35903 ProjectFinance andGuarantees January 2005 ProjectFinanceandGuaranteesGroup InfrastructureEconomicsandFinanceDepartment IDA Provides an Innovative Partial Risk Guarantee in Support of the West African Gas Pipeline Project Project Overview The West African Gas Pipeline Project (WAGP), (Ghana). The final terminal of the proposed pipeline with an estimated cost of US $ 590 million, includes: system is at the Takoradi Power Stations (Ghana) with (a) a new pipeline system (678 km long) that will an option to extend the pipeline to other West African transport natural gas from Nigeria to Ghana, Togo, and states, if feasible in the future. Benin; (b) spurs to provide gas to power generating The West African units in Ghana, Benin, and Togo; (c) conversion of The Project includes a number of (a) contracts for the design, engineering, construction, ownership, Gas Pipeline, one existing power generating units to gas; and (d) as needed additional compression investments. operation and maintenance, oversight, and political of the largest risk mitigation of the new pipeline; (b) contracts for the To meet the expected market potential of about 450 purchases of natural gas from the upstream private investments million standard cubic feet per day (MMscf/day), the Producers, for the transportation of natural gas by the new pipeline will be 20 inches in diameter. The main Transporters, for the sales of foundation amounts of in Africa, will trunk of the offshore pipeline will be placed on the natural gas to the Foundation Customers; and (c) transport natural seabed in 26 to 70 meters water depths at an Environmental Assessments and Resettlement Action approximate distance of 15 to 20 kilometers from the Plans. gas from Nigeria to shore. At three locations, connections will be made in The new pipeline project does not include the owner- Ghana, Togo, and from the main offshore trunk into 8 inches or more lateral spurs, which will transport gas to delivery points ship or operation of the Escravos-Lagos Pipeline Sys- Benin at or near Cotonou (Benin), Lomé (Togo), and Tema tem (ELPS) in Nigeria, which transports gas from the Figure 1 ­The West African Gas Pipeline Niger delta to the starting point of this pipeline, nor the (62.35%), ChevronTexaco N-Gas Limited (20.00%), extraction of hydrocarbons from the ground. and Shell Overseas Holdings Limited (17.65%) will contract for the purchase (from NNPC/CNL and The Project brings substantial economic benefits to all NNPC/SPDC/Elf/Agip), transportation (by NGC and four countries. In addition, all four countries will benefit WAPCo), and sales (to VRA and CEB) of natural from a reduction in air pollution as some of the gas; generating plants currently using fuel oil would switch to natural gas supplied through this pipeline. · Nigerian Gas Company (NGC), a wholly Contractual Framework owned subsidiary of NNPC, under contract from N- The WAGP is a cooperative effort of the four States, Gas, will transport natural gas from its sources in the Producers, the Sponsors, the Transporters, the Nigeria to a terminal near Lagos over the existing Foundation Customers, and the providers of political ELPS; and risk guarantees. · West African Gas Pipeline Company Limited The implementing agencies for the four States are as (WAPCo), a newly formed entity owned by follows: ChevronTexaco West African Gas Pipeline Company Ltd (38.2%), NNPC (26.0%), Shell Republic of Ministère des Mines, de Overseas Holdings Limited (18.8%), and Takoradi Benin: l'Énergie et de l'Hydraulique Power Company Limited (as shareholder for the Cotonou, Benin Government of Ghana) (17.0%)1 ­ referred to as the Sponsors of the Project ­ will build, own, operate, Republic of Ministry of Energy and transport (under contract with N-Gas) natural Ghana: Accra, Ghana gas through the new pipeline system. Federal Republic Ministry of Petroleum The Foundation Customers, which have committed of Nigeria: Resources to purchase the initial volumes of gas, Volta River The WAGP is a Abuja, Nigeria Authority (VRA) and Communauté Electrique du Bénin (CEB), will underwrite the costs of the new pipeline. cooperative effort Togolese Ministère de l'Équipement, des Republic: Mines, de l'Énergie et des The contractual underpinnings of the Project (see of the four States, Postes et Télécommunications Figure 2) are based on the following simplified value the Project Lomé, Togo chain: (a) the Producers will sell natural gas to N-Gas under long-term Gas Purchase Agreements; (b) N-Gas participants, and The four States have established by treaty the WAGP will engage the Transporters to move the gas under Authority to, inter alia, monitor compliance by WAPCo long-term Gas Transportation Agreements; and (c) the political risk guarantors Figure 2 ­ Value Chain for Foundation Customers NNPC/CNL NNPC/SPDC/ Joint Venture Agip/Elf Producers Joint Venture Nigerian West African Transporters Gas Gas Pipeline Company Natural Gas Flow Company Ltd (NGC) (WAPCo) Communauté