene to LPG project (LPG Direct) in selected LGAs of Abuja Area Councils of (FCT).
• Acquire tanks with mobile weighing and filling facilities.
• Acquire 3 kg and 6 kg gas cylinders for distribution to participants.
• Provide LPG filling skids at the stations.
• Expand the capacity of the existing facilities.
• Acquire or charter flat bottom LPG vessels for shuttle.
• Evaluate fiscal policy options including VAT removal, import duty exemption and incentives for local cylinder manufacturers.
• Encourage new investment in LPG infrastructure to reduce product prices and the bottleneck in LPG supply chain.
The kerosene to LP Gas program will create investment opportunities for SMEs. The roll out of the program will create employment and create a multiplier effect in the industry.




4 PROJECT DESCRIPTION

4.1 THE COMPANY

Masters Energy Oil & Gas Limited (MEOGL) is a wholly indigenous petroleum products marketing company registered in Nigeria, established in 2005 with a vision to be the world’s bench-mark in the oil and gas industry.

MEOGL is licensed by Department of Petroleum Resources (DPR) as importers, bulk buyers and sellers of petroleum products. MEOGL also does retail marketing which includes on the spot depot sales of product, product storage/warehouse services, contract supply services and supply to corporate organisations, private businesses and institutional users.

MEOGL aspires to live out its vision, “To be the world’s benchmark in the oil and gas industry.” The pursuit of this vision propelled MEOGL in 2006 to acquire over 110 hectares of land in Rumuolumeni, Port Harcourt for the construction of an ultra modern integrated oil & gas logistics centre, christened “Masters Energy City”, thus making it the first and only wholly Nigerian one-stop Energy Solution Provider.

The first phase of Masters Energy City was commissioned in 2009 and houses its 158,000 MT petroleum products storage facility, reputed to be the biggest in sub-Saharan Africa and stores all refined products lines (i.e. PMS, AGO, DPK, ATK, LPFO and other chemicals). Other features of the Energy City include: Functional & Dedicated Jetty, Logistics Centre and other future development projects.

MEOGL has a functional and dedicated 8 m draft finger jetty with 300 m shoreline protection, approach channel of 9 m deep with a width of 40 m which allows 30,000 tonnage tankers to conveniently discharge at the jetty. MEOGL’s jetty has been included on NPA global map, which has been certified by both NPA and NNPC. Masters Energy is a key player in the downstream sector of oil & gas.  MEOGL presently has over 60 retail outlets scattered all over Nigeria and presence in over 16 states of Nigeria. MEOGL projects to have retail outlets in all the 36 states of Nigeria including the Federal Capital Territory in a very short time.

MEOGL also has a Transport Division that is very strong, robust and competitive, comprising of many long trucks and Peddler trucks; and a vibrant Marine and Shipping Subsidiary that renders shipping services.

MEOGL’s future development plans include the setting up of the following: Liquefied Petroleum Gas (LPG) Plant, Bitumen Plant, Lubricant Plant and a 20,000 barrel per day Modular Refinery, all within the Energy City.

Masters Energy Oil & Gas Limited is managed by highly qualified professionals with years of experience in diverse fields.


4.2 BOARD AND MANAGEMENT TEAM

MEOGL’s Board and Management include highly skilled professionals with experience from a diverse range of industries:

Anchoring the Team is Mr. Uchechukwu Ogah, the President of Master Energy Oil & Gas Limited, with an HND in Accountancy and Finance, BSc. Degree in Business Administration, Masters of Business Administration and capped with professional qualification from the Institute of Chartered Accountants of Nigeria and Chartered Institute of Bankers of Nigeria. Prior to the establishment of Masters Energy, he had worked for Zenith Bank in various departments such as Internal Control, Human Resources Management, Business Development and Strategic Planning.

Assisting the President of Masters Energy is Mr. Vincent Ajala, the Executive Vice Chairman/Chief Executive Officer of the Company. He has a Post graduate Certificate in Management from the Oxford Brooks University and a Higher National Diploma from the Institute of Management & Technology Enugu. He came aboard Masters Energy with virile working experience that spanned the Oxford University Press (Now UPL) Ibadan, British Caledonian Airways (Now British Airways). He is also an Aluminous of the prestigious Lagos Business School (LBS), the Pan African University.

Also on the Board of Masters Energy is Mrs. Ngozi Ogah, who holds BSc. and HND Degrees in accounting from Enugu State University and Institute of Management & Technology, respectively. Added to her qualifications are certificates from the Lagos Business School (LBS) and Oxford Princeton College, London. Her work experience spans many companies, most notably Julius Barger Plc.

Heading the Legal Team is Mrs. Patience Dappa. She doubles as the Head of Legal and the Company Secretary. She brings to the table, experience that covers more than 20 years professional practice, having worked with the Messrs Alegeh & Associates, with special skills in properties, company Law & Litigation from where she moved to T & A Management Consultants as Company Secretary. She eventually established Pat Dappa & Associates from where she was invited to join the Team  of Legal Luminaries appointed to review and proof read the Laws of Delta State in 2005. Pat holds Bachelors’ Degree in Law from the University of Calabar and a Masters Degree in Humanitarian Law and Refugee Studies from the University of Lagos. She is a member of the Chartered Institute of Arbitrators (UK), International, Commonwealth and Nigerian Bar Associations.

Mallam Abdullah Dodo Maijamaa is Executive Director in charge of Assets Management, purchasing, supplies and general Administration of non human capital of Masters Energy.  He holds a Degree in Accounting from Ahmadu Bello University, Zaira and a Post Graduate Diploma in Hotel Management from Manchester Metropolitan University, United Kingdom. He was Chief accountant, Hill Station Hotel Ltd, Jos; Chairman, Keffi Local Government in present Nasarawa State; General Manager, Bristol Hotel, Lagos; General Manager, Kano Central Hotel; Director of Operations and then Managing Director, Nigeria Hotels Limited Lagos.

The Group Executive, Trading, Mr. Femi Sotunde, joined Masters Energy after working for 10 years in the Energy Desk of banks such as Ecobank, Zenith Bank and Fidelity Bank. He has strong skills in corporate finance and credit. Femi, without doubt has very high knowledge of the Energy Sector. He holds a Degree in Bioscience from University of Ilorin, with a second class upper and has attended many senior management courses in the prestigious Lagos Business School and holds an MBA in Human Management Science from Lagos State University.

Mr. Franck SAGBOHAN is the General Manager Technical of Masters Energy Gas.
Franck accumulated more than twelve years experience in gas depot operations at the ADDAX-ORYX Benin Oil & Gas Terminal where he functioned as Assistant Officer in charge of Operation and Head of Centre for Butane Gas Filling. He is a highly trained Industrial Auto Technician; he forwarded his Higher Education at the Polytechnic University Centre of Benin before starting up his career as Head of Team at the gas operation company, SOBEGI BENIN whereby he functioned for two years. His academic and professional experience was strengthened by an important internship at VERON in France related to storage, distribution and fire fighting procedures involved in LPG depot operations.

Heading the Commercial arm of Masters Energy Gas is Mr. Emeka Obuekwe. Prior to joining the Gas subsidiary, Emeka was in the Petroleum Trading arm of Masters Energy. He obtained a Masters Degree in Financial Economics from Boston University, USA after a BSc Degree in Banking & Finance from the University of Nigeria, Nsukka.  He is an alumnus of the Oxford Princeton programme having attended several Energy trading and Gas related courses. He is a member of the National Gas Association and LPG group of the Lagos Chamber of Commerce.

With a vision to be the world’s bench-mark in the oil and gas industry, MEOGL is poised to provide excellent world-class services to its stakeholders and Nigerians.

MEOGL is well positioned to meet the demands of an ever dynamic sector. MEOGL’s long term ambition is to become an active player in the mid and upstream sectors of oil and gas.

Aware of the challenges of the industry, MEOGL has re-positioned and re-engineered to enhance the profile of indigenous Nigerian oil marketing companies in the competitive and complex global energy market.

Within a short time of its existence, tenacity of purpose has seen MEOGL operate a haulage division with over 100 trucks in its fleet; all traversing the length & breadth of Nigeria delivering products to its customers.

MEOGL’s retail outlets, predominantly sited in the South-East are operational and contributing to availability and affordability of petroleum products to Nigerians.


4.3 THE PROJECT

Masters Gas, a subsidiary of Masters Energy Group, is processing their licenses and permits from DPR to build and operate LPG bulk storage, LPG distribution infrastructure including LPG re-filling plants. The company has acquired about 392,000 square meter land space beside Saipem Agip,  Port Harcourt,  Rivers state, Nigeria for the purpose. The company’s ultra modern facility is located in Port Harcourt and more bottling plants are envisaged across the major cities in Nigeria to make cooking gas available and affordable to more people. The company has also invested in LPG truck rentals to ease off distribution of LPG gas to all the nook and corners of Nigeria. The future strategic plan of the company is to include Natural Gas distribution network via pipelines.

Jetty is currently being expanded to three finger jetty. On completion of the third finger, the jetty will conveniently berth 3 vessels simultaneously. There are only two jetties in the country that have the capacity to berth 3 vessels with over 9 meter draft in this jetty.

Masters Energy Oil and Gas Limited, intends to set-up a fully integrated LPG Plant in its Energy City logistic centre at Rumuolumeni, Port Harcourt, River State. The facility shall comprise of :

- Dedicated Jetty for LPG vessels

-      Bulk storage terminal for LPG with 25,000MT storage capacity (Phase-1 capacity will be 17,000MT) to warehouse Gas received from NLNG

- Mother Bottling Plant with dedicated 100MT capacity x 2nos storage bullets

The Plant will handle and receive LPG at its own Jetty facility, right down to the supply of consumer retail packs of LPG, while conforming to the highest HSE standards. The Company hopes to make a significant contribution to the social development of its customers and communities. It is intended that with the coming on stream of the LPG Plant, a focus on marketing LPG to rural communities and the building of new retail centers across the country shall be an excellent step forward in realizing company’s goal in the energy sector.

