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Cablegate: Nigeria: Local Investor Says Power Projects That

VZCZCXRO1764
PP RUEHDE RUEHMA RUEHPA
DE RUEHOS #0302/01 2141431
ZNR UUUUU ZZH
P 011431Z AUG 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 0081
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHHH/OPEC COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9765
RUFOADA/JAC MOLESWORTH AFB UK
RUEKJCS/SECDEF WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEWMFD/HQ USAFRICOM STUTTGART GE

UNCLAS SECTION 01 OF 03 LAGOS 000302

SENSITIVE
SIPDIS

DOE FOR GPERSON, CHAYLOCK

E.O. 12958: N/A
TAGS: ENRG PGOV NI
SUBJECT: NIGERIA: LOCAL INVESTOR SAYS POWER PROJECTS THAT
CONTROL DISTRIBUTION AND COLLECTION OF FEES ARE MOST VIABLE

REF: A. LAGOS 122
B. ABUJA 840
C. 07 LAGOS 750

1. (SBU) Summary: In a June 30 meeting with Resources
Officer, Adewale Audifferen, former Managing Director of
General Electric Nigeria, now Vice President for Power at
Global Energy Nigeria (GE), said independent power projects
(IPPs) like the Geometric Plant being built in Abia State are
the most viable because they are vertically integrated,
controlling distribution and collection of user fees.
Chinese construction in Ondo and Ogun State's plants was
shoddy; the Government of Nigeria (GON) contracted GE to
complete the projects. High import taxes on electrical
equipment hurt Nigeria's effort to improve power generation
capacity. Natural gas remains the best choice for fueling
Nigeria's electric power. End Summary

Controlling Distribution Key to Revenue Stream
--------------------------------------------- -

2. (SBU) Resources Officer met June 30 with Adewale
Audifferen who said the most viable and sustainable power
projects will be structured like the Geometric Power Ltd
power plant's captive power model currently under
construction in Abia state. That project is a stand alone,
off-grid power project with Geometric building everything
from gas pipelines to the power plant, transmission lines,
and distribution networks. It is estimated that the
transmission lines will be in place by June 2009; the plant
is expected to be completed by November 2009. By employing
the captive power model of vertically integrating and
particularly by controlling distribution and collection of
payments, Geometric will be able to guarantee a revenue
stream from the sale of electricity. He estimates Geometric
will receive an average of 17 naira (USD 0.14) per kilowatt
hour, double what it would get from selling under Power
Purchase Agreement (PPA) to the national grid.

3. (SBU) In contrast, Independent Power Producers (IPPs) that
sell to Nigeria's quasi-state owned Power Holding Company of
Nigeria (PHCN), in addition to facing a lower tariff, must
struggle with the not inconsequential burden of actually
getting paid. (Note: U.S. company AES Barge Nigeria, the
only operating IPP in Nigeria, is seeking arbitration in a
dispute with PHCN over the terms and conditions of its PPA.
Payments on its existing PPA are perpetually in arrears. End
Note) In Audifferen's opinion, while Nigeria's newly
announced Multi-Year Tariff Order is a significant
improvement over the old electricity tariff structure (ref
A), it falls just short of what is necessary to make
independent power projects economically attractive to many
investors, especially foreign investors. Still, he said it
was a significant step in the right direction.

GON Growing Leery of Chinese Power Plants
-----------------------------------------

4. (SBU) Audifferen saw most of the financing for power
projects coming from local banks, which, he noted, are awash
with capital. Nigerian banks are able to offer financing at
much more competitive rates than they currently do, but he
said they lack technical expertise to develop sound project
financing. (Note: The AES Barge Nigeria finance manager has
said Nigerian banks are "knocking down the door" to offer
financing to AES. End Note) Financing from Chinese or
Indian sources was less likely; Audifferen says most Chinese
capital flowing into Nigeria is destined for the real estate
sector, which is less technically complex and offers a
quicker payoff.

5. (SBU) On Chinese participation in power generation
construction, Audifferen was notably dismissive. He
recounted how Chinese contractors built two power plants for
the GON, the Papalanto Thermal Power Station in Ogun State
and Omotosho Thermal Power Station in Ondo State. Both
plants, he said, suffered from cost overruns and
commissioning delays. According to Audifferen, the GON

LAGOS 00000302 002 OF 003


ordered the Chinese contractors to bring in General Electric
to help complete the commissioning. GE engineers were
shocked at the poor quality of construction and the failure
to comply with industry safety standards. Overall,
Audifferen thought the GON was growing leery of Chinese
participation in complex infrastructure projects.

Import Taxes Hurt Power Plant Construction
------------------------------------------

6. (SBU) One of the biggest obstacles to private sector
investment in the electricity sector was Nigeria's onerous
and "self-defeating" import taxes. Despite the obvious need
to expand its generating capacity, Nigeria continues to levy
steep duties on the importation of electrical equipment and
associated raw and semi-finished materials like cement,
flat-rolled steel, and wire cables. Increased construction
costs require larger loans, requiring increased financial
payments or debt structures with longer tenures and
accordingly higher interest rates, Audifferen said.
Including financing, a Nigerian power project costs around
USD 4 million per megawatt.

Gas Still Power Generation's Best Choice
----------------------------------------

7. (SBU) Audifferen lamented that lack of coordination
between electricity and natural gas planners. Like many of
our contacts, he noted that access to natural gas is the most
significant operational impediment to power generation.
While generally supportive of Nigeria's gas master plan,
Audifferen viewed the natural gas pricing policy (ref B, C)
as unworkable and unlikely to make new gas available for
power customers because of the unreasonably low gas price set
by the GON. Audifferen was disappointed in the roadshow put
on by the Nigerian National Petroleum Corporation (NNPC) to
attract new natural gas sector investors (held April in Abuja
and May in Houston, TX). NNPC, in his opinion, failed to
properly target large international institutional investors.
When asked about alternatives to natural gas, Audifferen
dismissed coal as too expensive in the short term, saying the
mines are not yet developed and the lack of a robust road and
rail infrastructure in Nigeria makes shipping coal
prohibitively expensive.

8. (SBU) Audifferen noted that Oando Plc, a mid and
downstream petroleum company, was taking advantage of its
ownership of a natural gas pipeline in Lagos State to expand
into the electricity sector. According to Audifferen the
company has moved aggressively to offer to build power plants
for companies seeking gas purchase agreements. The
international oil companies, which also produce natural gas,
have no interest in getting into the power plant building
business in Nigeria.

9. (U) Audifferen's company, Global Energy Nigeria, is a
small, privately held company lead by Nigerians with
international experience in the oil, natural gas, and
electricity industries. Besides its interests in
electricity, the company owns seven small Nigerian oilfields
and is a minority partner in Enviro Africa, a company working
in the carbon credit markets.

10. (SBU) Comment: Like any good businessman Audifferen saw
the myriad problems as an opportunity to make money.
Although he noted the difficulty of doing business in the
sector, Audifferen and his company are clearly bullish on the
prospects in the gas sector. He epitomizes an important
element of doing business in Nigeria; namely, it helps to
actually be in Nigeria. Although investors, and American
investors in particular, cannot only rely on analysts and
bankers who reside in London, New York, and Johannesburg,
flying in to Abuja or Lagos only on occasion, to provide a
picture of the situation on the ground. Opportunities exist,
but the Nigerian market, is too opaque to permit investing at
arm's length, but no noted best business practices and
sanctity of contract remain real issues here. End Comment.


LAGOS 00000302 003 OF 003


BLAIR

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