VZCZCXRO1394
PP RUEHMA RUEHPA
DE RUEHOS #0415/01 2961259
ZNR UUUUU ZZH
P 221259Z OCT 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 0242
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9891
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 000415 
 
SENSITIVE 
SIPDIS 
 
DOE FOR GPERSON, CHAYLOCK 
 
E.O. 12958: N/A 
TAGS: ENRG EINV EFIN PGOV NI
SUBJECT: NIGERIA: CONOCOPHILLIPS POWER PLANT POINTS TO 
WIDER ISSUES IN ELECTRICITY SECTOR 
 
REF: A. LAGOS 318 
     ¶B. LAGOS 302 
     ¶C. LAGOS 143 
 
SENSITIVE BUT UNCLASSIFIED BUSINESS PROPRIETARY INFORMATION; 
HANDLE ACCORDINGLY 
 
¶1. (SBU) Summary: Expansion of a 480 megawatt power plant in 
Delta State, which would double the plant's capacity, has 
stalled because the state power company consistently fails to 
make payments while demanding the power supply contract be 
renegotiated.  ConocoPhillips, part owner of the plant in a 
consortium with Agip and the Nigerian National Petroleum 
Corporation (NNPC), will not invest in the expansion until it 
is paid USD 135 million owed to it for power supplied to the 
national grid, and until the power supply contract dispute is 
settled.  Furthermore, backsliding on the current power 
contract has made ConocoPhillips less likely to accept GON 
payment guarantees in future power projects.  Compared to 
other emerging market countries, with functioning 
transmission and distribution grids, that generate 10-20 
percent of their electricity from IPPs, Nigeria plans to 
generate 40 percent from IPPs.  Instead, Nigeria might be 
better served by focusing its efforts on stabilizing the 
power grid, reconditioning existing government-owned power 
plants, bringing new government-owned plants on-line and 
coming to some finality about the status of the transmission 
and distribution companies.  Alternately, the GON could push 
for off-grid generation, transmission, and distribution 
projects as stop gap measures to provide power to the 
industrial customers who generate sufficient income to pay 
for electricity without GON assistance.  End Summary. 
 
Payment Problems Hamper Delta State Power Plant 
--------------------------------------------- -- 
 
¶2. (SBU) The Kwale-Okpai Independent Power Plant is located 
in Delta State and is a combined cycle, gas fired plant that 
produces 480 megawatts of electricity, or 15-20 percent of 
Nigeria's total electricity supply.  It came on-line in March 
2005 and is owned by the joint venture consortium that 
includes Nigerian Agip Oil Company, ConocoPhillips and the 
Nigerian National Petroleum Corporation (NNPC). (Note:  The 
joint venture is primarily an oil production joint venture 
with Agip as the operating partner and ConocoPhillips and 
NNPC as equity partners. End Note.) The joint venture has a 
power purchase agreement (PPA) with the Power Holding Company 
of Nigeria (PHCN) for PHCN to off-take all the electricity 
produced at the plant.  Natural gas to fuel the plant is 
supplied from the joint venture's nearby fields. 
 
¶3. (SBU) Construction of a second phase to the plant, which 
would add an additional 480 megawatts and was scheduled to 
commence in 2007, has stalled.  According to local press 
reports and conversations with executives from ConocoPhillips 
nether Agip nor ConocoPhillips have been paid in full for 
electricity produced by phase one of the plant.  A senior 
ConocoPhillips executive in Nigeria told Energyoff that his 
company is owed USD 135 million by PHCN, while Agip, which 
owns a larger share of the joint venture, is reportedly owned 
a proportionally larger sum (Ref A).  Before phase one of the 
power plant was constructed, ConocoPhillips and Agip 
understood that payment securitization would be essential for 
the deal to succeed.  Accordingly, the PPA for phase one 
includes an agreement by NNPC, as a state-owned company, to 
securitize PHCN payments by forgoing its portion of the 
profits from the power plant if PHCN failed to make payments 
to the joint venture, thus giving ConocoPhillips and Agip a 
superior claim on the cash flow from the plant.  However, the 
ConocoPhillips executive said PHCN consistently fails to make 
timely payments and consistently under pays what it owes, 
while NNPC has proven adept at finding loopholes and other 
reasons not to make good on its promise to make the other 
joint venture partners whole. 
 
¶4. (SBU) In addition to not making payments, PHCN is 
demanding the current PPA for phase one be renegotiated. 
ConocoPhillips is open to the idea if it can get a guarantee 
that the negotiations will settle the dispute once and for 
 
LAGOS 00000415  002 OF 003 
 
 
all and if the company is paid all it is owed from phase one. 
 However, the company refuses to even consider investing in 
phase two until the issues surrounding phase one are settled. 
 Additionally, ConocoPhillips will be reluctant to accept 
payment securitization from any GON entity in future 
electricity projects.  ConocoPhillips estimates it would need 
to invest USD 500 million for phase two, with that amount 
increasing if the project is further delayed.  According to 
the local press, negotiations with Agip on phase two have 
broken down as the dispute over the current PPA drags on. 
 