This project is aimed at supporting the sales drive of the Federal Government in the Eastern, Mid-Western and North-Eastern parts of Nigeria and it comes to Masters Energy under a partnership arrangement with confirmed product supply and a ready market that was never tapped and with a capacity that is far above the planned product availability.

The market covers about 11 States with estimated average population 58 million people culled from the last population count. The population gives a platform for about 1/3 of the National population and this will translate into the same volume in Gas market across board.

These locations are projected to take 30% of the future supply of Gas in Nigeria. With this agreement and storage capacity, MEOGL is in a position to control 54% of the present market and 30% of the emerging one.

   Proposed Production distribution arrangement is as follows :

The Masters Energy City LPG plant is expected to capture all the value chain benefits from LPG storage facility right down to the final consumer dispenser business unit. This would enable the total business to conveniently edge against future negative effects of competition.

Masters Energy City LPG business unit shall comprise of three different business units:

1.  Masters Energy City Storage Terminal.

Location for setting up a LPG distribution plant has major implications on fixed costs, operational costs and procedures. The proposed LPG Bulk Storage facility & Bottling Plant will be established at Port Harcourt. The location has basic infrastructure and facilities required for LPG bottling plant and distribution unit. Small ‘Satellite’ LPG Bottling Plants will be located at various strategic locations in the country.

Masters Energy City Storage Terminal shall constitute the main business unit of the facility. It shall receive its feedstock from refineries (Foreign and Local) and oil and gas production platform via LPG tanker Vessels. Patronage by throughput from other customers shall be allowed. It could also supply other depot via coastal LPG Tanker Vessel.

MEOGL has planned to build a 17,000 MT (34000 M3) storage terminal for liquefied petroleum gas products plus a dedicated jetty.

This Tank Farm will be completed and commissioned in January 2015. The tank farm is expected to generate income from three main sources, namely:

1. Throughput charges for those using the storage facilities provided by the farm i.e. other off-takers to NLNG, LPG importers, PPMC, and other Independent Marketers.

2. Trade income by virtue of active engagement in liquefied petroleum gas marketing

3. Jetty Fees from vessels berthing at the depot

These three major lines of operation are vital to the economies of Nigeria, Africa and it is MEOGL’s mission to create wealth and add value to these economies.

The depot jetty design is such that it can receive products from barges and even tanker vessels up to 30,000 MT capacities. The Depot is designed to receive, store and load to tanker Lorries of between 5,000 MT and 20,000 MT haulage capacities. Product specifications for the liquefied petroleum gas are attached as Annex ‘A’. The product will only be available for local consumption.

The Tank Farm has been conceived to meet the needs of users in the South Eastern, South-South and North-Central parts of Nigeria who hitherto had to travel to Lagos to buy liquefied petroleum gas. This increased the cost to the end-user due to additional transportation charges.

Feed stock for the Tank Farm will come from the Nigerian Liquefied Natural Gas (NLNG) Company. MEOGL has signed a Sales Purchase Agreement (SPA) with the NLNG guaranteeing supply.

Storage terminal will also have  bottling plant  termed as ‘MOTHER BOTTLING PLANT’ of 2400 bottle/day capacity (on single shift basis).  Output from this plant will feed company’s own Retail outlets as well as Re-sellers. Filling capacity of this plant will be gradually ramped-up to three shift working as the market for domestic LPG cylinders develops.

Enclosed as Annexure-1 is the layout of the proposed LPG Plant & storage facility.

2.   Masters Energy City Gas Cylinder Filling Plant (Satellite Plants)

These units will be situated in the middle of the supply chain and will be set up by MEOGL. The feedstock will be received from the Masters Energy storage terminal to be supplied to these LPG cylinder filling plant. The company plans to set up three of such plants every year, for first six years of operations, in the six geographical zones in the country. Capacity of each plant will be 200 MT/month (200x1000/12.5/25= 640 cylinders/day). Estimated cost of setting up such satellite plant is ~ 1.0 Mio US$ including cost of land.

LPG Bottling Plant are sophisticated and require fool proof systems because Liquefied Petroleum Gas  is   flammable  and  prescribed   instructions  for  fire extinguishment systems must be complied with. Qualified Consultant Engineers shall be engaged for preparing layout and structural drawings for LPG set-up.

In order to comply with the safety standards prescribed by the explosive department and provisioning for the future expansion in the storage capacity, a minimum of 2 Acre area would
be required for the LPG bottling plant setup.


PLANT  CONSTRUCTION COST


The LPG storage and distribution site (LPG bottling plant) can be divided into three areas:
Administration block will be used for accounts, administration and other official purposes. LPG dispensing/filling area will be used to fill cylinders. Four LPG dispensers will be installed. LPG bulk storage and supply receiving area will house a 50MT storage tank and LPG tank truck unloading area.


1.  Administration block/Office area
2.  LPG dispensing/filling area
3.  LPG bulk storage & supply receiving area

Typically,  these plants will comprise of :

Sr No. Machinery
1. Bulk storage tank – 50MT
2. Filling Dispensers
3. Pumps
4. Cylinders
5. Supporting structures, Piping, Instrumentation & controls, Electricals

6. Fire fighting equipments


Satellite bottling plants will be set up (3nos /year over initial 6 years)  and are assumed to cost USD 1 million  each with cost break up as follows :
Sr.No. Particular Amount in USD
1 Land Cost  100,000
2 Building & Civil works  150,000
3 Plant & Machinery  750,000
Total 1000,000

There  are  few  local  suppliers/  manufacturer  of  storage  Tanks  and  other  related machinery for  LPG  distribution  setup.

Other options viz. Mobile Containerized Bottling plants are also being reviewed.  (See Appendix-1 for Technical Details).




3.   Masters Energy City Gas Distribution Unit.

This business unit is aimed at meeting up with the logistic challenges of directly reaching out to the final consumers in the supply chain. Several LPG tanker trucks shall be purchased for this purpose. It is assumed that the Gas Distribution Unit will operate as separate Business Unit and business plan for the same is not under purview of this feasibility report.


4.4 TECHNOLOGY OPTIONS

PROPOSED  PROJECT PARAMETERS

Installation & Capacity Human resource Technology location
Jetty & Unloading facility
- 3 Berths



LPG Bulk Storage Terminal
- 17000 MT (34000 M3)
- LPG Bottling Plant
2400  cylinders/day

LPG Bottling Plants
- 40 MT – LPG Storage
- LPG Bottling Plant(10MT/day)
800 cylinders/day



LPG Retails Outlets

40


14 per plant Local and Imported

Machinery -
Local and Imported


Machinery -
Local and Imported
Energy City, in Rumuolumeni,
Port-Harcourt, Rivers State


Energy City, in Rumuolumeni,
Port-Harcourt, Rivers State

Any urban City

For  a  LPG  storage  and  distribution  plant,  technology options  are  important  while selecting filling equipment, storage tanks and filling pumps. For the proposed project following technology options have been assumed:

Technology Supplier Company
Gas filling dispenser German / imported To be finalised
Pumps USA / imported To be finalised
Storage Tanks International Italy


4.5 HUMAN RESOURCE  REQUIREMENT

A team of approximately 40 employees will need to be hired for establishing and running LPG bottling plant in the initial years. Additional people will be hired with increased level of operation & increased no. of shifts. The following table presents details about the staff to be hired for LPG Terminal & Bottling plant.

POSITIONS
DEPOT MANAGER 1
LOADING BAY OPERATIVES 7
BOTTLING PLANT OPERATIVES 5
SUPERVISORS - LOADING BAY 2
BOTTLING PLANT - WITHIN DEPOT 2
SECURITY - GATES 4
SECURITY - TANKS 3
SECURITY -BOTTLING PLANT 3
SECURITY -TRUCK PARK 1
ENGG/MAINTENANCE 1
LOGISTICS UNIT 2
COMMERCIAL
COMMERCIAL MANAGER 1
REGULATORY/ COMPLIANCE 1
BUSINESS DEVELOPMENT/MARKETING 6
MARKET ANALYSIS 1
 
TOTAL- DEPOT & BOTTLING UNIT 40

A team of approximately 14 employees will need to be hired for establishing and running LPG bottling plant. The following table presents details about the staff to be hired and their estimated payroll requirements.

BOTTLING PLANT – manpower requirement
 
PLANT INCHARGE   1
SUPERVISORS   2
OPERATORS   4
LOGISTICS / ACCOUNTS 2
QUALITY / TECHNICAL 1
SECURITY 4
TOTAL 14



Depot & Plant In-charges  will  be  responsible  for  the operation of the unit. As the operations will be of technical sort,  it  would need trained, experienced  staff familiar with compliance norms &  safety standards.  It is proposed that staff with a minimum of 5 to 6 years of relevant experience shall be hired. It is also proposed that safety audits shall be conducted at regular intervals & adequate training will be imparted to employees to ensure safe & reliable operations of the facility.

