Identifier
Created
Classification
Origin
03ABUJA2161
2003-12-17 05:11:00
CONFIDENTIAL
Embassy Abuja
Cable title:  

NIGERIA: WHITE ELEPHANT STEEL COMPLEX TO GULP MORE

Tags:  ECON EIND EINT EINV ELAB ENRG ETRD NI 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 04 ABUJA 002161 

SIPDIS

E.O. 12958: DECL: 12/16/2013
TAGS: ECON EIND EINT EINV ELAB ENRG ETRD NI
SUBJECT: NIGERIA: WHITE ELEPHANT STEEL COMPLEX TO GULP MORE
CASH

REF: LAGOS 1799

CLASSIFIED BY COUNSELOR JAMES MAXSTADT FOR REASONS 1.5 (B)
AND (D).

C O N F I D E N T I A L SECTION 01 OF 04 ABUJA 002161

SIPDIS

E.O. 12958: DECL: 12/16/2013
TAGS: ECON EIND EINT EINV ELAB ENRG ETRD NI
SUBJECT: NIGERIA: WHITE ELEPHANT STEEL COMPLEX TO GULP MORE
CASH

REF: LAGOS 1799

CLASSIFIED BY COUNSELOR JAMES MAXSTADT FOR REASONS 1.5 (B)
AND (D).


1. (C) Summary: In June 2003, the GON awarded SOLGAS (a
U.S.-based energy company) sole rights to refurbish the yet
to operate Ajaokuta Steel Complex, to sell energy to the
national grid from the Complex's electric plant, and to
operate a yet to be built LNG-fired electric plant. Despite
claims by SOLGAS and the GON that Ajaokuta would produce 1.3
million tons of steel per year in 18 to 24 months and supply
2300 MW of energy to the complex and national power grid by
2005, the GON and SOLGAS representatives have yet to name
investors or provide a basic feasibility study for the
estimated USD 4 billion in investment projects.


2. (C) Since 1979, the GON has spent more than USD 5 billion
on the Ajaokuta Complex and is now poised to spend hundreds
of millions more in the coming years on what most energy
experts call a White Elephant. President Obasanjo,
nonetheless, has tied manufacturing steel and producing power
at Ajaokuta to national pride, to poverty reduction through
industrialization and job creation, and to breaking away from
the West to make Nigeria a major steel producer and exporter.
Ajaokuta may produce steel one day and the GON may build a
multi-billion dollar pipeline and LNG-fired electric plant
for the complex, but if history is a lesson, this White
Elephant will consume more of the GON's limited resources
without returning any benefits. End Summary.

Money, Money, Money
--------------


3. (U) In June 2003, the GON brokered a deal giving SOLGAS,
and its Nigerian subsidiary SOLGAS Energy Nigeria Limited,
the sole rights to:

-- complete and operate Ajaokuta's steel production complex,

-- supply electric power to the national grid from Ajaokuta's
present generating plant, and

-- operate a not yet constructed LNG-fired electric plant to

be funded by the GON.

In the agreement, SOLGAS will operate the steel complex and
electric plants until June 2013, keeping any profits from the
operations. SOLGAS, a small U.S. energy service provider,
has never managed or operated a steel factory. It has,
however, brokered several energy deals in Russia over the
last ten years, according to SOLGAS' CEO Thomas Russell.


4. (C) In a private meeting with Econoff early December,
SOLGAS's Nigeria-based Vice Chairman Oluwaseun "Seun" Oyefeso
said the only reason SOLGAS was in Nigeria was to enter the
electricity and gas markets, and to make "money, money,
money". He admitted privately that taking control of
Ajaokuta was only a quick way to enter the Nigerian energy
market. SOLGAS saw the steel operation as political
expediency: President Obasanjo and Vice President Atiku
wanted something to show they were committed to
industrializing Nigeria and providing jobs. Oyefeso said
that figures cited by him in the press that Ajaokuta would
employ up to 9,000 staff were "for the press," and he said
SOLGAS's claim that it would provide USD 3.6 billion to the
project were overstated by the GON and the press. Oyefeso
stated that his claim in late November, that Ajaokuta would
make a USD 5 billion profit in ten years, was if "everything
went well".

