US embassy cable - 04ACCRA1447

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, energy 
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