4.6 PROJECT COST

Total estimated project cost is as follows :

Srno Particular Estimated cost
(in USD) Sub-Totals
(in USD)

1. Land/Improvemenents (EQUITY) 9,375,000
2. Jetty (EQUITY) 9,316,770
18,691,770
3. Engineering Design/ Project Management 2,702,316
4. Piling 4,347,826
5. Procurement of Spheres 9,559,813
6. Transportation 3,167,500
7. Construction of Spheres 7,453,416
8. Painting of Spheres / Piping 1,552,794
9. Civil works, Buildings,  Drainage etc. 2,173,914
10. Mechanical Equipments, Piping Materials,  Fire fighting equipments etc. 5,448,101
11. Electrical / Instrumentation procurement 1,900,621
12. Installation of Electricals / Automation & Controls 1,565,217
13. Bottling Plant procurement / Construction 1,532,219
14. Spare Parts 633,500
15. Commissioning 1,013,601
16. Contingency & escalation provision 4,557,084
17. Procurement of Bottles 2,520,000
18. Interest during Construction period 7,378,053 57,505,977
18. TOTAL PROJECT COST 76,197,747
19. MARGIN MONEY FOR WC 15,000,000
20. TOTAL PROJECT INVESTMENT 91,197,747

PROPOSED DEBT:EQUITY RATIO 3.88

Total project cost is USD  76.197 Million including cost of land, jetty,  bulk storage& handling facility, LPG bottling plant;  It also includes a provision of USD 2.52 Million       towards upfront payment for procurement of LPG bottles;

In addition,  USD 15 million is considered towards 'Margin Money for Working capital'  taking the total Project investment to USD 91.197 million;  thus increasing the debt : equity ratio to  3.87.

Project cost  includes 'Interest during construction period'  at the rate of 12%;

4.7 PROJECT FINANCING

Proposed Means of Financing of the Project is as follows :


Sr.No. Particulars Amount in USD

1. Equity 18,691,770

2. Debt finance (including Interest during construction period) 72,505,977

TOTAL 91,197,747


4.7.1 EQUITY

This represents the amount already injected and will be injected by the promoters in the form of cost of land acquisition,  development and dedicated jetty construction.   Equity contribution is estimated at USD 18,691,770.

4.7.2 PROJECT LOAN (DEBT)

A Project loan of  USD  65,127,923  (including margin money of USD 15,000,000 towards working capital requirement) is required to finance this project.  This shall be raised from any reputable bank or syndicate of banks that believes in this project and would like to identified with it.

In addition to the above main project cost,  we also expect to raise USD  18 million (at the rate of USD 3 million each year starting from year-1 to year-6) towards construction of bottling plants (Total 18 plants at an estimated cost of USD 1million each).

Security

- The bank(s) will have first charge over the fixed and floating assets of the special purpose vehicle created for this project.

- A lien on the products in the tanks

- Personal guarantee of the directors.

The company is inviting financial institutions to provide the required financing for the design, construction and Commissioning needs of the project in addition to the requirements of Margin money towards Working capital with a moratorium of 2 years.

The company has contracted an experienced designer and builder to put together a comprehensive engineering design, procurement and construction program for the 17,000 MT capacity LPG Tank farm at the site in Port Harcourt on fixed price, data caption basis.

A preliminary financial structure based on the estimated budget has been included in the financial model; as a result the following should be viewed as an indicative structure only. Please note that the indicative interest rates and fees have been modeled at conservative levels to demonstrate the robustness of the cash flows and are subject to confirmation and negotiation.

The financing plan envisaged by the Company is as detailed below:

Facility1: Project Finance Facility
Amount: $65.2 Million dollars for
$18.0 Million dollars (at the rate of USD 3 million /year  from year-1 to year-6 (post commissioning of project towards addition of bottling plants)
Lender: Syndicate of financial Institutions
Purpose: To finance the construction of 17,000MT (34,000 cu. mt) LPG Tank     farm & bottling plants;
Tenor:   10 years (including 2year moratorium post construction)




4.8 MARKET ENTRY TIMING

There is no specific time for the entry in LPG marketing. After allocation of quota from the producer/ Major market, a marketing company can start its operations immediately as demand is persistent in urban areas.


4.9 PROPOSED BUSINESS LEGAL STATUS

The legal status of business tends to play an important role in any setup; the proposed LPG Marketing and Distribution business is assumed to operate on as a private limited company. It is mandatory for an oil or gas company to register as a private limited company.



1. PROPOSED FUNDING MODEL / OPTIONS


NATURE OF PROJECT

MEOGL  proposes to develop a 25,000MT storage capacity to warehouse Gas from NLNG, at Energy City, in Rumuolumeni, Port-Harcourt, Rivers State.

This project is aimed at supporting the sales drive of the Federal Government in the Eastern, Mid-Western and North Eastern parts of Nigeria and it comes to Masters Energy under a partnership arrangement with confirmed product supply and a ready market that was never tapped and with a capacity that is far above the planned product availability.

The market covers about 11 States with estimated average population 58million people culled from the last population count. The population gives a platform for about 1/3 of the National population and we see this translated into the same volume in Gas market across board.

These locations are projected to take 30% of the future supply of Gas in Nigeria. With this agreement and storage capacity, Masters Energy is position to control 54% of the present market and 30% of the emerging one.

MEOGL believes that the project will cover a minimum construction period of 2 years, while sales cash flow shows repayment capacity of 10 years, however, to achieve this project MEOGL has considered a funding structure that has taken critical consideration of the needs of the project from take off to completion and further into sales and repayment of exposures of financiers.

In the light of this consideration, it is proposed to have the following structure –


Considering the repayment tenor of the likely exposure of financiers of this project, MEOGL considered a bridge support that will take care of the project period, while various refinancing options are taken up to pay out the bridge funding agencies.

a. The structure considers the option of taking the whole funding need from a source to take care of design, construction, installation of fittings, purchase of equipments and machinery, testing and commissioning of the plant upon completion.

b. To protect the above exposure, MEOGL requires Guarantee from a group of local banks via Club funding model or syndication as each funding structure requires collaterization in some form.

c. MEOGL will look forward to taking out the bridge finance funder upon completion of the project via Term loans or other forms of facilities structure, relying on the cash-flow from trading to take out the lenders in under mutually acceptable tenor

d. MEOGL is aware of the need for further cushion for the Term Loan Financiers; hence it will consider the renewal of the Guarantees earlier used for the Bridge funding during the project construction.

In view of the above described platform, MEOGL proposes other funding parameters to make up its bouquet of various funding options, which include:

i. VENTURE CAPITAL :- MEOGL is open to funding of this project through venture capital from Local or International platforms, either considering the single throng funding of both the construction and sales/repayment tenors of 12 years, or any of the two (Construction or repayment tenors).

ii. PRIVATE EQUITY:- Private Equity owners are also welcome on the Board of this project under mutually agreed terms and conditions.

For these two platforms and without any form of apprehension, MEOGL is willing to get funding under most unambiguous terms and conditions, especially in the areas of Security, Interest rates or Dividend (ordinary or preferential).

iii. PUBLIC DEBT
iv. BOND

In view of the options expressed above, MEOGL is open to other options that can equally support the development of this project.

Securitization/Collateral

1. Corporate Guarantee
2. Trust Deed nomination
3. Future cash flow: we shall be offering the cashflow of the Gas company to financiers
4. Stock of product funded by the company

The Gas Company will offer to give Corporate Guarantee to financiers as a primary security platform to confirm the passion and seriousness of project owners to the financiers/investors, while not limiting the security cover to Corporate Guarantee, MEOGL assures that the land on which the plant to be built will be the primary asset of the Gas company and it resides under the control of a Trustee, from where the financier’s interest will be noted.

Further upon completion of this project the next phase is product sales and MEOGL is willing to set up the cash-flow from sales as part of the collateral to financiers. Also to give additional comfort to financiers, MEOGL will offer stock bought with the company’s money as security.

6 REVENUE MODEL

KEY ASSUMPTIONS FOR REVENUE MODEL

6.1 BASIS

1. All figures are in US DOLLARS
2. Exchange rate 1 euro = N204.00
3. Exchange rate 1 dollar = N160.00
4. Project cost figures are based on preliminary budget estimates
5. Disbursements tied to time schedule and terms of payment with vendors.
6 Project Timeline is considered as 24 months and project will be commissioned into service in year 2015.

6.2 DEMAND PROJECTIONS

• Domestic demand is projected as 300,000 MT/A in year 2013 which is expected to grow at a  CAGR of  22.22%  to achieve a volume target of 1000,000 MT/A in year 2019 as per figures below,  in line with projections of the Federal Government:

Year Demand
  in MT
 
2013 300000
2014 366600
2015 448140
2016 547722
2017 669433
2018 818189
2019 1000000

• It is assumed that regional growth in the Target market area of South & South-East (constituting  11 states) will also keep pace with the overall demand growth  and will have a demand share of approximately 33%.
• It is assumed that demand for Domestic usage will be 75% of the overall demand and Industrial will be  25% by volume.  For the purpose of the analysis it is assumed that only 12.5kgs cylinders will be used as selling unit for the domestic sector;

6.3 DEPOT THROUGHPUT PROJECTIONS

• There are 6 loading bays, It takes an average of 1 hour to load one (20 ton) truck.
• Sales figures in the depot are based on the average retail price in 2012 of one 20ton LPG truck of N3.497 million ($21,860)

• That sales will grow exponentially as customers who hitherto travelled from the east to Lagos to buy gas,  will patronize the terminal in the 2nd year;

• From 5th years onwards sales growth will be slower as we reach full capacity and competitive pressures stabilize growth
• We have assumed 6 hour working days in the first two years
• We have assumed 24 working days each month.
• In year 3 we increase shifts and increase working hours per day to 12 and loading 56 trucks per day; From year 4,  it is assumed that loading time /truck will be reduced and 8 trucks will be loaded/shift;
• By year 6,  we have increased number of shifts to 3 and load 18 hours per day

Yearwise,  throughputs considered are as follows :

Year Nos of Loading Despatch Despatch
  Shifts Trucks/d per month per year
  (in MT)
 
1 1 18 8640 103680
2 1 36 17280 207360
3 2 56 26880 322560
4 2 80 38400 460800
5 2 80 38400 460800
6 3 90 43200 518400
7 3 90 43200 518400
8 3 100 48000 576000
9 3 100 48000 576000
10 3 108 51840 622080
 

6.4 BOTTLING PLANT

• LPG bottling plant inside the Depot which is termed as "MOTHER PLANT"  will have a capacity of 300 bottles/hr;  Utilization of the plant will be ramped up from 50% in Year 1 to 75% in Year 2 to 100% in year 3.

