VZCZCXRO1764
PP RUEHDE RUEHMA RUEHPA
DE RUEHOS #0302/01 2141431
ZNR UUUUU ZZH
P 011431Z AUG 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 0081
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHHH/OPEC COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9765
RUFOADA/JAC MOLESWORTH AFB UK
RUEKJCS/SECDEF WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEWMFD/HQ USAFRICOM STUTTGART GE

UNCLAS SECTION 01 OF 03 LAGOS 000302 
 
SENSITIVE 
SIPDIS 
 
DOE FOR GPERSON, CHAYLOCK 
 
E.O. 12958: N/A 
TAGS: ENRG PGOV NI
SUBJECT: NIGERIA: LOCAL INVESTOR SAYS POWER PROJECTS THAT 
CONTROL DISTRIBUTION AND COLLECTION OF FEES ARE MOST VIABLE 
 
REF: A. LAGOS 122 
     ¶B. ABUJA 840 
     ¶C. 07 LAGOS 750 
 
¶1. (SBU) Summary: In a June 30 meeting with Resources 
Officer, Adewale Audifferen, former Managing Director of 
General Electric Nigeria, now Vice President for Power at 
Global Energy Nigeria (GE), said independent power projects 
(IPPs) like the Geometric Plant being built in Abia State are 
the most viable because they are vertically integrated, 
controlling distribution and collection of user fees. 
Chinese construction in Ondo and Ogun State's plants was 
shoddy; the Government of Nigeria (GON) contracted GE to 
complete the projects.  High import taxes on electrical 
equipment hurt Nigeria's effort to improve power generation 
capacity.  Natural gas remains the best choice for fueling 
Nigeria's electric power. End Summary 
 
Controlling Distribution Key to Revenue Stream 
--------------------------------------------- - 
 
¶2. (SBU) Resources Officer met June 30 with Adewale 
Audifferen who said the most viable and sustainable power 
projects will be structured like the Geometric Power Ltd 
power plant's captive power model currently under 
construction in Abia state.  That project is a stand alone, 
off-grid power project with Geometric building everything 
from gas pipelines to the power plant, transmission lines, 
and distribution networks.  It is estimated that the 
transmission lines will be in place by June 2009; the plant 
is expected to be completed by November 2009.  By employing 
the captive power model of vertically integrating and 
particularly by controlling distribution and collection of 
payments, Geometric will be able to guarantee a revenue 
stream from the sale of electricity.  He estimates Geometric 
will receive an average of 17 naira (USD 0.14) per kilowatt 
hour, double what it would get from selling under Power 
Purchase Agreement (PPA) to the national grid. 
 
¶3. (SBU) In contrast, Independent Power Producers (IPPs) that 
sell to Nigeria's quasi-state owned Power Holding Company of 
Nigeria (PHCN), in addition to facing a lower tariff, must 
struggle with the not inconsequential burden of actually 
getting paid.  (Note: U.S. company AES Barge Nigeria, the 
only operating IPP in Nigeria, is seeking arbitration in a 
dispute with PHCN over the terms and conditions of its PPA. 
Payments on its existing PPA are perpetually in arrears.  End 
Note)  In Audifferen's opinion, while Nigeria's newly 
announced Multi-Year Tariff Order is a significant 
improvement over the old electricity tariff structure (ref 
A), it falls just short of what is necessary to make 
independent power projects economically attractive to many 
investors, especially foreign investors.  Still, he said it 
was a significant step in the right direction. 
 
GON Growing Leery of Chinese Power Plants 
----------------------------------------- 
 
¶4. (SBU) Audifferen saw most of the financing for power 
projects coming from local banks, which, he noted, are awash 
with capital.  Nigerian banks are able to offer financing at 
much more competitive rates than they currently do, but he 
said they lack technical expertise to develop sound project 
financing.  (Note: The AES Barge Nigeria finance manager has 
said Nigerian banks are "knocking down the door" to offer 
financing to AES.  End Note)  Financing from Chinese or 
Indian sources was less likely; Audifferen says most Chinese 
capital flowing into Nigeria is destined for the real estate 
sector, which is less technically complex and offers a 
quicker payoff. 
 
