The West African Gas Pipeline Project: Three Short Steps To Long-Term Energy

By Chris Miller, Project Manager
West African Gas Pipeline Project

Second Forum on World Bank Group's Role in the Oil and Gas Sector

Washington, D.C.

Also see a press release regarding this speech.

Few projects in the international energy industry offer as much potential for shared benefits as the West African Gas Pipeline project.

The plan calls for Chevron and its partners to build a 620-mile offshore line capable of initially shipping 180 million cubic feet of Nigerian gas per day for sale to power plants and other major gas users in Ghana, Togo and Benin. And we believe that if we start now, this pipeline can be completed in about three years for a shared investment of about $400 million from private and public investors.

One of the required power plants is already operational and under expansion: the VRA/CMS 300-megawatt facility at Takoradi, Ghana. Other power plant developments are in the advanced stage of planning, most notably the KMR Power 220-megawatt facility at Tema Ghana. The power plants will run on crude oil until the Nigerian gas arrives, and Chevron was very pleased to announce in October a 20-year supply agreement to fuel the proposed KMR plant.

So, our company is very excited about this first agreement and the prospects ahead. With the support of the World Bank, we have been talking seriously about this project for more than five years. As a result of the efforts to date, a value chain is coming together — gas suppliers and processors, gas shippers, power-plant operators, power distributors and end users. But these links are not yet connected. No single company can do it. No single country. Only all of us together united — each contributing what it can — will be able to embrace this project and make it a reality. We have a three-step plan to accomplish this, and I'll tell you more about that in a moment. But first I'd like to review the reasons why this project is so vitally important to West Africa.

Thirty-two years ago, the Akosombo hydroelectric project was constructed on the Volta River. Since then, it has served the region's economy as surely — and almost as inexpensively — as the rains fall from above. For the regional market, Akosombo has been there to provide power for many years. But 1998 has been different. The rains fell short, and water levels on the Volta dropped to historic lows. And the region has spent virtually all of this year in an energy crisis. The last time this happened was 1983. We learned then, as we learned this year, that even this great hydroelectric power source is neither totally secure nor sufficient. Now, in addition to getting that lesson again, we have been also reminded that hydropower can be exhausted. Even at peak output, hydropower can't serve the economic growth the region needs in the 21st century.

Six months ago, President Jerry Rawlings of Ghana was quoted in the Ghanaian Digest magazine, saying that the energy crisis facing Ghana, Togo and Benin makes it imperative that work is accelerated on the proposed West African Gas Pipeline. And of course, we heard similar endorsements from President Rawlings and General Abubakar of Nigeria following their meeting in Accra in early October. This is understandable, and it's not just because these leaders want to avoid future power shortages.

We call the West African Gas Pipeline the "long-term regional catalyst." It links trillions of cubic feet of proven gas reserves to what we hope will be a sustainable expansion of the economies of the sub-region — the kind of expansion that the government of Ghana talks about in its Vision 2020 plan. This pipeline project will generate benefits not just in 2020 but also in 2001, the year that gas will start flowing.

A Dames & Moore study commissioned by Chevron suggests that between 10,000 and 20,000 primary sector jobs will be created as the new power supplies stimulate the growth of new industry. In addition, this industrial growth would create up to three times that number of secondary jobs due to the multiplier effect. Further, the study identifies about $1.8 billion in total capital investment for the region as a result of the pipeline project. That consists of $400 million for the pipeline, another $600 million for the power plants and $800 million in new industries, which would include minerals processing.

The pipeline is also one of the more significant opportunities to help put out the flares in Nigeria, which currently burn off about 2 billion cubic feet of gas per day, roughly 75 percent of the country's total gas output. We can reduce the waste of valuable resources and generate new revenue for the supplier country; and in the three consuming countries, we can supplement hydropower and replace large amounts of fuel oil, kerosene and wood, which are less reliable and more expensive but not as friendly to the environment as gas. Indeed, a 1993 study supported by the World Bank (the regional governments in the pipeline project) and others, projected that replacing crude oil and other fuels with natural gas could save about $500 million over 20 years.

But there is more to be gained here than fuel-cost savings. As the world community looks for ways to mitigate global climate change, putting out Nigeria's flares becomes all the more relevant. The flares are a major source of carbon dioxide and methane emissions in the region. Carbon emissions alone are in the tens of millions of tons per year. This is a difficult challenge, but the progress toward providing the Clean Development Mechanism (CDM) to help reduce greenhouse-gas emissions is highly encouraging. In short, CDM could provide additional incentives both to companies and host countries to build projects that eliminate flaring. Clearly, projects like the West African Gas Pipeline should be eligible for the emission credits proposed in the CDM. Not only will these projects reduce greenhouse emissions, they'll reduce those emissions at less than half of the estimated cost of alternative carbon-mitigation projects in Europe and the United States.

Beyond the environmental opportunities, we must recognize that the project is also a solid opportunity for West Africa to show it is serious about attracting private-sector investment. There is no doubt as to what is required; we need fair, stable and attractive fiscal and tax regimes as well as transparent regulations. These will reduce obstacles to investment.

But it is not enough merely to reduce obstacles to investment. West Africa must prove to the world that it can be competitive against other parts of the world in attracting private capital. Again, there is no better or more immediate opportunity to achieve this than the West African Gas Pipeline project. Making the pipeline a success will demonstrate that willing partners, political and regulatory stability, and reliable energy for new industries await major private investors in the subregion. The project will show investors that they don't have to bypass West Africa when they seek a reasonable and attractive rate of return. Indeed, we want them someday to think of West Africa first for investment, and other regions second.