Years Nos of Prodn
  Shifts per day
(Bottles/d)
1 1 1800
2 2 2400
3 2 3600
4 2 3600
5 3 4800
6 3 4800
7 3 5400
8 3 5400
9 3 6000
10 3 6000

• In order to meet the growing demand from retail sector,  it is considered that further Bottling plants will be added at the rate of  3 new plants every year during the first 6 years;  These bottling plants which are termed as 'SATELLITE PLANTS' will have capacity of 200MT/month on the basis of  single shift operation;  Cost of each of these plants is taken as USD 1million each.
• Satellite plants will have a capacity utilization of 50% in year 1 which will be ramped up to 75% in year 2 and 100% in year 3;
• These Satellite plants will be set up in the predominantly in the Target Market constituting the 11 states and a few also in the key markets - Lagos, South East, North Central and South-South.
6.5 PROJECT COST

• Total project cost is USD  76.197 Million including cost of land, jetty,  bulk storage & handling facility, LPG bottling plant;  It also includes a provision of USD 2.52 Million towards upfront payment for procurement of LPG bottles;

• Satellite bottling plants to be set up (3nos /year over 1st 6 years)  are assumed to cost USD 1 million  each with cost break up as follows :
Land Cost 100000 USD
Building & civil works 150000 USD
Plant & Machinery 750000 USD

• In addition,  USD 15 million is considered towards 'Margin Money for Working capital'  taking the total Project investment to USD 91.197 million;  thus increasing the debt: :equity ratio to  5.3 which we have assumed is within the norms of  lending Financial Institutions;
• Project cost  includes 'Interest during construction period'  at the rate of 12%;

6.6 REVENUE MODEL

• Jetty fees earned from 3rd party vessels is estimated based on the assumption of 24 vessels /year and fee per berth of USD 25000/-;
• Throughput charges will be earned by storage /handling of LPG for other marketers,  volumes of which are taken as 20,000MT in year 1 and 30,000M in later years.  
• Throughput charges are assumed as Naira 2/kg
Sales through  RO

• No. of Retail outlets are currently 60 and will be 80 by year 2015, when the LPG facility goes on stream.
• It is assumed that every year 20 new Retail outlets will get commissioned into service.

• Demand at the RO for LPG bottles - is taken as 200 bottles/month in year 1 and it is assumed due incentives being proposed by the Govt,  it will grow by 30% each subsequent years to reach a peak level of 1000 bottles/month;
• It is assumed that LPG cylinders will be supplied to ROs on basis of upfront payment (including  deposit towards cylinders);  Transfer price to ROs is taken as USD 1250/MT on self-collection basis;
Sales through  Resellers

• In addition to ROs, in order to increase the spread,  it  is assumed that Resellers will be appointed at strategic locations;   As these Resellers are expected to have better reach,  it is assumed that each reseller will be in a position to sell 800 bottles/mon in the 1st year which will be ramped upto 3000 bottles/year;
• It is assumed that LPG cylinders will be supplied to Resellers on basis of upfront payment (including  deposit towards cylinders);  Selling price to ROs is taken as USD 1250/MT on self-collection basis;
Supplies to Franchise

• In addition to Retail outlets & Resellers,  it is proposed that Franchise will be appointed who will invest in   Bulk Storage, bottling & distribution of products under the 'Master'  brand.  Thus,  they will supplement the bottling capacity of MEOGL and in return for their .   These Franchise will buy the product from MEOGL in bulk at the prevailing market rates ( USD 1100 /MT);
• All sales whether through Franchise, RO or Resellers - is proposed to be done 100% on cash basis; No credit sales are considered;

6.7 COST OF SALES

• Cost of Sales figures are based on average platts price for LPG of  $950.00 MT in year 2011-12 and includes  $50 premium to cover logistics costs
• Production losses in storage/handling /filling (overall)  are taken as 0.3%
• Manpower cost considered as per prevailing rates;  average 5% increase in salary /wages is considered year on year; Manpower cost also includes Manpower requirements at Mother bottling plant as well as Satellite bottling plants;  
• No additional manpower charges to MEOGL is considered on account of  LPG selling activities at  RO;    
• Business development support will be provided by MEOGL  by a team comprising of 1 Business development manager assisted by  1 graduate and OND holders covering 1 state within coverage area
• Gas Terminal will share services with existing White products depot  for services such as Administration,  HSE, Accounts,  Technical,  Quality control & Stores etc.
• Maintenance costs are taken at 0.5% of Plant cost;
• Sales and marketing expenses, 1% of sales the 1st yr as we build market share and 0.3% in subsequent years
• Insurance  on Fixed Assets is taken at 0.5% of Plant cost and Insurance on Product is taken at 0.3% of product  cost;

6.8 FINANCIAL OVERHEADS

• Depreciation has been worked out on WDV method & following  Depreciation rates have been considered :

o Plant & Machinery 20%
o Factory construction 2%

• No separate Vehicles, Furnitures & Fixtures, Office Equipments have been considered for this facility as the same are assumed to be shared with the White product depot
.
• Preliminary expenses (viz.  Engineering design,  project management, construction supervision, commissioning support etc.)  are proposed to be amortized over a period of 5 years;   Further,  as the product has a ready market,  it is assumed that no major expenditure on  Advertising, business promotions etc. would have to be incurred.
• It is assumed that LT borrowings will have 2 year moratorium period post commissioning.  Repayments will start from Year 3 of operation.  Interest rate is taken at 12% p.a.

• Working capital requirement has been estimated on following basis :
Inventory of RM 3 months
Salary (Production staff) 3 months
Power cost 3 months
Misc. expenses 1 month

• It is assumed that increases in Working capital requirements will be met from Internal accruals (cashflow)

Corporate tax rate is taken at flat rate of 20%.  It is also assumed that Losses can be carried forward and adjusted against profit of subsequent years.


7 FINANCIAL ANALYSIS


FINANCIAL SUMMARY & KEY ASSUMPTIONS


SUMMARY


7.1 PROJECT COST
  Particulars Amount in USD
  Cost of Land 9,375,000
  Plant & Machinery (including dedicated Jetty) 52,881,941
  Factory construction (Civil & Structural) 9,112,907
  Preliminary expenses 4,827,898
  Total Fixed Capital 76,197,747
  Add: Margin Money for Working Capital 15,000,000
  Total Project Cost 91,197,747

7.2 MEANS OF FINANCING

  Loan Finance 72,505,977
  Equity Financing 18,691,770
  Debt:Equity Ratio 3.879

7.3 PROJECT RETURNS & OTHER FINANCIALS
  RETURN ON INVESTMENT (IRR) 25%
  PAY-BACK PERIOD -INVESTMENT 4.54 YEARS
  NPV (INVESTMENT) USD 43.4 MILLION

  RETURN ON EQUITY (ROE) 57%
  PAY-BACK PERIOD - EQUITY 2.6 YEARS
  NPV (EQUITY) USD 66.63 MILLION
 
 


A Enclosed as Annexure-2 is the Financial projections for the Project for the 10 years of operation prepared on the basis of ‘Revenue Model’  as described in Chapter 7.

Following are enclosed :


Annexure No. Description
2.1 Summary
2.2 Fixed Assets
2.3 Milestone payments – Interest during construction period
2.4 Manpower Projections & Cost
2.5 Cashflow Projections
2.6 Projected Balance Sheets
2.7 Feasibility Analysis


Conclusions :

Based on the financial projections,  the project is prima facie economically attractive.


8.  SWOT & RISK ANALYSIS

8.1 SWOT ANALYSIS

Given below is realistic & objective assessment of Strengths,  Weaknesses,  Opportunities and Threats involved in this project.

STRENGTHS
1 Proximity to our target market and to the source of supply in Bonny will give us an edge over our competitors.

2. There are significant barriers to entry for potential competitors due to the cost of building a storage terminal.

3. Economies of Scale – due to the size of our Terminal,  will be in favor of MEOGL

4. Less friction with host community since MEOGL already have a Tank Farm for white products operating in the same location in the last 3 years.

5. Strategically located retail outlets for the distribution of gas cylinders.

6. Dedicated jetty for LPG will make for faster turnaround time and eliminate demurrage claims.

7. Ensure the efficient distribution of products in the catchment area of MEOGL  (namely South-South & South-East)

8. Guaranteed product availability and supply.

9. Encourage the adoption of LPG as an alternative to kerosene and firewood.

10. Reduce deforestation and indiscriminate felling of trees.

11. Provide above average returns for all stakeholders

12. Utilisation of locally available primary products.


WEAKNESS
1 Inadequate Operational Experience in LPG handling, storage & bottling
2. Inadequate Marketing experience in LPG
3. High Debt::Equity Ratio
4. Use of Floating Storage and Shuttle Vessels: The current supply scheme implemented by NLNG relies on a Mother Vessel which loads from NLNG’s Bonny plant and sails to Lagos waters from where Off-takers lift with a shuttle vessel. The reason for this is that only refrigerated vessels can load from the Bonny plant and these are normally large vessels which carry volumes larger than existing storage facilities. The Mother Vessel therefore acts as a floating storage facility for the scheme.


