STATUS OF THE WEST AFRICAN GAS PIPELINE -- THE

UNCLAS SECTION 01 OF 03 ACCRA 001447

SIPDIS

SENSITIVE

AF/W FOR LAWRENCE JOHNSTON
TREASURY FOR ALEX SEVERENS
STATE PASS OPIC FOR CONAL DUFFY

E.O. 12958: N/A
TAGS: ENRG EFIN ECON EAID GH
SUBJECT: STATUS OF THE WEST AFRICAN GAS PIPELINE -- THE
PERSPECTIVE FROM GHANA


Summary
--------------

1. (SBU) The parties involved in the West Africa Gas Pipeline
(WAGP) are working to keep it on schedule and avoid
escalating costs. It appears unlikely they will meet the
July 31 deadline for "Final Investment Decision" (FID),but
mid-September may be possible. The "TO DO" list is daunting:
1) World Bank and OPIC insurance reach a decision to insure
the project, which can only happen after the World Bank has
posted the Environmental Impact Assessments (EIAs) and
Resettlement Action Plans (RAPs) on its website for 60 days;
2) all four states must pass the WAGP Treaty and enabling
legislation; only Ghana has accomplished both; 3) the parties
must agree on the price of gas; and 4) all investors must
make equity payments by FID. GoG officials are considering
MCA as a source of funding for Ghana's USD 90 million stake.
End Summary.

The Setting
--------------

2. (SBU) Representatives of the West Africa Pipeline Company
(WAPCo),Chevron Texaco (CTX),Shell, the World Bank, OPIC,
and the governments of Ghana, Nigeria, TOGO and Benin, and
the ECOWAS Secretariat have met regularly over the last month
in the hope of completing WAGP negotiations and preparations
so construction can begin this fall. The longer the delay
the more risk that costs will escalate -- by as much as USD
30 million -- due to higher steel prices and construction
costs. WAPCo still clings to the July 31 FID date, or at
least to a tentative July 31 FID, pending World Bank
guarantees. Post considers the July 31 outcome unlikely, but
believes mid-September conclusion is possible.


3. (SBU) WAPCo's spreadsheet outlines 89 separate actions
that must occur prior to construction. While not all must be
accomplished prior to FID, even the September goal is
ambitious. Below is Post's outline of the state of play.

World Bank Insurance Requirements
--------------

4. (SBU) WAPCo applied for a guarantee from the Multilateral
Insurance Guarantee Agency (MIGA) and a partial risk
guarantee from the World Bank. It initially insisted that
these guarantees, which cover the contingency that Ghana
fails to pay for gas delivered, must be confirmed before FID.
Before the World Bank can approve the guarantees, it must
post the regional and country specific EIAs and RAPs for 60
days. The World Bank raised numerous questions about the
EIAs, but recently assured WAPCo officials it would post all
documentation on its "InfoShop" website on or about July 7.


5. (SBU) In a June 7 meeting, WAPCo agreed that in return for
World Bank assurances to accelerate the review process, WAPCo
would consider accepting the World Bank's Operations
Committee Meeting Report prior to FID, with the final deal
pending World Bank Executive Board endorsement. (Note: The
purpose of the Operations Committee's review is to assess and
mitigate project/country risks and World Bank exposure. End
Note).


6. (SBU) WAPCo hopes to accomplish all tasks and get
Operations Committee approval by the original July 31 FID,
with full Board approval in September. However, Post's
contacts in the GoG, World Bank and Nexant, the USAID-funded
advisor to the four states, say it is more likely the
Operations Committee will meet mid-August, with FID in early
September and World Bank Board approval in the
October/November timeframe.


7. (U) As with all its votes on World Bank Group projects
(including MIGA projects),the US must comply with the Pelosi
Amendment, which requires that an environmental impact
assessment be made available both in-country and to the Board
at least 120 days prior to Board consideration. Otherwise,
the US cannot vote in support of the project. The binding
constraint on timing is often the date of board availability
(when the Bank posts the assessment in its InfoShop). For
this project, such a posting in July would require a November
Board date in order to gain a US "yes" vote. In past cases,
US abstentions based solely on the Pelosi Amendment have not
generally affected whether a project is approved by the World
Bank Board.


OPIC Political Risk Insurance
--------------

8. (SBU) WAPCo also applied for political risk insurance from
OPIC. Since the 60-day posting period also applies to OPIC,
the Bank must post the EIAs and RAPs not later than July 9
for OPIC's Board to vote on the project at its September 9
meeting. The USD 200 million coverage that WAPCo is seeking
constitutes about 35 percent of the total investment. There
are three insurance scenarios: 1) MIGA covers USD 75
million, Partial Risk covers USD 50 million and OPIC covers
USD 75 million; or 2) MIGA covers USD 75 million and OPIC
covers USD 125 million; or 3) if the World Bank backs away or
creates excessive delays, OPIC could potentially cover the
entire amount.

Government Actions -- WAGP legislation
--------------

9. (U) Ghana's Parliament ratified the WAGP Treaty on June
30, 2004, and the GoG approved WAGP enabling legislation on
June 24. Benin ratified the Treaty on July 5, 2004, but it
is still pending in Nigeria and TOGO. WAPCo is calling for
Benin and TOGO to meet their full legislative obligations
prior to FID, but made an exception for Nigeria, since
Nigeria requires FID approval before ratifying the Treaty and
passing the enabling legislation. Even with this exception,
WAPCo and Nexant officials argue that President Obasanjo will
have to engage directly to assure passage.

