US embassy cable - 03ABUJA2161

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