OPPORTUNITIES
1. The possession of a tank farm or throughput agreement with an existing tankfarm is a prerequisite for signing a sales purchase agreement (SPA) with NLNG.

2. Existing Storage capacity for LPG in Nigeria is concentrated in West (Lagos).

3. Existing capacity nationwide of 27,500 MT cannot satisfy projected demand (in the near-term) of 300,000 MT per annum.

4. The South East and South South areas consume 50% of kerosene imports( LPG substitute) in  Nigeria.

5. The establishment of Masters Energy gas storage in Port Harcourt will drive down the cost of LPG in the region.

6. We will gain competitive advantage in the market due to proximity to our catchment area.

7. Potential demand for LPG in Nigeria is estimated at 1.3 million MT per annum based on our population.
The Federal Government wants to increase LPG usage to 1 million MT per annum in 2015, the existing capacity in the country is grossly inadequate to meet the expected demand.
8. Industries in Aba, Port Harcourt, and Onitsha are likely to switch to gas to power their facilities since it will become more available and cheaper than diesel.

9. The abundance of Natural gas in Nigeria, 184 trillion cubic meters of proven reserves, make LPG the fuel of the future.

10. LPG typically returns 50% annually for vertically integrated players. Masters Energy is in the process of acquiring a vessel for LPG and bottling plants within and outside our target market.

11. Deregulation of the petroleum sector will eliminate subsidies for kerosene and increase demand for LPG in the long run.

12. Reduction in the cost of liquefied petroleum gas (LPG) in the South- South and Eastern region, and also to the Northern parts of the country- will facilitate growth in demand.

13. Drive the economy in the region by providing a cheaper and cleaner burning fuel for industries.

14. Encourage the use of LPG as autogas for vehicles.


THREATS
1 LPG prices are based on volatile & high International prices; Without a subsidy or a price moderating mechanism, domestic market price therefore fluctuates with movement in international prices;
2. Contractor /Construction performance Risk

3. Country Risk

4. Demand Risk

5. Political Risk

6. Regulatory Risk

7. Cost Overrun Risk

8. Security Risk – Niger Delta related

9. Exchange Rate risk

10. Supply Risk

11. Operating Risk

12. Competitive Risk


Based on the above analysis, it is clear that the Strengths & Opportunities more than outweigh the Weaknesses & Threats.

It is important to highlight the abundant investment opportunities created as a result of the federal government’s GAS MASTER PLAN.



Whilst the introduction of the Gas Master Plan has created new investment opportunities in the Nigerian gas sector, significant progress has indeed been made within the sector in the past few years.

The Government has focused on this sector and has approved ‘LPG production and distribution policy 2008’. This policy aims at increasing LPG supplies, streamlining its distribution at affordable prices, especially to LPG starved areas of the country and promoting healthy competition or growth of LPG market while ensuring minimum safety standards across the Liquefied Petroleum Gas supply chain. To achieve this goal, issues regarding LPG production, LPG licensing, safety standards, pricing, distribution in under developed areas and import of LPG have been addressed in this policy.


8.2   RISK ANALYSIS


KEY  SUCCESS FACTOR  & PRACTICAL TIPS

Following are the key success factors in LPG business :

o Site feasibility of the LPG  Storage Terminal & LPG Bottling Plant

o Dealing with a Major marketer/importer  Directly

o Understanding  the supply and demand for composite product like kerosene

o Understanding the  LPG  market and Government  Gas master plan policy


RISK SUMMARY ANALYSIS

The risk assessment process is used to identify and evaluate the impact of various points like Country Risk, Political Risk, Demand, Supply, Security, Exchange Rate, Contractor’s non-performance, Operational risk on current project under review. This analysis focuses on existing problems, importance of country risk of Nigeria and also intends to show the regulatory framework issue, micro economic and macroeconomic issue to give a detailed picture of the Nigerian business Risk.

8.2.1 CONTRACTOR/CONSTRUCTION PERFORMANCE RISK

The risk that the construction of the storage tanks will not be completed on time and according to designed specifications, which will result in the inability of the depot to provide through put service targeted. An incomplete project may not be able to generate cash flow to support repayment of the facilities.

MITIGANT
The contractors to the projects will issue performance Bonds guaranteeing the quality of work to be delivered and executed within the period of construction. The bank (s) will also appoint an independent project engineer who oversees work progress and approves bill of quantities presented. The contractor was also appointed based on their experience and capacity as examined in the contract analysis. This has since been done.

The entire project is planned as a fixed – price turnkey contract for which a world class Engineering, Design, Procurement and Construction (EPC) Contractor will be selected to handle the project. The facility being sought for, for the construction of the depot will be disbursed directly to the Engineering Procurement and Construction Contractor on a milestone basis subject to receipt of Performance certificate(s) issued by a first Class bank in Nigeria. In addition, there are severe penalties included in the contract for delays.

The EPC contractor to be selected will have the requisite experience and track record in the construction and operation of similar Gas plants.

8.2.2 COUNTRY RISK

Country risks cover the political economy. Examples of country risk include civil unrest, guerrilla sabotage of projects, work stoppages, any other form of forcemajeure, exchange controls, monetary policy, inflationary conditions, etc.

MITIGANT
To take out political risk insurance against force majeure specific events. The political situation has been stable in the past 12 years with the successful transition from one civilian regime to the next. Standard and Poors outlook for the country was upgraded at the beginning of the 2012 from stable to positive citing improved reforms, growth in GDP and low sovereign debt.

8.2.3 DEMAND RISK

The risk that the customer may be unable to lease out the tanks or sell the product due to a fall in demand.

MITIGANT
Currently, end-users and operators of bottling plants in the South South, South East, and North Central travel to Lagos to buy gas. The cost of the gas includes the shipping cost from Bonny where the NLNG is located, and the cost of transporting the gas back to the eastern part of the country. The proximity of our tank farm to our target market gives us an edge. In addition the size of our tank in comparison to existing capacity gives us scale advantage. Total installed capacity in Nigeria is 17,000 MT, majority of the capacity is in Lagos. Our proposed facility is 25,000 MT, more than double the size of individual competitors.

Total installed capacity in our target market is 1,000 MT. Demand analysis based on kerosene usage in Nigeria shows that 50% is consumed in the South East and South South.  Projected demand for LPG in Nigeria is 1.3 million MT per annum, current demand is 120,000 MT, leaving a gap of 1 million MT per annum. Annual rate of return is 50%.

Per capita consumption in Nigeria is 0.5 kg per annum, the average for West Africa is 8 kg per capita, for Egypt 45.5kg per annum and 57 kg for Morocco

8.2.4 POLITICAL RISK

The risk that a change in government may change, negatively, the Government’s policy towards the downstream sector.

MITIGANT
The advantages of gas over other domestic fuels will make it imperative for any successive government to encourage its usage. It burns cleaner and more efficiently than kerosene and firewood. The current drive by Governments in Africa to reduce carbon emissions and curtail desertification increases the relevance of gas as a viable energy source. There is also a push to reduce the flaring of Natural Gas in Nigeria from which liquefied petroleum gas is a by-product

8.2.5 REGULATORY RISK

The risk that the regulatory authorities may not allow the construction to be completed. However, it’s worthy to mention here that the Regulatory Authorities offered considerable assistance in this regards before, during and after the construction period.

MITIGANT
The company has obtained all the necessary approvals guiding the construction of LPG tank farms from regulatory authorities before disbursement (This is a condition precedent). Agencies such as DPR, SON, NNPC, Local Government, Rivers State Ministry of Planning etc approve of the construction work before commencement of the project and disbursement of fund.

8.2.6 COST OVERRUN RISK

This is the risk that the cost of purchase of the items and material for the construction works may increase above the budgeted amount.

MITIGANT
This risk is mitigated by providing for 10% of the project cost to cover overruns due to inflation, foreign exchange differentials and other exigencies. We are also projecting a 20% sensitization on the bill of quantities against the cash flow projection of the company for the project which is well above the current inflation rate of 7%. The cash flow analysis is based on the possible fluctuation in market prices of material, items for construction and economic situation.

8.2.7 SECURITY RISK –NIGER DELTA SPECIFIC

Recently, there have been a whole lot of cases in the Niger Delta which has led to hostages, kidnapping and in some cases resulted to killings and general abuse. This has translated to persistent disruption of flow of production and thereby reduces the revenue generation.

MITIGANT
Masters Energy has been operating in the region since 2009. The company has a 158,000 MT capacity tank farm for white products. There have been no incidents since inception. The company has a very robust community relations department. They have actively engaged the communities by employing youth and training them on vocational skills. We have berthed over 200 vessels since 2009 with no issues pertaining to piracy.

Additionally, the amnesty program of the Federal Government has reduced restiveness in the region. Business activities have since returned to the area. Rivers State Government by way of incentives reduced the taxes for those companies operating at the Onne Port and equally asked those companies who had moved out of the State to return.

8.2.8 EXCHANGE RATE RISK

This is the risk that the Naira will lose value against the dollar and jeopardize dollar repayments.

MITIGANT
We will employ hedging tools such as currency swaps, forwards, and options

8.2.9 SUPPLY RISK

The general issue here is with securing supplies for the project - feedstock. The three critical dimensions of supply are quality, quantity and availability. Does the input meet the necessary quality requirements of the project? Can the project get enough of the input? Is the supply reliable or are interruptions likely?

MITIGANTS
We have signed a long tern Sales Purchase Agreement (SPA) with the Nigerian Liquefied Natural Gas (NLNG) company. The duration of the contract is 5 years commencing from the completion of the Tank Farm. The contract specifies quantity and quality obligations of the supplier. The contract is a Take-or-Pay one which means that the supplier must provide feedstock of a specific quantity or quality for the duration of the SPA.