Not Peanuts: Over USD 5 Billion Spent Before SOLGAS
-------------- --------------


5. (U) According to the GON and Embassy contacts, since 1979
Ajaokuta Steel Complex has been used as a mechanism to grant
contracts to contractors performing substandard work at
overinflated prices while providing senior GON officials with
large kickbacks. The GON estimates it has spent at least USD
5 billion on what was to be Africa's largest steel production
facility, while World Bank estimates put the cost at about
USD 7 billion (not adjusted for inflation). President
Obasanjo's military government in 1979 began the project with
Russian and German technical partners. That Obasanjo
administration may have thought the project feasible,
according to an Irish engineer who was a member of Ajaokuta's
construction team in the 1980s, but within a few months
senior GON officials were already siphoning off millions in
kickbacks from real and false contracts for the complex's
construction. Construction continued until 1983, when the
newly installed Buhari military regime cut the project's
funding. From 1990 to 1996 construction of the plant
resumed, but it was halted in 1996 by Abacha's regime with
about 90 percent of Ajaokuta completed.


6. (C) Embassy sources say Abacha had made all the money he
could from Ajaokuta by that point, and never intended to
complete or operate the plant. For example, Abacha directed
the GON to purchase the debt it owed Russia for Ajakouta's
construction for 53 percent of its face value. Abacha then
cooked the books to show that the GON had paid the debt in
full to Russia, pocketing nearly 75 percent of the debt
scheme profit for himself. Since 1979, the GON has also paid
and housed Ajaokuta's estimated 4,500 workers, and maintained
the 24,000 hectare property and steel operations.

White Elephant's New Mates?
--------------


7. (C) Over the last two months, Econoff toured the Ajaokuta
Steel Complex in Kogi State and met three separate times with
SOLGAS's CEO Tom Russell and Nigeria-based Executive Vice
Chairman Seun Oyefeso. During a November meeting at Ajaokuta
of SOLGAS's Nigerian Board of Directors, Oyefeso assured
Econoff that under SOLGAS management Ajaokuta would roll
steel billets (imported from Ukraine) by the end of December,
sell power from Ajaokuta's electric plant to the national
power grid within 6 months, sell steel in 18 to 24 months
from fully operational blast furnaces and 2 rolling mills,
and have a fully operational LNG-fired electric plant
connected to the national grid "shortly." Oyefeso said
American companies (Lexicon/Schueck Steel and IBM) and a
Russian company (Zarubezhstroimontazh) were also involved in
completing and bringing Ajaokuta steel production on-line.


8. (C) Oyefeso told Econoff in early December that SOLGAS was
partnering with Lexicon/Schueck Steel, whose officials had
visited Ajaokuta's steel complex and said it was "in
excellent condition." Lexicon/Schueck Steel officials in the
United States in the second week of December told Econoff by
telephone that they had discussed the project with SOLGAS.
They denied visiting Nigeria, or partnering with SOLGAS on
the project.

But the Cage Still Stinks,
--------------


9. (U) While visiting Ajaokuta, Econoff noted several major
impediments to actually operating the plant and producing
steel at a competitive prices in a slumping Nigerian steel
market. All iron ore and coking coal needs to be imported
and transported to the plant, even though Nigeria has large
reserves of coal and iron ore sitting unearthed in defunct
mines. Ajaokuta's needs new multi-million dollar loading
docks. The Niger river can only be navigated to Ajaokuta
during 8 months of the year, connector roads are in poor
condition, and rail lines have yet to be completed. Most of
Ajaokuta's staff (average age 42 years old) have never
performed their jobs and need training.

And So Does the Deal
--------------


10. (U) The June agreement between SOLGAS and the GON holds
SOLGAS blameless against any claims or liabilities occurring
in the course of its ten-year management agreement. The
estimated costs for the project as envisioned in the
agreement are:

refurbish the steel complex - USD 1.25 billion

construction of the additional gas-powered electricity
generating plant system to supply "2300 MW" to the steel
plant and national grid - USD 2.5 billion.


11. (U) An additional cost not included in the agreement is
that the GON has yet to complete the Ajaokuta-Warri rail line
(reftel) connecting the steel complex to the port in Warri.
The line is necessary to supply Ajaokuta with (imported) coal
and iron ore, and to transport Ajaokuta's finished product
even as far as its home market in densely populated southern
Nigeria. The GON has already spent several hundred million
USD on the line, but failed to pay the contractor who then
halted construction. It is estimated that the GON will have
to spend another USD 150 million to complete the line, while
millions more will have to be spent on rolling stock.