ConocoPhillips Uses Power Generation for Oil Access 
--------------------------------------------- ------ 
 
¶5. (SBU) ConocoPhillips power generation business unit is 
expressly designed to assist its upstream exploration and 
production unit gain access to oilfields and provide a ready 
market for its natural gas.  ConocoPhillips expects nine to 
eleven percent return on power projects and fifteen percent 
on upstream oil and gas.  While the company accepts lower 
rates of return in power generation, the company does not 
operate the unit as a "loss-leader".  Okpai is not profitable 
for ConocoPhillips and its local executives will not go back 
to the company's headquarters and recommend additional 
investment in the Nigerian electricity sector until the 
problems surrounding the first phase of a Okpai are resolved. 
 
Dilapidated Grid Raises Power Plant Operating Costs 
--------------------------------------------- ------ 
 
¶6. (SBU) The ConocoPhillips executive also lamented the poor 
condition of Nigeria's electricity transmission network, 
saying power surges and grid outages have been problematic 
for the power plant, increasing operating costs and damaging 
some power generation equipment. (Note: Managers at AES 
Nigeria's Lagos IPP have told us that the unstable grid has 
caused equipment damage at their power plant as well.  End 
Note.) Additionally, he described the structure of Nigeria's 
transmission and distribution companies as "baffling", noting 
anecdotally that in a recent meeting with the Minister of 
State for Gas, the Minister himself admitted he didn't 
understand the structure of Nigeria's transmission and 
distribution sector.  (Note: The GON "unbundled" the state 
owned power company into six generation, one transmission, 
and eleven distribution companies under a single holding 
company called Power Holding Company of Nigeria (PHCN).  The 
aim was to eventually privatize the eighteen companies, but 
that effort stalled after the new Presidential administration 
came to power in 2007.  End Note.) 
 
Comment 
------- 
 
¶7. (SBU) We probably should not get too worked up over the 
fact that Nigeria is seeking better terms on contracts.  As 
noted in a 2006 Stanford University study of independent 
power projects built in emerging market countries in the 
1990's and as reflected in both the AES and ConocoPhillips 
cases, investors are not always adverse to renegotiating 
power contracts.  Power purchase agreements signed before a 
complex IPP has been built are likely to require some 
adjustment after the project is completed.  The Stanford 
study notes the inherent tension between the short term goal 
of immediate investment in IPPs, which demands some policy 
and regulatory consistency (but not necessarily ideal 
policies or regulations), and the long term goal of 
electricity sector reform, which is often an iterative 
process that evolves over time in fits and starts.  Nigeria 
is at the beginning of what looks to be a long and probably 
contentious process of reforming its electricity sector. 
While laudable, that may in fact hinder significant foreign 
IPP investment in the near term. 
 
¶8. (SBU) Oil company-lead IPPs further complicate the 
picture.  Clearly, the primary goal of these projects is 
access to oil reserves and not power generation, company 
claims about corporate social responsibility not 
withstanding.  It is hard to see what is going on behind the 
scenes in these power projects, but we wonder if the dynamic 
 
LAGOS 00000415  003 OF 003 
 
 
of oil is not warping the negotiations and sending the GON 
the wrong signals about how to deal with IPP investors. 
Given their quest for access to Nigeria's oil reserves and 
their long experience dealing with the GON, oil companies 
have been far more accommodating to the vagaries and whims of 
the GON than pure-play, foreign IPP investors are likely to 
be.  In any case, elaborate power purchase agreements, 
sovereign risk guarantees, and payment securitization schemes 
may not be enough to attract sufficient numbers of IPP 
investors to Nigeria if the existing electricity sector is in 
a state of collapse and fuel supplies are sporadic and 
vulnerable to militant attack.  It's simply too risky for the 
anticipated returns.  Instead, Nigeria might be better served 
by focusing its efforts on stabilizing the transmission and 
distribution grid, reconditioning existing government-owned 
power plants, bringing new government-owned plants on-line 
and coming to some finality about the status of the 
transmission and distribution companies.  Alternately, the 
GON could push for off-grid generation, transmission, and 
distribution projects as stop gap measures to provide power 
to the industrial customers who generate sufficient income to 
pay for electricity without GON assistance. 
 
¶9. (SBU) Worldwide, an emerging market IPP boom in the 1990's 
ended in decidedly mixed results for foreign IPP investors. 
Initial investor enthusiasm in the early to mid 1990's was 
followed by a severe pullback in the IPP sector as the Asian 
financial crisis hit, returns to equity investors proved 
disappointing, and high profile IPPs in India and Pakistan 
went bust.  We note Nigeria's IPP plan is ambitious even by 
the standards of the 1990s boom years, with an internal GE 
document showing 40 percent of planned, new generating 
capacity coming from IPPs.  Other large emerging market 
countries like India, Indonesia, Brazil, Turkey limited IPPs 
to 10-20 percent of generating capacity and they added those 
IPPs to more or less functioning transmission and 
distribution grids.  We are not aware of another large 
developing country that planned to use IPPs as the 
cornerstone for building a functioning electrical grid.  End 
Comment. 
 
¶10. (U) This cable cleared with Embassy Abuja. 
BLAIR