8.2.10 OPERATING RISK

This risk centers around the efficient continuous operation of the project.

MITIGANT
There is an Operations and Maintenance (O& M) contract in place.


8.2.11 COMPETITIVE RISK

The risk that competitors will build similar facilities within our catchment area and erode our profits.

MITIGANT
The cost of building an LPG storage terminal of the capacity envisaged is a major barrier to entry to potential competitors. We also have the advantage of a dedicated jetty, eliminating demurrage, and a draught of over 10 meters allowing for larger vessels to berth. We have a grip on the market having operated the largest white products tank farm for the last three years. We have mapped out effective strategies to dominate the market. We will acquire an LPG tanker allowing us to increase efficiency and reduce our cost profile.  We also have off-take agreements with most of the major buyers in the region.

9.  STATUTORY & REGULATORY FRAMEWORK


9.1 LPG LICENSING

Pre-Qualification for LPG License

Any company willing to distribute and market Oil and Gas needs to obtain a license from DEPARTMENT OF PETROLEUM RESOURCES (DPR)

DPR issues provisional licenses to technically and financially sound applicants/ parties for construction of works commensurate with their work program, for a certain period

DPR inducts reputable third party inspectors to check/monitor compliance with the terms and conditions of licenses.

The licenses can be cancelled in case of non-compliance with licensing terms and conditions.

9.1.1 PROCEDURE  AND REQUIREMENTS FOR  THE GRANT OF APPROVAL TO   CONSTRUCT AND OPERATE A LIQUEFIED PETROLEUM GAS (LPG) PLANT.

A. APPLICATION PROCEDURE

 In accordance with Part VI Section Sub 87 -section (2) of the Petroleum Regulation 1967, Petroleum Gas plant or installation shall be constructed or modified without approval granted by the Director of Petroleum Resources.

 Accordingly, all applications for approval to construct/modified a Liquefied Petroleum Gas plant or installation shall be addressed to the Director of Petroleum Resources, 7, Kofo Abayomi Street, Victoria Island, Lagos, Nigeria giving full details of the proposals. Each application shall be accompanied by three copies of the following:

 Detailed approved plans drawings showing the existing or proposed buildings on the site and the relative distances to the roadways and adjoining properties.

 Piping and instrumentation diagram of the Gas filling Plant and Sectional design drawings of the storage tanks.

 Certificate signed by the Chief Federal/State Fire Officer or an officer authorized by him in that behalf, that he is satisfied with the proposed arrangements for the prevention of fire.

 A letter from the appropriate Town Planning Authority, authorizing sitting of the Liquefied Petroleum Gas filling plant at the proposed arrangements for the prevention of fire.

 An evidence that the company is duly incorporated by the Federal Ministry of Trade to deal in Petroleum products.

 A current 3-year tax clearance certificate.

 Codes, Standards and Specifications adopted in the design of the tanks.

 Non-Destructive Examination report or Pressure test report of the LPG storage (Pressure) tank.

B. REGULATIONS AND CONDITIONS GOVERNING THE CONSTRUCTION OF LIQUEFIED PETROLEUM GAS (LPG) BOTTLING/FILLING PLANT.

Liquefied Petroleum Gas must be stored under pressure in vessels designed to withstand safely the vapor pressure at the maximum temperature. Construction of such vessels must be to an acceptable design codes such as:

 The American Society of Mechanical Engineers (ASME) boiler and Pressure Vessel Code for unified pressure vessels. Code reference ASME.

 The American Petroleum Institute Standard 2510 (2)

 British Standard (BS) 1500 Part 1, fusion Welded Pressure Vessels for use in the Chemical, Petroleum and Allied Industries or BS 1505.

 Nigerian Standards Organization approved standard on pressure vessels and liquefied Petroleum Gas containers.   NIS 220/85.

 BS 5500 for new vessels design, construction, test and certification.



9.2 ENVIRONMENTAL AND PROTECTIONS ASPECTS

LPG is much cleaner than diesel. The dirty black smoke that we see coming from diesel vehicles is particulates – a known cause of sickness and deaths. By replacing a diesel engine with an LPG powered equivalent, over 90 percent of this particulate matter can be eliminated.

LPG powered vehicles emit significantly fewer greenhouse gases and other pollutants than  petrol-powered  equivalents.  LPG  typically has  around  20  per  cent  less ozone forming  potential  (a  measure  of  the  tendency  to  generate  photochemical  smog), between  10 and 15 per cent lower greenhouse gas emissions and only one fifth air toxics emissions.

LPG delivers clear environmental benefits over diesel and petrol. Recent independent automotive  tests  submitted  to  the Department  for  Transport  have  shown  that  LPG emits:

 120 times less particulate matter compared to diesel;
 less than half the NOs of petrol and less than one twentieth the NOs of diesel;
 17 per cent less CO2  compared to petrol and 2 per cent less CO2 compared to diesel, on a wheel to wheel basis

LPG’s impact on the environment in the unlikely event of a spillage is minimal as propane  is lighter than water. It therefore readily disperses without combustion and with no contamination of water courses or surrounding land – unlike petrol or diesel where spillage is a major environmental concern.

9.3 PRODUCT/PROJECT STANDARDS AND COMPLIANCE ISSUES

Rules and regulations which govern any explosive material also apply on LPG. Its transportation, storage, construction of storage facility, filling of cylinders and their transportation all need  to  be  carried  out  according to the standards and specifications provided by the explosive department, government of Pakistan. For LPG business,  a  license  will  be  required  from  explosive  department  of  the  concerned province. Details have been provided in the following lines.

9.3.1 REQUIREMENTS FOR GRANT OF PERMANENT LICENSE UNDER EXPLOSIVES

I)  Formal  application  with  attested  photocopy  of  National  Identity  Card  briefly stating the purpose of obtaining License and justification.
II)   Application in the prescribed form , dully filled in and signed by the applicant.
III)   Distance Form D, dully filled in against all columns there of as per schedule VI of the Explosives Rules and signed by the applicant.
IV)  Original  receipt for the amount payable
V)  No objection certificate along with the signed plan from the District Authority concerned to the effect that the Authority has No objection to the grant of license to the application for possession/sale of Explosives.
VI)  Six copies of plan duly signed by the applicant and drawn to scale showing full constructional details of the proposed LPG storage site, and site with full surroundings and important land marks to facilitate its location. The distances  maintained  around  the  proposed  LPG  storage  site  shall  be  marked clearly.

VII)   Documents showing the extent of possession/ownership of land for maintaining required safety distances from the explosives storage magazine.

VIII)   Present consumption of explosives in the area and nature of work requiring use of explosives.

IX)  Expected market potential in 5 years from now with full justification.

X)  Complete details of the present consumers of explosives in the area giving their names,  complete postal addresses, nearest  Police station(s),  approximate  daily consumption  of  explosives  by  each  consumer  stating  their  nature  of  work requiring explosives.

XI)  Details of other explosives magazine(s) 6  existing if any within a radius of 50 KM from the site of proposed magazine.

XII)   Any proof/certificate showing competence and experience of the applicant or his authorized worker/agent/employee/supervisor in the handling of explosives.

XIII)   Details of vehicle to be used for transport of explosives from source of supply to the storage magazine and the approximate distance in between.

XIV)   Undertaking  by  the  applicant  to  the  effect  he  will  observe  strictly  all  the requirements of Explosives Rules.

XV)   Certificate to the effect that guard over the magazine will be provided 24 hours by the license.

To  ensure  safety  throughout  the  LPG  supply  chain,  LPG  storage  tanks,  cylinders, LPG transport tankers and  distribution outlets of the  licensees should  meet  the minimum  safety standards as laid down in applicable Rules.

9.3.2 CONDITIONS FOR TRANSPORT OF COMMERCIAL EXPLOSIVES IN A  VAN BY ROAD

1. The vehicle shall be in perfect serviceable condition in all respects.

2. The words DANGER and EXPLOSIVES shall be written conspicuously in Red color on three sides of the vehicle so as to be clearly visible from a distance and electric lamp with siren shall preferably be fixed on the vehicle for use in emergency.

3. There shall be no naked iron or steel in the interior of vehicle and no footwear with exposed iron or steel shall be worn by attendants on the vehicle.

4. The interior of vehicle shall be kept thoroughly clean from grit, oil rag, waste and other combustible material at all times.

5. All electric cables must be with heavy sheathing. No junction boxes, switches, fuses, lamp fittings or other electrical appliances or cable joints shall be allowed within the cargo compartment.

6. A quick action cut-off valve shall be fitted to the fuel pipe in an accessible position.

7. The driver shall not be under the age of 21 years and the attendant shall not be under the age of 18 years. The driver shall hold heavy duty driving licence.

8. Persons  in-charge  of  the  vehicle  must  be  experienced  in  the  handling  of explosives.

9. All  persons  engaged  in  loading,  unloading  or  conveying  explosives  shall observe all necessary precautions for the prevention of accidents by fire or explosion and no unauthorized person shall be allowed to have an access to the vehicle.

10. No person shall smoke while driving, attending to or working on the vehicle and no matches or sources or fire of heat, smoking material shall be carried on the vehicle.

11. Every consignment of explosives for transportation shall be accompanied by a license

12. Loading and unloading shall NOT be done in the vehicle while its engine is running or its fuel tank is being filled.

13. Explosives in excess of the authorized limit shall NOT be carried on the vehicle.

14. Damaged packages shall NOT be loaded in the vehicle.

15. Explosives shall NOT be carried in the Driver’s Cabin under any circumstances.

16. Detonators or other explosives containing their own means of ignition and Fire crackers shall  NOT  be  loaded  together  or  with  any  other  explosives  and  must  be transported separately.