12. (U) The GON will also have to spend an estimated USG 115
million for a new gas processing facility to make the
gas-powered electricity generating plant feasible, plus
millions more to get the gas there from where it is produced
elsewhere in southern Nigeria. Despite the estimated total
for the entire project being near USD 4 billion, and SOLGAS
not having anything like that to invest nor the expertise to
make steel, the June GON-SOLGAS agreement did not mention who
SOLGAS's financial or technical partners would be.

Another 419 Scam?
--------------


13. (C) SOLGAS's CEO Tom Russell and SOLGAS's Nigerian-based
Vice President Seun Oyefeso have had a difficult time getting
their stories straight. Asked in late October who was
financing Ajaokuta's completion, Russell asked Econoff to
"pray" for SOLGAS that it gets financing, but for the moment
it is relying on its "stockholders." Russell had not
contacted OPIC, Ex-Im or USTDA, but claimed last May to have
had contacts "high-up" at the White House. Oyefeso then told
Econoff in early December that he wanted to be truthful with
the Embassy, as SOLGAS's operating Ajaokuta is seen by many
in the GON as "an American deal," and admitted that producing
energy, not steel, was SOLGAS's goal at Ajaokuta.


14. (C) At the same luncheon meeting in early December,
Oyefeso said he had worked "a long time" at SOLGAS's office
in Texas. After looking at Oyefeso's Nigerian passport and
United States visas, Econoff verified that Oyefeso had never
obtained a work or student visa for the United States.
Oyefeso also claimed to Econoff that he was a U.S.-trained
firefighter/paramedic, and had won an award for saving a
woman's life on a "United or Delta flight." Oyefeso's
previous false statement about SOLGAS's ties to
Lexicon/Schueck and his lack of candor on his ties to the
United States make him suspect on that one too, and he
travels in Nigeria with two bodyguards and five Nigerian
policemen.


15. (C) A senior Nigerian National Petroleum Corporation
(NNPC) official told Econoff last week that SOLGAS asked NNPC
in mid-June to back SOLGAS's borrowing for Ajaokuta with
Nigerian crude oil. The NNPC official said former NNPC Group
Managing Director Gaius-Obaseki flatly refused. The NNPC
official said he doubted SOLGAS had any financial backing,
saying the SOLGAS-GON arrangement may be another "419 scam"
(fraud). He stated that with new management at NNPC, SOLGAS
may receive President Obasanjo's backing for NNPC to secure
SOLGAS's borrowing with Nigerian crude, but that this would
only mean that the GON would ultimately pay for the loans
when SOLGAS went bust.

What's In It for the GON
--------------


16. (C) Within the GON and Nigerian Government parastatals,
there is a belief that "Western-controlled" institutions,
especially the World Bank, have sabotaged Nigeria's steel
industry. The World Bank recommended several times in the
past five years that the GON scrap Ajaokuta's steel
production facility and concentrate only on power production
at the plant. Several GON officials stated to Econoff that
this recommendation was proof the Bank was protecting Western
Governments' steel industries and deliberately keeping
Nigeria from joining the industrialized world. World Bank
officials have stated that steel production at Ajaokuta --
with its outdated equipment, no coking coal and iron ore, and
likely high cost of production (and not including the USD 7
billion already spent on the project) -- would most likely
not be profitable.


17. (C) Ajaokuta's completion and operation remains one of
President Obasanjo's campaign promises for his second term.
Obasanjo has repeatedly stated that Nigeria cannot catch up
with the Western World unless Nigeria industrializes and
produces steel. It fits well with many of Obasanjo's other
promises -- maintaining a national air carrier, revitalizing
the rail network, and privatizing the GON's oil refineries
and downstream oil sector -- that are continuing in more
above-board (if still costly) fashion.

What's In It for Us -- Trouble
--------------


18. (C) Comment: It is likely Ajaokuta will roll at least
some Ukrainian imported billets by the end of this year,
largely to meet GON political expectations that Ajaokuta is
working and will soon be employing thousands more Nigerians.
Senior GON officials and foreign contractors may see the
obsession with producing steel and power at Ajaokuta as a
means for them to steal millions more in contracting fraud.
It is difficult to say what role SOLGAS is playing at
Ajaokuta, but it is clear that the company:

-- is not interested in producing steel,

-- has no major financing of its own to complete the present
facility, and

-- is relying on the GON to build a new USD 2.5 billion power
plant at Ajaokuta, a gas pipeline, rail system, and supply
natural gas at a considerable markdown.

SOLGAS has prominently portrayed itself as an American
company, and fraud or failure at Ajaokuta may spark
anti-American reports in the media and anti-American
sentiments within the GON. End Comment.
MEECE