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UNCLAS SECTION 01 OF 02 LAGOS 000429 
 
SENSITIVE 
SIPDIS 
 
DOE FOR GPERSON, CHAYLOCK 
 
E.O. 12958: N/A 
TAGS: ENRG EINV EPETEIND NI
SUBJECT: NIGERIA:  LOCAL COMPANY DEVELOPS NATURAL GAS 
PIPELINE TO POWER LAGOS' INDUSTRIAL SECTOR 
 
REF: A. LAGOS 157 
     ¶B. LAGOS 122 
     ¶C. LAGOS 167 
 
SENSITIVE BUT UNCLASSIFIED BUSINESS PROPRIETARY INFORMATION; 
HANDLE ACCORDINGLY 
 
¶1. (SBU) Summary.  A natural gas distribution pipeline 
serving industrial customers is an example of a rare success 
story in Nigeria's slow developing domestic gas sector.  The 
pipeline, owned by Oando Gas and Power, serves 82 industrial 
customers in Lagos.  Oando does suffer from typical political 
meddling and unreliable gas supplies, but the company plans 
to double its existing capacity in Lagos and to develop a 
second distribution pipeline network in Calabar.  Oando sees 
power projects tied to specific industrial customers as a 
more feasible method for improving Nigeria's power situation 
than the construction of large, on-grid IPPs which Oando 
shuns as too risky in light of transmission and distribution 
problems.  To expand rapidly, local companies like Oando will 
need foreign capital while they provide the local market and 
political expertise necessary for operating a successful 
business in Nigeria.  End Summary. 
 
Expansion Planned for Successful Gas Distro System 
--------------------------------------------- ----- 
 
¶2.  (U) While the news about Nigeria's erratic natural gas 
sector has been generally negative, one local company is 
making in-roads in supplying local industrial consumers with 
natural gas.  Oando Gas and Power, a subsidiary of Oando Plc, 
operates Gaslink, a 100 km natural gas distribution pipeline 
that serves industrial customers in Lagos' Ikeja and Apapa 
areas.  Oando currently has supply contracts with 82 
customers, including Heineken, Cadbury, and the state water 
company, delivering one million cubic meters of gas per day. 
Customers use the fuel for heating and steam generation 
needed in their industrial processes and some customers are 
converting existing diesel power generators, to run on 
natural gas.  The natural gas originates in Chevron and Shell 
fields in the western Niger Delta and is transported to Lagos 
area through the Nigerian Gas Company (NGC) Escravos-Lagos 
Pipeline. (Note: That pipeline also supplies the Lagos Egbin 
power station and the West African Gas Pipeline that will 
supply gas to Ghana, Benin and Togo.  End note.) 
 
¶3.  (SBU) Olalere Odusote, Business Development Manager for 
Oando Gas and Power, told Energyoff on October 14 that the 
company has plans to expand the Gaslink pipeline to serve 
more areas in Lagos.  Additionally, two off-grid mini-power 
projects, both less than 50 megawatts each, will be built for 
the state water company in Ikeja and for the Apapa port 
authority.  These expansion plans and mini-power plants will 
double the amount of gas Oando currently supplies to 
customers. 
 
Oando Shuns IPPs as Too Risky 
----------------------------- 
 
¶4. (SBU) When asked by Energyoff about possible Oando 
interest in building larger independent power plants to feed 
the Nigerian electricity grid, Odusote demurred.  He noted 
Nigeria's dilapidated distribution and transmission systems 
make such projects very risky and he said Nigeria's new 
multi-year tariff order sets prices too low to make the 
market attractive for potential private investors.  Oando 
plans to expand by building on relationships with existing 
industrial customers in Lagos while seeking opportunities to 
replicate the model in Calabar.  He thought expansion of 
Nigeria's currently inadequate power supply must be based on 
industrial customers ready and able to pay market prices for 
power. 
 
Oando Suffers From Political Meddling, Supply Problems 
--------------------------------------------- 
 
¶5. (SBU) Oando's business model is not without controversy. 
The company's Managing Director was summoned to appear before 
the Senate Committee on Natural Gas on October 20 to explain 
 
LAGOS 00000429  002 OF 002 
 
 
a recent decision to raise gas prices by 50 percent. 
Senators complained that Oando was unfairly taking advantage 
of its monopoly position and hurting Nigerian manufacturers. 
Odusote told Energyoff that Oando's pricing model was 
complex, but transparent.  NGC, a state-owned company, buys 
natural gas from Chevron and Shell at a low fixed price and 
resells that gas to Gaslink at a percentage of the world 
market price of fuel oil, an alternate fuel for industrial 
customers.  Oando is allowed to put a standard markup on the 
gas and part of the revenue Oando generates is shared with 
NGC, with which Oando has a twenty year gas sales purchase 
agreement. (Ref A, B) 
 
¶6. (SBU) Oando's business model is also vulnerable to 
Nigeria's inadequate gas infrastructure.  Odusote said the 
supply of natural gas was steady for the first five years of 
Gaslink's operations, but in the past year and a half, the 
supply have been erratic and the gas has been too "wet" or 
filled with condensate.  Gas which contains too much 
condensate could damage both Gaslink and customer equipment. 
Odusote blamed recent gas quality problems on vandalization 
of the Escravos Lagos Pipeline and poor pipeline maintenance 
on the part of NGC.  Natural gas is dried in a processing 
facility and the condensate, a mixture of various hydrocarbon 
byproducts, is diverted into a side pipeline to be 
transported away and sold.  Vandals tap into the condensate 
pipeline and steal the condensate, causing the line to be 
shut down and forcing raw, wet natural gas to be injected 
directly into the Escravos-Lagos Pipeline without being 
processed.  In addition, Odusote noted that Shell's oil 
fields are aging and the natural gas they produce naturally 
contains more and more condensate.  He complained Shell has 
been slow to rectify the problem.  Odusote said if the 
problems with gas quality and supplies continue, Oando may 
need to declare force majeure on deliveries to its customers. 
 (Ref C) 
 
¶7. (SBU) Comment:  It is refreshing to see a company make a 
business of supplying natural gas to domestic customers on a 
commercial basis in Nigeria, difficulties notwithstanding. 
Oando has indicated it wants to replicate this model in the 
Calabar area.  As they expand, Oando and its Nigerian 
competitors, will likely seek foreign partners to supply not 
only financial capital, but human capital as well.  (Note: 
Shell Gas will develop a network to supply Oshun State and 
four other companies are completing pipeline and other 
infrastructure to supply gas to Lagos State. End note.) Most 
of the top notch Nigerian gas and power executives have 
extensive experience with international oil or industrial 
companies.  Odusote himself is a product of General 
Electric's well regarded management training program. 
Conversely, foreign investors, especially in gas and power, 
would be well advised to seek out competent, stable, and 
politically savvy Nigerian corporate partners to help 
navigate this country's complex political and operating 
environment.  End Comment. 
BLAIR