17. All packages must be well secured and effectively protected against weather and the risk of pilferage or sabotage.

18. All packages must be appropriately labeled as to the nature of Explosives.

19. If loading, unloading takes place in wet weather, adequate stops shall be taken to keep the packages of Explosives dry.

20. The loading or unloading of explosives when once begun shall be proceeded with all due vigilance until the same has been completed.

21. No extra fuel shall be carried during conveyance other than in the fuel tank of the vehicle.

22. Vehicle  shall  not  be  taken  to  any  garage  or  repair  station  while  carrying explosives and condition of types, breaks and explosives shall be checked after short breaks during journey.

23. Efficient locking arrangement shall be provided at all times.

24. Efficient chemical fire-extinguisher of adequate capacity shall be carried on the vehicle.

25. At  least  one  person (attendant)  shall accompany  the  driver  and  the  vehicle containing explosives shall not be left unattended except when absolutely necessary.

26. Other vehicle with its engine running shall NOT as far as possible be allowed within fifty feet of the vehicle containing explosives.

27. The  vehicle  shall  NOT  be  driven  at  the  speed  more  than  30  miles  (50
Kilometers) an hour on smooth road.

28. Populated areas shall be avoided as far as possible and vehicle SHALL NOT be parked in any building during journey.

29. The vehicle shall NOT be driven in any street or public place within the limits of local administration and will be driven in accordance  with the conditions of a written permit granted by the Local Authority.

30. Explosives shall be delivered to authorize consignee only.

31. In case of any emergency, one person shall warn the traffic and one person shall inform police and  the consignor or  consignee,  as may be  convenient  by the quickest possible means.

32. One  copy  of  the  drawing  approved  by the  Department  of  Explosives  shall always  be  kept  with  the  driver  of  the  vehicle  for  production  on  demand  by  an inspecting officer.

9.4 REGULATORY ENVIRONMENT

BACKGROUND

The Nigerian National Petroleum Corporation [NNPC] and The Department of Petroleum Resources [DPR/ The Inspectorate] are amongst the regulators primarily responsible for formulating and enforcing regulations in the Industry [see Key Players in next chapter]. The DPR is an arm of the Federal Ministry of Petroleum and Mineral Resources and is vested with the authority of the Petroleum Inspectorate, mentioned in the NNPC Act of 1977 and the Petroleum Act 1969. Section 9(2) of NNPC Act 1977 makes provision for the Minister of Petroleum Resources to delegate to the Chief Executive of the Inspectorate such powers conferred on the Minister under the Petroleum Act 1969, the Pipeline Act or any other enactment as he may deem fit.

The Petroleum Inspectorate is principally responsible for the enforcement of the under mentioned Acts and Regulations:

• Oil Pipelines Act Cap 145, 1956.
• The Minerals Oil Safety Regulations 1963
• Oil in Navigable Waters 1968
• Petroleum Decree 1969
• Petroleum (Refining) Regulations 1974
• Petroleum Production and Distribution (Anti-Sabotage) Act 1975
• Petroleum products (Identification of Tankers) Regulations 1985.
• Oil Pipelines Act Chapter (CAP.) 338, Laws of the Federation Of Nigeria (L.F.N.) 1990

To discharge some of its responsibilities, the Inspectorate requires the cooperation of Law Enforcement Agencies, the Nigerian Ports Authority, Customs and Excise Department and the Nigerian Navy.

Legal Framework:

1. Constitution of the Federal Republic of Nigeria:  Chapter II of the Constitution deals with the Fundamental Objectives and Directive Principles of State Policy. Under this Chapter is Section 16 which provides that the government shall manage and operate the major sectors of the economy. Although the term

2. Petroleum Act 1965: The Petroleum Act vests in the Federal Government, the ownership of petroleum resources in Nigeria. Petroleum is defined in the Act to include natural gas. Under the Act, prospecting, exploration, production and distribution of petroleum may only be done with the consent of the Minister in charge of petroleum. The Act gives the Minister power to issue necessary regulations necessary for the discharge of its duties under the Act.Section 4 of this Act provides that no person shall import, store, sell, or distribute any petroleum products in Nigeria without a license granted by the Minister of Petroleum Resources.

Any person who engages in any act requiring a license without the appropriate license required shall be guilty of an offence and liable on conviction for two years or a fine of N2, 000 [please see the Special Tribunal Act which is intended to provide a more appropriate penalty in view of the current value of this sum] and in addition, the petroleum products in respect of which the offence was committed shall be forfeited.

3. Petroleum Industry Bill (PIB): The PIB may be the most comprehensive and far-reaching piece of legislation that the present National Assembly may legislate upon. Gas has become an increasingly contributor to the national energy mix and so is given significant consideration in the Bill. The Bill covers areas such as policy formulation, regulation, and commercial operations. The Bill proposes the development of a fiscal regime for gas that is decoupled from oil and will create a level playing field for oil investors in gas. There is, on the whole, a separation of the oil and gas value chain into upstream, midstream and downstream which potentially will reduce overlapping responsibilities and bureaucratic bottlenecks. The Bill also seeks to impose domestic supply obligation on companies exporting liquefied gas in Nigeria.

4. The NNPC Act 1977: This is the Act that establishes the Nigerian National Petroleum Company [NNPC]. Section10 of the Act provides for the establishment of the Petroleum Inspectorate [Department of Petroleum Resources], which shall be an integral part of the Corporation. It further authorizes the Petroleum Minister to delegate to the Alternate Chairman or the Chief Executive of the Inspectorate any of the powers conferred upon the Minister under any Act or enactment. In particular, the Minister may delegate to the Inspectorate any of the under-mentioned matters. In effect, the DPR has responsibilities for the following matters except determined otherwise by the Minister:
• Issuing permits and licenses for all activities connected with petroleum exploration and exploitation and refining, storage, marketing, transportation and distribution.
• Acting as an agency for the enforcement of the provisions of the Petroleum Act, NNPC Act or any other enactment. In exercising any of these powers, the DPR is not answerable to any person or authority except the Minister.

5. Environmental Impact Assessment Act 1992:

Environmental Impact Assessment is mandatory for the construction of LNG facilities. This is issued by the Federal Ministry of Environment. The National Environmental Standards and Regulations Enforcement Agency Act (NESREA), the Environmental Impact Assessment Act (EIA) and the Environmental Guidelines and Standards for the Petroleum Industry in Nigeria (EGASPIN) prescribe environmental and emission standards applicable to natural gas activities in Nigeria.

The Federal Ministry of Environment, formerly the Federal Environmental Protection Agency [FEPA], is responsible for ensuring the formulation of and compliance monitoring of environmental standards. The Ministry has very wide powers covering all industries including the petroleum industry. The Ministry is responsible for approving Environmental Impact Assessments [EIA] of all projects and activities undertaken by players in the Industry. New oil and gas projects require EIA approved by the Ministry before any construction can commence.

The Department of Petroleum Resources (DPR) has also issued a set of Environmental Guidelines and Standards for the Petroleum Industry in Nigeria (1991), which overlap with and in some cases, differ from those issued by the Ministry. For the most part, the specific standards set are comparable to those in force in Europe or the U.S.

The Environmental Impact Assessment Act (Decree No. 86 of 1992) requires an environmental impact assessment (EIA) to be carried out “where the extent, nature or location of a proposed project or activity is such that it is likely to significantly affect the environment.” The public and private sectors are enjoined to give “prior consideration” to the environmental effects of any activity before is embarked upon. An EIA is compulsory in certain cases, including oil and gas field’s development and construction of oil refineries, some pipelines, and processing and storage facilities.

Some state governments have established state authorities, which monitor compliance with the EIA Act. For instance, the Lagos State Government established the Lagos State Environment Protection Agency [LASEPA] for monitoring and enforcing compliance with environmental laws within Lagos State. In July 2002, the Nigerian government ordered oil companies operating in the country to comply with the Environmental Guidelines and Standards for the Oil Industry, published by the Department of Petroleum Resources (DPR), the monitoring arm of the Nigeria National Petroleum Corporation (NNPC), or risk paying a fine. The 300-page guidelines provide rules to reduce pollution and procedures for environmental monitoring. The DPR also has been tasked with conducting regular health, safety and environment audits of the oil companies.

Companies in the Industry having chemical plants within Lagos are required to submit the following reports to the Federal Ministry of Environment, the DPR and relevant state authorities e.g. Lagos State Environmental Protection Agency [LASEPA]:

• Environmental Impact Assessment
• Monthly Effluent Analysis Report
• Environment Audit Report to be submitted upon commencement of operations

6. Companies and Allied Matters Act (CAMA) Cap C20, 2007 Edition, Laws of the Federarion of Nigeria (LFN): The CAMA regulates the incorporation, management and winding up of companies in Nigeria. It established the Corporate Affairs Commission (“CAC”), Abuja to administer its provisions.

Section 197 (1) of the CAMA prescribes that every charge created by a company with the intention that it provide security, shall be void against the liquidator and any creditor of the company unless it is registered with the Nigerian Companies Registry (i.e. the Corporate Affairs Commission (“CAC”)) within ninety (90) days of its creation. The CAMA requires the registration of all floating charges and specified categories of fixed charges including charges “for the purpose of securing any issue of debentures.”

The registration with the CAC is done after stamping of the security documents and attracts a fee of one percent (1%) of the amount secured. Barring any unforeseen circumstances, the registration of a charge with the CAC can generally be concluded within a period of two (2) weeks from stamping of the security documents.

