CHEVRON CONTEMPLATES BYPASSING ELP TO LINK TO WEST

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 000645

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E.O. 12958: DECL: 10/20/2016
TAGS: EPET ENERG PGOV NI
SUBJECT: CHEVRON CONTEMPLATES BYPASSING ELP TO LINK TO WEST
AFRICA GAS PIPELINE

LAGOS 00000645 001.2 OF 002


Classified By: Ambassador Donald McConnell, Consul General a.i.; Reason
s 1.4 (B,D)


1. (C) Summary: The West African Gas Pipeline (WAGP),
originally scheduled for completion in December 2006, has
stalled repeatedly. Vandalism to the Escravos to Lagos
Pipeline (ELP) is slowing the flow of gas to existing
facilities and threatens Nigeria's ability to supply gas to
the WAGP. Chevron is considering laying a second pipeline
offshore to bypass the ELP and connect directly to the WAGP.
The Nigerian government has persuaded Chevron, ExxonMobil,
and Shell to build power plants; Chevron's is due to be
completed in two years. End Summary


2. (SBU) According to Charles Alenji, Chevron Nigeria
Limited,s General Manager of Gas, Marketing and
Commercialization, and Femi Odumabo, Chevron,s General
Manager of Policy, Government and Public Affairs, the
offshore segment of the WAGP is 99 percent and the onshore
segment 47% complete. Connections between the onshore and
offshore segments are being made in Niger, Benin, Togo and
Ghana.


3. (SBU) Although the original plan was to build the entire
WAGP offshore, the Nigerian Gas Company (NGC) opted to use
the ELP. This onshore line has been crippled by vandalism
since 2003 when a community, mistakenly thinking the gas
pipeline was an oil pipeline, hacked into the line to
illegally bunker oil. Although they got no oil, community
members realized the act drew the attention of the companies
and the Government of Nigeria (GON). In February 2006, the
pipeline was vandalized between the Warri gas treatment plant
and the Escravos Beach node; the pipeline remained down for
over a year. In the past six years, the pipeline has been
down approximately 30% of the time, Chevron officials said.


4. (C) To avoid similar problems with the WAGP, Chevron is
considering laying a second pipeline offshore. Chevron,s
goal is to monetize the estimated 500 million standard cubic
feet of gas per day (Mmcf/d) flared in the Escravos Eastern
Zone. The Egbin power plant, located in a suburb of Lagos,
relies on gas from the ELP. Approximately 180 Mmcf/d would
be delivered to the plant daily if not for sabotage to the
ELP. The completed WAGP will have the capacity to carry 500
Mmcf/d of compressed gas. Until completion of the
Badagry/Lagos Beach compression plant, the WAGP will carry
30-60 Mmcf/d of non-compressed or free gas. Upon completion
of the compression plant, planned for December 2007, volume
in the WAGP will increase to 200 Mmcf/d, or just under half
its capacity. Volume currently contracted for sale to Benin,
Togo and Ghana is 140 Mmcf/d, and WAPCO has already received
requests for an additional 200 Mmcf/d. Most industry
contacts do not believe the WAGP will be operational in any
capacity before May 2008 at the earliest.

IOCs Cave, Agree to Build Power Plants
--------------


5. (SBU) Since 2006, the Government of Nigeria (GON) has
asked international oil companies (IOCs) to build power
plants; Chevron, Shell, ExxonMobil and Total have agreed to
build the plants as economic development projects. Chevron
expects its plant to be completed within two years, with the
first phase generating approximately 450-500 megawatts (MW)
of power and the second phase approximately 780-800 MW. Many
issues regarding the plant remain to be resolved, Chevron
officials said.


6. (C) Due to the GON,s poor payment history, Chevron is
requiring as a pre-condition for construction the
establishment of a payment guarantee or securitization
system. According to current plans, the GON will set up two
accounts and establish a letter of credit (LOC). The

LAGOS 00000645 002.2 OF 002


operating account will be funded with proceeds from sales of
electricity. Investors will have priority for payment from
the account. When funds in the operating account are
depleted, the second account, with a balance equal to three
months of payments, will serve as an escrow account. Draws
on the LOC will be undertaken as a last resort. As a final
guarantee, in the event of non-payment the companies will
either lift crude or take an offset against taxes owed to the
GON. According to Chevron, power plant projects generally
have a low rate of return, so while the company does not see
this venture as commercially attractive, it does believe it
is necessary in order to protect the company,s base business
and future projects.


7. (SBU) Despite a reform that promised 10,000 MW of
electricity by 2007 and cost 574 billion naira over the past
seven years, peak power generation in 2005 was only 3,500 MW
and dropped below 2,000 MW early in 2007. The Egbin power
plant, the largest power generation plant in the country,
produces 1,300 MW of electricity at full capacity, and with
the Afam power plant in Rivers State produces 75% of
Nigeria,s power supply. The February 2006 attack on the ELP
caused the Egbin power plant to drop to a quarter of its
installed generating capacity and affected Afam as well. The
impact was felt in individual homes, small businesses and
large corporations alike. The National Gas Company (NGC),a
supplier of gas to the plant and to other industries serviced
by the ELP, lost an estimated 28 billion naira for the year
the pipeline remained non-functional, the Chevron executives
said.


8. (U) This cable was written by Consular Officer Alice
Holder.
MCCONNELL