Volta River Offtakers Electrique du Bénin Authority (CEB) (VRA) of its obligations under the International Project N-Gas will sell the gas to the Foundation Customers Agreement. The WAGP Authority does not set tariffs, under long-term Gas Sales Agreements. as these are regulated by contract and the pipeline access code. Two new entities and one existing entity will implement 1 the WAGP: In addition, two prospective shareholders nominated by the governments of Benin and Togo, Societé Béninoise de Gaz · N-Gas Limited, a newly formed entity owned by S.A. and Societé Togolaise de Gaz S.A., respectively, each Nigerian National Petroleum Corporation (NNPC) independently hold an option to buy a 2.0% share in WAPCo. The principal Project agreements relating to the IDA The gas to be transported in WAGP will be gas pro- Guarantee are: duced from the western part of the Niger Delta in Nigeria. Two existing oil-producing joint ventures ­ · International Project Agreement (IPA) among referred to as the Producers ­ will be producing, the four States and WAPCo, providing for the processing, and selling the gas to N-Gas under 20- development, financing, construction, ownership, year contracts. One is a joint venture of NNPC (60%) and operation of the WAGP by WAPCo; and Chevron Nigeria Limited (CNL) (40%). The other · Takoradi Gas Sales Agreement (Takoradi GSA) is a joint venture involving NNPC (55%) and The Shell between VRA and N-Gas, providing for the sale by Petroleum Development Company of Nigeria (SPDC) N-Gas and purchase by VRA of up to 120 (30%), Elf Petroleum Nigeria Limited (Elf) (10%), and MMscf/day of gas on a take-or-pay and ship-or-pay Nigerian Agip Oil Company Limited (Agip) (5%). basis; · Takoradi Gas Transportation Agreement Uses of Natural Gas (Takoradi GTA) between WAPCo and N-Gas for the The pipeline is being financed based on amounts of gas being sold by N-Gas under the Takoradi GSA; gas contracted upfront with the core customers, namely VRA and CEB. These customers are referred · VRA Direct Agreement among VRA, WAPCo, to as Foundation Customers and the volumes of gas and N-Gas whereby N-Gas assigns to WAPCo (as they are contracting to purchase are referred to as the security for N-Gas's payment obligations to WAPCo "foundation volumes." The Project financing is under the Takoradi GTA) the component of the VRA structured on the basis of these contracted foundation The Project termination payment and arrears owing to N-Gas volumes. In the early years, VRA would account for under the Takoradi GSA corresponding to the same about 92% of the Foundation Customer demand and agreements component payable to WAPCo by N-Gas under the CEB would account for about 8% of the Foundation allocate Takoradi GTA; and Customer demand. The final physical configuration of WAGP is based on market growth forecasts. As in construction and · Government Consent and Support Agreement most pipeline projects, the economics of the Project (GCSA) under which Ghana, in compliance with its operation risks to depend on the amount of gas actually transported undertaking under the IPA, irrevocably and uncondi- through the pipeline, which in turn depends on the the private sector, tionally guarantees to N-Gas and WAPCo the per- degree to which gas market growth is achieved. formance obligations of VRA under the Takoradi Several market studies have concluded that there is payment risk to the GSA and the VRA Direct Agreement. likely to be significant growth in demand, primarily in public sector The Project agreements allocate the risks among the the power sectors, with total quantities contracted for parties. Generally, the private sector participants are transportation on WAGP peaking at approximately 450 taking the construction- and operations-related risks, MMscf/day in year 20 of the Project. while the public sector is taking the payment risks There is residual uncertainty over underlying short- under the Foundation Customer GSAs, which are on a term electricity demand in Ghana, particularly due to take-or-pay basis in US Dollars. Events of force the financial problems of Volta Aluminum Company majeure are shared among the parties; however a (Valco),2 which owns an aluminum smelter near Tema. default by the Producers in delivering gas in Nigeria As a consequence, the WAGP gas tariffs have been will result in the payment of liquidated damages to the structured to be sustainable both with and without the Foundation Customers. electric load of the Valco smelter. Sources of Natural Gas Financing Structure Nigeria's proven natural gas reserves (associated (AG) The Sponsors estimate the new pipeline to cost about and non-associated (NAG)) are conservatively US$590 million; additional compression-related costs estimated at about 125 trillion cubic feet. About 1,300 are estimated to be about US$110 million over 20 billion cubic feet of these reserves are produced years (which would be needed if the capacity annually, of which nearly 