VALCO/Market Forecast/Gas Pricing
--------------

10. (SBU) One of the more contentious and unresolved issues
is the negotiation of the "Mid-Market (medium term) Forecast
(MMF)." This is the key component to establishing the price
of delivered gas. The situation is complicated by the
uncertainty related to the Volta Aluminum Company (VALCO),
which the GoG has agreed to purchase from Kaiser Aluminum.
VALCO, which is currently shut down, comprises one-third of
total power demand in Ghana. With VALCO closed, the GoG can
meet most of Ghana's energy needs through hydropower. If
Valco remains closed, WAGP's main customers -- Ghana's
thermal power plants ) would run well below capacity.


11. (SBU) The original MMF included VALCO's energy demand in
the pricing formula. Greater demand lowers costs per unit,
and VALCO operating would allow WAGP to deliver gas at a
lower cost than oil. Without VALCO, the lower demand could
lead to gas prices higher than oil prices.


12. (SBU) Since the gas sales agreements are "take or pay"
arrangements, and Ghana is the primary off taker, it is in
all parties' interests to ensure the gas price is
economically and politically sustainable. Therefore, during
meetings on June 14 and 23, the parties negotiated three
pricing scenarios for the Pipeline Development Plan:

a) The lowest tariff scenario assumes VALCO reopening prior
to "first gas" or "Commercial Operation Date" (COD),and
Ghana's thermal power plants operating near full capacity.
The GoG insists this will be the case, although WAPCo and
World Bank officials are skeptical.

b) The second scenario assumes VALCO remains shut down. This
would result in a low utilization rate of Ghana's thermal
power plants, and the cost of gas would rival or exceed oil
prices. Since this is untenable for the GoG, WAPCo proposed
mitigation measures: 1) Ghana, Benin and TOGO would commit
to foregoing new electricity investments until Ghana's
thermal plants reach 80 percent capacity; and 2) the VRA
would reduce its use of hydropower and increase reliance on
thermal power, thus allowing Ghana's Volta Lake to recover
and maintaining higher WAGP utilization.

c) A second "No VALCO" scenario is dubbed "Ramp Up," where
the tariffs would increase over time as demand increases.
This solution would increase WAPCo's revenues in later years
but the higher prices would reduce the Ghana's longer term
benefits. However, gas prices would be lower in the short to
medium term. The GoG balked at entering into an arrangement
where it would pay higher average prices even if its local
demand were higher than forecasted or VALCO resumed
operations subsequent to first gas/COD. In response, the
parties negotiated a mechanism under which the price ramp up
will go into effect only when the gas price is higher than
oil prices.

Final Investment Decision -- Equity Payments
--------------

13. (SBU) The GoG, represented by the Volta River Authority
(VRA),will take a 16.3 percent ownership share in WAGP, or
approximately USD 90 million of the estimated USD 550 to 600
million total investment. The other major shareholders are
CTX with 36.7 percent, the Nigerian National Petroleum
Corporation with 25 percent, Shell with 18 percent, and Benin
and TOGO with 2 percent each. Most concerns over WAGP
financing are over Ghana's ability to pay its share. The GoG
insists it has several financing options, but the reality is
Ghana is cash-poor and under IMF pressure to cut
expenditures.


14. (SBU) Bank of Ghana (BoG) officials confirm they are
prepared to provide a USD 90 million bridge loan to the GoG,
using foreign reserves. While this would help the GoG meet
FID, the IMF's ResRep in Ghana says the BoG would have to
unwind the loan prior to the December IMF review of the
Poverty Reduction and Growth Facility. IMF officials have
suggested in the past that a waiver of this requirement might
be possible, especially if the BoG kept ownership of the WAGP
shares so its Net Foreign Assets Position remained unchanged.
During a recent meeting in Benin, GoG Energy Minister Paa
Kwesi Nduom insisted that Ghana would make the equity payment
without resorting to a bridge loan. However, he did not
provide details and the GoG is short on other sources of
financing.


15. (SBU) If the IMF is not prepared to grant a waiver, a
longer-term financing package will be needed. It is still
unclear how the GoG will resolve this situation. The GoG
approached the IFC about financing, but only for USD 25
million. WAPCo, IMF, World Bank and some mid-level GoG
officials have inquired about the possibility of pursuing MCA
funds for this purpose. (Comment: The GoG's point of
contact on the MCA told Econoff on July 4 that senior GoG
officials believe WAGP is a top contender among GoG
priorities for the MCA compact. End Comment).

Other Pending Actions
--------------

16. (SBU) A critical element is for Nigeria's N-Gas to
complete gas sales agreements (GSA) with Ghana's VRA and the
Benin Electricity Company (CEB). Although N-Gas is close to
reaching a deal with VRA, WAPCo and Nexant are concerned that
the negotiations with CEB are moving too slowly. One
complication is that both VRA and CEB are concerned that the
GSA draft contract security package does not reflect
reciprocity and establishes unfair terms between the parties.



17. (SBU) The parties must also conclude negotiations started
by the GoG to reduce or eliminate certain "eligible
development costs," which would contribute to reducing gas
tariffs. The World Bank must also complete an Economic and
Financial Assessment of the project prior to Operations
Committee review. However, it cannot finish the report until
the parties complete the pricing scenarios. Part of the
assessment will be to determine the "benefits to Ghana,"
meaning the savings from the use of WAGP gas (as against
liquid fuels).

Comment
--------------

18. (SBU) The four states, WAPCo, World Bank and other
parties have finally increased the tempo and urgency of their
discussions. Coordination has improved and the recent
meetings resolved several outstanding issues. Despite the
goodwill generated during these meetings, however, the number
and difficulty of the remaining actions will likely delay FID
until September or later. This will delay the beginning of
construction and, consequently, will delay "first gas" past
the June 2005 objective. Ghana's ability to find a long-term
financing package, either in time for FID or to replace a
Bank of Ghana bridge loan, is a major concern. It will be
interesting to see whether the GoG decides to pursue MCA
funding to meet this obligation. End Comment.
Yates