Section 197 (1) of the CAMA prescribes that every charge created by a company with the intention that it provide security, shall be void against the liquidator and any creditor of the company unless it is registered with the Nigerian Companies Registry (i.e. the Corporate Affairs Commission (“CAC”)) within ninety (90) days of its creation. The CAMA requires the registration of all floating charges and specified categories of fixed charges including charges “for the purpose of securing any issue of debentures.”

The registration with the CAC is done after stamping of the security documents and attracts a fee of one percent (1%) of the amount secured. Barring any unforeseen circumstances, the registration of a charge with the CAC can generally be concluded within a period of two (2) weeks from stamping of the security documents.

7. The Customs and Excise Management Act (CEMA) Cap C44, LFN 2004

The CEMA 2004 forms the legal basis for the imposition of import and excise duties on the importation into, and exportation of goods out of, Nigeria.

Section 37 of CEMA provides that no imported goods shall be delivered or removed on importation until the importer has paid the proper officer any duty chargeable thereon.  The import duty payable will depend on the category of the imported item, based on the Harmonised System (HS) Code.

8. Nigeria Investment Promotion Act

9. Companies Income Tax Act ,Cap C21, 2007 Edition, Laws of the Federation (“LFN”)

The Companies Income Tax Act (“CITA”) provides the legal basis for the imposition of taxes on the incomes of companies in Nigeria, other than those involved in the exploration and production of petroleum. Section 9(1) of CITA imposes tax upon the profits of any company accruing in, derived from, brought into, or received in Nigeria in respect of a trade or business. The CITA is administered by the Federal Inland Revenue Service.

Nigerian Companies (i.e. companies incorporated in Nigeria) are liable to tax on their worldwide income. A non-Nigerian company doing business in Nigeria and receiving payment abroad will be liable to tax in Nigeria to the extent that such income is derived from its operations in Nigeria.

The current tax rate is 30% of taxable profits and it is computed on a preceding year basis. In respect of non-Nigerian companies, taxable income is defined as gross revenue multiplied by a deemed profit rate (this is usually 20%). The effective income tax is therefore usually 6% (30%*20%) for non-resident companies.

In Nigeria, the liability of a non-resident company to tax is mainly dependent on whether the company has a permanent establishment (PE) in Nigeria and whether any income is attributable to that PE.  Specifically, Section 13 (2) of CITA provides that the profits of a non-Nigerian company shall be deemed to be derived from, and therefore taxable in, Nigeria under any of the following conditions:

• if the company has a ‘fixed base’ in Nigeria.

• if the company operates in Nigeria through a dependent agent authorised to conclude contracts or deliver goods or merchandise on its behalf.

• if the company executes a turnkey project in Nigeria.

• if transactions between the company and its Nigerian subsidiary or related party are deemed not to be at arm’s length.

The Nigerian court has also held, in the case between Shell Petroleum International BV and the Federal Board of Inland Revenue, that “the place of business from which a taxpayer carries on his business means any identifiable place.  It is a place which a taxable person is using at a given time.  The place need not be owned or rented by it.  It might even be a hotel or given to it gratis once the taxpayer is carrying on its business in such location”.  Thus, once a foreign entity can be identified to be carrying on a business at any particular point in Nigeria, it becomes liable to Nigerian taxation.

10. Withholding tax (WHT)

WHT is governed by the CITA and other Nigerian tax laws which require tax to be deducted at source when payments on qualifying transactions become due from, or payable by, one company to another company.  The company making the payment is required, to deduct therefrom, tax at the appropriate rate and to remit to the relevant tax authority the amount so deducted.

Once deducted, WHT must be remitted to the relevant tax authority within a reasonable period, but not later than 21 days after the payment is made or credited, whichever occurs first.  WHT deducted from companies must be remitted to the FIRS while WHT deducted from individuals, partnerships and other unincorporated bodies must be remitted to the relevant State Board of Internal Revenue (SBIR).

The tax deducted represents an advance payment of corporate income tax and it is applied as a tax credit against the tax liability of the company from whom the tax is withheld for the relevant tax year.  Where the WHT credit exceeds the assessment for a given year, the excess may be carried forward to a future period.

Payment of WHT is to be made in the currency of transaction (or currency of payment of the contract sum).  The rate ranges between 5% and 10%; depending on the nature and description of transaction, the beneficiary and the residence of the beneficiary.

Applicable WHT rate of rent and interest is 10% while that of contract of service is 5%.  However, for beneficiaries of interest payment resident in a country that has a double taxation treaty with Nigeria, the WHT rate is reduced to 7.5%.  This is the final tax liability on this stream of income.

11. Exempted Income

To encourage longer-term inflows of foreign funds, section 11 of CITA provides that interest payable on a foreign loan may be exempted from tax as follows:


Repayment Period
Including Moratorium Grace Period Tax Exemption Allowed
Above 7 years Not less than 2 years   100%
5-7 years Not less than 18 months   70%
2-4 years Not less than 12 months   40%
Below 2 years NIL   NIL

The “repayment period” is the total period within which the borrower is obliged to repay the loan, commencing from the date the loan is granted till the last installment is paid.  Thus, a loan that is repayable over a period exceeding 7 years (including a 2 year grace/moratorium period) will enjoy 100% exemption.

The law does not define the terms: “grace” and “moratorium” periods.  In our opinion, therefore, the interpretation of these two words would largely depend on the provisions of the loan agreement between the borrower and the lender.

We are however, aware that, in practice, the terms “moratorium” and “grace period” are used interchangeably to refer to the period during which the beneficiary is not required to make any repayment of either the principal amount or interest accruing on the loan.

11. Bi-lateral Investment Treaties / Double Taxation Treaties/Agreements (DTTs/DTAs)
Nigeria has DTTs with Canada, Romania, Belgium, France, the United Kingdom, Czech Republic, Pakistan, China, the Netherlands and South Africa.  These agreements offer some tax advantages to companies resident in treaty countries.

The usual WHT rate for dividend, interest and royalty is 10%.  For companies from treaty States however, a reduced rate of 7.5% is applicable.

12. The NDDC Act / Niger-Delta Master-plan

13. The Gas Master Plan: The three components of the Gas Master Plan are – the Domestic Gas Supply Obligation (which is the government’s first attempt at refocusing the gas resource for domestic use), the Pricing Framework (which reiterates the Federal Government’s commitment towards making gas available and affordable in the domestic market) and the Gas Infrastructure Blueprint (which focuses on the Central Processing Facilities and domestic gas transmission systems within the country)

14. Arbitration and Conciliation Act (……)Nigeria is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Convention has been ratified and incorporated as the second schedule to the Nigerian Arbitration and Conciliation Act. Nigeria is also a signatory to and has ratified the ICSID convention.

14. Banks and Other Financial Institutions Act

15. Consumer Protection

16. Stamp Duties Act Cap S8 Laws of Federation of Nigeria (“LFN”) 2004 (“SDA”): Under Nigerian law, stamp duty is chargeable on a wide range of instruments with connection to Nigeria. Specifically, stamp duties are payable, ad valorem, on virtually all security documentation. Duty rates range from 0.375 percent to 1.5 percent of the amount secured, and vary with the specific type of security and the nature of the assets involved. Under the Stamp Duties Act Cap S8 Laws of Federation of Nigeria (“LFN”) 2004 (“SDA”), relevant instruments are required to be stamped within thirty (30) days of execution or, where executed outside Nigeria, within thirty (30) days of receipt of the instrument in Nigeria. The obligation to stamp is statutorily imposed on the obligee (the banks); although in practice, the burden for the payment of the duty is usually transferred to the obligor (the borrower).

The payment of stamp duty is particularly relevant for the purpose of enforcing the security created by the security documents. This is because instruments that are required to be stamped under the SDA are precluded from being admitted in evidence by a Nigerian court without the required duty and applicable penalties first being paid. Further, late payment of stamp duty attracts a penalty of interest at the rate of 10 percent per annum from the due date up to the time when the amount of interest is equal to the unpaid duty. Thus, in order to enforce the security interests created by documents such as a letter of pledge, contracts assignment agreement and or deed of charge over account in Nigeria, it is imperative that same are duly stamped.

Where stamp duty is chargeable at an ad valorem rate of the amount secured, most times, depending on the sum that was borrowed, the borrower may be unable to pay the full stamp duties payable or, even where able, the parties may agree that it is prudent to minimise the transaction costs. In practice, parties need not secure the entirety of the borrowing company’s obligations in the first instance but may agree on a notional amount for stamping purposes and subsequently, where the need arises, upstamp the secured amount to the full obligation. This structure will assure that the parties only incur the full stamp duty obligation where the need arises. In this regard, section 202 of the Companies and Allied Matters Act Cap C20 LFN 2004 (“CAMA”), permits parties to a registrable charge to determine a figure as the maximum amount secured by the charge, particularly where the charge secures fluctuating or uncertain amounts. The proviso to section 202 of CAMA further states that the maximum sum deemed to be secured by a registrable charge can be increased at any time prior to the winding up of a company, provided additional stamp duty is “subsequently” paid on such increase. It is however pertinent to note that the instrument will only be enforceable in respect of the additional amount, from the date of up-stamping thereof and charges registered by third parties over the same asset during the intervening period may claim priority over the additional amount in respect of which the instrument is up-stamped.

17. VAT Act (VATA) Cap V1 LFN 2004

The VATA governs the administration of VAT in Nigeria.  A flat rate of 5% is applicable on the supply of all goods and services except those specifically exempted under the First Schedule to the VAT Act.  Both resident and non-resident companies engaged in VATable activities in Nigeria are required to register for the tax, and to include VAT on their invoices to customers.

For a non-resident company, the local recipient of the service is required to withhold VAT on the invoices and remit it directly to the FIRS.  Government bodies and agencies are also required to withhold VAT charged by contractors and remit directly to the FIRS.