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Cablegate: Nigeria: Local Company Develops Natural Gas

VZCZCXRO8256
PP RUEHMA RUEHPA
DE RUEHOS #0429/01 3031621
ZNR UUUUU ZZH
P 291621Z OCT 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 0265
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9913
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 02 LAGOS 000429

SENSITIVE
SIPDIS

DOE FOR GPERSON, CHAYLOCK

E.O. 12958: N/A
TAGS: ENRG EINV EPETEIND NI
SUBJECT: NIGERIA: LOCAL COMPANY DEVELOPS NATURAL GAS
PIPELINE TO POWER LAGOS' INDUSTRIAL SECTOR

REF: A. LAGOS 157
B. LAGOS 122
C. LAGOS 167

SENSITIVE BUT UNCLASSIFIED BUSINESS PROPRIETARY INFORMATION;
HANDLE ACCORDINGLY

1. (SBU) Summary. A natural gas distribution pipeline
serving industrial customers is an example of a rare success
story in Nigeria's slow developing domestic gas sector. The
pipeline, owned by Oando Gas and Power, serves 82 industrial
customers in Lagos. Oando does suffer from typical political
meddling and unreliable gas supplies, but the company plans
to double its existing capacity in Lagos and to develop a
second distribution pipeline network in Calabar. Oando sees
power projects tied to specific industrial customers as a
more feasible method for improving Nigeria's power situation
than the construction of large, on-grid IPPs which Oando
shuns as too risky in light of transmission and distribution
problems. To expand rapidly, local companies like Oando will
need foreign capital while they provide the local market and
political expertise necessary for operating a successful
business in Nigeria. End Summary.

Expansion Planned for Successful Gas Distro System
--------------------------------------------- -----

2. (U) While the news about Nigeria's erratic natural gas
sector has been generally negative, one local company is
making in-roads in supplying local industrial consumers with
natural gas. Oando Gas and Power, a subsidiary of Oando Plc,
operates Gaslink, a 100 km natural gas distribution pipeline
that serves industrial customers in Lagos' Ikeja and Apapa
areas. Oando currently has supply contracts with 82
customers, including Heineken, Cadbury, and the state water
company, delivering one million cubic meters of gas per day.
Customers use the fuel for heating and steam generation
needed in their industrial processes and some customers are
converting existing diesel power generators, to run on
natural gas. The natural gas originates in Chevron and Shell
fields in the western Niger Delta and is transported to Lagos
area through the Nigerian Gas Company (NGC) Escravos-Lagos
Pipeline. (Note: That pipeline also supplies the Lagos Egbin
power station and the West African Gas Pipeline that will
supply gas to Ghana, Benin and Togo. End note.)

3. (SBU) Olalere Odusote, Business Development Manager for
Oando Gas and Power, told Energyoff on October 14 that the
company has plans to expand the Gaslink pipeline to serve
more areas in Lagos. Additionally, two off-grid mini-power
projects, both less than 50 megawatts each, will be built for
the state water company in Ikeja and for the Apapa port
authority. These expansion plans and mini-power plants will
double the amount of gas Oando currently supplies to
customers.

Oando Shuns IPPs as Too Risky
-----------------------------

4. (SBU) When asked by Energyoff about possible Oando
interest in building larger independent power plants to feed
the Nigerian electricity grid, Odusote demurred. He noted
Nigeria's dilapidated distribution and transmission systems
make such projects very risky and he said Nigeria's new
multi-year tariff order sets prices too low to make the
market attractive for potential private investors. Oando
plans to expand by building on relationships with existing
industrial customers in Lagos while seeking opportunities to
replicate the model in Calabar. He thought expansion of
Nigeria's currently inadequate power supply must be based on
industrial customers ready and able to pay market prices for
power.

Oando Suffers From Political Meddling, Supply Problems
---------------------------------------------

5. (SBU) Oando's business model is not without controversy.
The company's Managing Director was summoned to appear before
the Senate Committee on Natural Gas on October 20 to explain

LAGOS 00000429 002 OF 002


a recent decision to raise gas prices by 50 percent.
Senators complained that Oando was unfairly taking advantage
of its monopoly position and hurting Nigerian manufacturers.
Odusote told Energyoff that Oando's pricing model was
complex, but transparent. NGC, a state-owned company, buys
natural gas from Chevron and Shell at a low fixed price and
resells that gas to Gaslink at a percentage of the world
market price of fuel oil, an alternate fuel for industrial
customers. Oando is allowed to put a standard markup on the
gas and part of the revenue Oando generates is shared with
NGC, with which Oando has a twenty year gas sales purchase
agreement. (Ref A, B)

6. (SBU) Oando's business model is also vulnerable to
Nigeria's inadequate gas infrastructure. Odusote said the
supply of natural gas was steady for the first five years of
Gaslink's operations, but in the past year and a half, the
supply have been erratic and the gas has been too "wet" or
filled with condensate. Gas which contains too much
condensate could damage both Gaslink and customer equipment.
Odusote blamed recent gas quality problems on vandalization
of the Escravos Lagos Pipeline and poor pipeline maintenance
on the part of NGC. Natural gas is dried in a processing
facility and the condensate, a mixture of various hydrocarbon
byproducts, is diverted into a side pipeline to be
transported away and sold. Vandals tap into the condensate
pipeline and steal the condensate, causing the line to be
shut down and forcing raw, wet natural gas to be injected
directly into the Escravos-Lagos Pipeline without being
processed. In addition, Odusote noted that Shell's oil
fields are aging and the natural gas they produce naturally
contains more and more condensate. He complained Shell has
been slow to rectify the problem. Odusote said if the
problems with gas quality and supplies continue, Oando may
need to declare force majeure on deliveries to its customers.
(Ref C)

7. (SBU) Comment: It is refreshing to see a company make a
business of supplying natural gas to domestic customers on a
commercial basis in Nigeria, difficulties notwithstanding.
Oando has indicated it wants to replicate this model in the
Calabar area. As they expand, Oando and its Nigerian
competitors, will likely seek foreign partners to supply not
only financial capital, but human capital as well. (Note:
Shell Gas will develop a network to supply Oshun State and
four other companies are completing pipeline and other
infrastructure to supply gas to Lagos State. End note.) Most
of the top notch Nigerian gas and power executives have
extensive experience with international oil or industrial
companies. Odusote himself is a product of General
Electric's well regarded management training program.
Conversely, foreign investors, especially in gas and power,
would be well advised to seek out competent, stable, and
politically savvy Nigerian corporate partners to help
navigate this country's complex political and operating
environment. End Comment.
BLAIR

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