¶5. (SBU) On Chinese participation in power generation 
construction, Audifferen was notably dismissive.  He 
recounted how Chinese contractors built two power plants for 
the GON, the Papalanto Thermal Power Station in Ogun State 
and Omotosho Thermal Power Station in Ondo State.  Both 
plants, he said, suffered from cost overruns and 
commissioning delays.  According to Audifferen, the GON 
 
LAGOS 00000302  002 OF 003 
 
 
ordered the Chinese contractors to bring in General Electric 
to help complete the commissioning.  GE engineers were 
shocked at the poor quality of construction and the failure 
to comply with industry safety standards.  Overall, 
Audifferen thought the GON was growing leery of Chinese 
participation in complex infrastructure projects. 
 
Import Taxes Hurt Power Plant Construction 
------------------------------------------ 
 
¶6. (SBU) One of the biggest obstacles to private sector 
investment in the electricity sector was Nigeria's onerous 
and "self-defeating" import taxes.  Despite the obvious need 
to expand its generating capacity, Nigeria continues to levy 
steep duties on the importation of electrical equipment and 
associated raw and semi-finished materials like cement, 
flat-rolled steel, and wire cables.  Increased construction 
costs require larger loans, requiring increased financial 
payments or debt structures with longer tenures and 
accordingly higher interest rates, Audifferen said. 
Including financing, a Nigerian power project costs around 
USD 4 million per megawatt. 
 
Gas Still Power Generation's Best Choice 
---------------------------------------- 
 
¶7. (SBU) Audifferen lamented that lack of coordination 
between electricity and natural gas planners.  Like many of 
our contacts, he noted that access to natural gas is the most 
significant operational impediment to power generation. 
While generally supportive of Nigeria's gas master plan, 
Audifferen viewed the natural gas pricing policy (ref B, C) 
as unworkable and unlikely to make new gas available for 
power customers because of the unreasonably low gas price set 
by the GON.  Audifferen was disappointed in the roadshow put 
on by the Nigerian National Petroleum Corporation (NNPC) to 
attract new natural gas sector investors (held April in Abuja 
and May in Houston, TX).  NNPC, in his opinion, failed to 
properly target large international institutional investors. 
When asked about alternatives to natural gas, Audifferen 
dismissed coal as too expensive in the short term, saying the 
mines are not yet developed and the lack of a robust road and 
rail infrastructure in Nigeria makes shipping coal 
prohibitively expensive. 
 
¶8. (SBU) Audifferen noted that Oando Plc, a mid and 
downstream petroleum company, was taking advantage of its 
ownership of a natural gas pipeline in Lagos State to expand 
into the electricity sector. According to Audifferen the 
company has moved aggressively to offer to build power plants 
for companies seeking gas purchase agreements.  The 
international oil companies, which also produce natural gas, 
have no interest in getting into the power plant building 
business in Nigeria. 
 
¶9. (U) Audifferen's company, Global Energy Nigeria, is a 
small, privately held company lead by Nigerians with 
international experience in the oil, natural gas, and 
electricity industries.  Besides its interests in 
electricity, the company owns seven small Nigerian oilfields 
and is a minority partner in Enviro Africa, a company working 
in the carbon credit markets. 
 
¶10. (SBU) Comment: Like any good businessman Audifferen saw 
the myriad problems as an opportunity to make money. 
Although he noted the difficulty of doing business in the 
sector, Audifferen and his company are clearly bullish on the 
prospects in the gas sector.  He epitomizes an important 
element of doing business in Nigeria; namely, it helps to 
actually be in Nigeria.  Although investors, and American 
investors in particular, cannot only rely on analysts and 
bankers who reside in London, New York, and Johannesburg, 
flying in to Abuja or Lagos only on occasion, to provide a 
picture of the situation on the ground.  Opportunities exist, 
but the Nigerian market, is too opaque to permit investing at 
arm's length, but no noted best business practices and 
sanctity of contract remain real issues here. End Comment. 
 
 
LAGOS 00000302  003 OF 003 
 
 
BLAIR