75% is AG and most of which requirement grows to the 450 MMscf/day target by the is flared (2,500 MMscf/day). This gas could meet Sponsors under the agreed demand forecast). The much of the power generation requirements of Sub- initial US$590 million cost will be financed through Saharan Africa, outside South Africa. All of the gas direct equity and shareholder loans to WAPCo from purchased by N-Gas for delivery in the new pipeline for the Sponsors, and the subsequent compression- about the first 10 years of the Project (i.e., until the related capital expenditures are expected to be earlier of 10 years or reserved capacity reaches 200 financed by cash flow from operations. WAPCo will MMscf/day, and open access begins) will be recover its investments through gas transportation purchased from the Producers. This gas will be about charges under its Gas Transportation Agreements 60% AG initially, declining to about 40% AG after 20 (GTAs) with N-Gas and other future shippers. years, much of which would have been flared without the development of productive uses for gas, including WAGP. 2 On November 1, 2004, Kaiser Aluminum Corporation sold its 90% interest in Valco to the Government of Ghana. From time to time, NGC is expected to incur some with WAPCo. The basis will be pro rata allocation of costs in upgrading ELPS for the additional WAGP claims; however, because of differences in structure volumes of gas and interconnections for inputs and and coverages, detailed mechanics under various output, as well as some additional operation and main- scenarios have been agreed by the Sponsors with tenance expenses associated with the additional vol- Zurich/OPIC, MIGA, and IDA. In the event of umes. NGC will recover its investments and additional termination of the Takoradi GSA, different pro-rata costs through transportation charges under its GTAs allocation of claims have been identified for different with N-Gas. demand and tariff scenarios. The allocation of payouts in a claim situation would be based on these After about five years, the Producers are also allocations. expected to incur some costs in upgrading and installing gas gathering systems and possibly gas The proposed IDA Guarantee scheme for the West treatment facilities upstream of ELPS, in the oil African Gas Pipeline system is summarized in production areas of the Niger Delta and elsewhere. Figure 3. In the event a termination payment is due The Producers will recover their investments and other and the Government fails to make the termination costs through gas sales under their contracts with N- payment to WAPCo, it would have deemed to have Gas or any other entity that ships gas through WAGP. made to the Government a loan equivalent to the IDA's Figure 3 ­ IDA Guarantee Structure Republic of Indemnity IDA Ghana (Guarantor) Takoradi GSA Government VRA · upon termination, VRA owes (inter alia) 'WAPCo Termination Consent & Support Payment' to N-Gas Agreement · guarantee of VRA's obligations under: · Takoradi GSA VRA Direct · VRA Direct Agreement Agreement · upon termination, N-Gas directs VRA to pay 'WAPCo Termination Payment' directly to WAPCo instead of to N-Gas IDA Project Takoradi GTA N-Gas Agreements · reps & warranties · upon termination, N-Gas owes · covenants 'WAPCo Termination Payment' to WAPCo WAPCo (Beneficiary) IDA Guarantee · guarantee of Government payment of IDA's share of 'WAPCo Termination Payment' share of the termination payment. IDA guarantees to IDA, MIGA, and Zurich/OPIC Guarantees WAPCo the repayment of this loan at its maturity. The political risk guarantees will involve complementary guarantees from IDA (US$ 50 million), Benefits of the IDA Guarantee MIGA (US$ 75 million), and Steadfast Insurance The IDA Guarantee of US$ 50 million for Ghana Company (US$ 125 million) (a subsidiary of Zurich played an important role in bringing the Project to Financial Services Group, and substantially re-insured financial closure. The Project would not have gone by Overseas Private Insurance Corporation (OPIC)). forward without the political risk guarantees. And the All will cover payments owing by the Government of Bank's involvement brought together world's best Ghana in the event of termination of the Takoradi GSA practices in environmental and social safeguards with VRA, although there are differences in application implementation, economic and financial assessment, of individual risk coverage. Each of IDA, MIGA, and structuring for sustainability, and transparency. Zurich/OPIC will have its own contractual undertakings For more information on the West African Gas Pipeline Project and the World Bank's Partial Risk Guarantee, please contact Scott Sinclair (202-473-9157) or Pankaj Gupta (202-473-6188) of the Project Finance and Guarantees Group or Michel Layec (202-473-3231) of the Africa Energy Group. To obtain a copy of the brochure, The World Bank Guarantee: Catalyst for Private Capital Flows, please call Andres Londoño (202-473-2326).