We've all heard the discouraging statistics; World Bank President James Wolfensohn cited them a speech in Addis Ababa earlier this year. He said that sub-Saharan Africa in 1997 attracted just $12 billion of the worldwide total of $300 billion in foreign capital flow. Even worse, only $2.6 billion was classified as foreign direct investment in Africa. Mr. Wolfensohn said, and I quote: "We have to face facts. Africa needs to set itself up to attract private investment, and that means a clean regulatory environment, a judicial system that works, property rights, corporate law, and predictability in both taxes and in relationships with governments."

Again, what better way to pursue these priorities than by making a success of the West African Gas Pipeline, the independent power plants and the industries they will support? If we can build and manage a $400 million infrastructure project, we will create a magnet for other projects to follow. But if we fail to perform, prudent investors and financial institutions will notice, and none will want to risk being both the first and the last to put money into the subregional economy.

There is another reason why the West African Gas Pipeline is a model project: We must take every opportunity to convert raw natural resources and commodities into regional value. It is not enough, as Sir William Ryrie told a World Bank conference in 1992, for Ghana to export pineapples or for Nigeria to export oil. These have been vitally important and will remain so, but West Africa also needs projects that keep natural resources within the continent as a basis for creating new value-added businesses and industries.

Clearly, few projects meet this test as well as a pipeline to move clean, plentiful energy resources from where they are currently underutilized to where they are needed desperately and can be put to use effectively. Power and gas are the lifeblood of industry worldwide, and those of us involved in the West African Gas Pipeline hold the energy supplies of tomorrow in our hands. We know regional energy can be harnessed and put to good use because we have seen it done in Ghana. This country has numerous examples of how energy and investment can be combined. Ghana has created not just new businesses and new jobs, it has created new exports. So our gas pipeline isn't just about energy. It's about stimulating foreign trade.

Lastly, let me say that Africa needs projects that build infrastructure — the muscle and bone of a modern economy — to help move things and connect things. Roads and railroads and ports do this. Telecommunications do this. And pipelines do this. Some pipelines gather oil for export, connecting West Africa to the outside world. But the West African Gas Pipeline is different — and just as important — because it will connect West Africa to West Africa. With global investment passing Africa by, day after month after year, the need for this pipeline — sooner, not later — is all the more compelling.

I'd like to turn now to the role of the World Bank in the West African Gas Pipeline project. The bank's leadership and perseverance in helping to move the pipeline project to its present stage have been invaluable. But fully half the significance of this project lies in its potential to proceed on a fully commercial basis. This is a project with the potential to make it on its own — that's the real beauty of it. It symbolizes what all future regional projects should be: self supporting and walking on its own legs.

Beyond providing decades of essential energy and economic benefits, an important attribute of our project is to be free-standing. Most of its potential value to West Africa's greater business reputation depends on this. This project was once discussed as something Nigeria could build and pay for on its own. Another option was that the four governments would do the project with World Bank funding. And of course, we're talking now about the private-sector approach. There may have been a time when the West African Gas Pipeline required World Bank financing, but I think that time has passed.

What has not passed, however, is the need for World Bank support. And here I'm talking about continuing your work with the four countries to help them set up a world-class fiscal and regulatory structure for this project. The project very much needs the help and influence of the World Bank to create what we might call an "enabling environment" for a commercial approach to this pipeline. For example, the bank's support for consultants to help the countries perform the market analysis of the project was extremely valuable.

I have one more point to cover regarding the World Bank. As I said earlier, we call The West African Pipeline project a long-term solution. The reason is the enormous natural gas resources of Nigeria, especially those still being flared. We are aware that Cote d'Ivoire gas has the potential to serve certain short-term needs in Ghana at Takoradi. However, the economics of the West African Gas Pipeline depend on very large volumes of gas under secure, long-term, take-or-pay contracts.

The incremental costs of overbuilding the pipeline infrastructure just to accommodate the short-term Cote d'Ivoire gas would add an unnecessary burden that everyone will have to pay for. This kind of diversion makes no sense for a project that has the potential to become a legacy like Akosombo has.

Twice now in the last four decades, nature has diminished Akosombo's ability to perform at peak capability. And short-term thinking about Cote d'Ivoire gas could diminish the West African Gas Pipeline project as well. The best gas supply for the long-term benefit of Ghana, Togo and Benin is a Nigerian supply. Reliable long-term power — measured in decades — is one of the keys to attracting long-term investment. The giant dam on the Volta taught us that, and Nigerian gas can underscore that truth once again. So we urge the World Bank to keep this in mind when giving gas-supply counsel to the subregion.

Earlier, I mentioned a three-step plan for getting this pipeline built and operating. Certainly, there are many steps within these steps! But let me outline briefly how we hope to put this pipeline project on the fast track to a start-up within three years.

We've already started Step One: a complete feasibility study on the project, prepared by an independent consultant, which will be released in final draft form in January. That's going to cost about $2 million. We fully expect this study to prove the commercial appeal of the project for everyone involved. And we anticipate that it will also result in the formal adoption of what we call the Private Sector Consortium as the official project developer. This consortium would likely include Chevron, Shell, GNPC, NNPC, SoBeGaz and SoToGaz. We're optimistic that the governments of Benin, Nigeria, Ghana and Togo will help us to fast track the project; as they have already established an implementation committee for this very purpose.

In 1997, Chevron completed Phase I of the Escravos Gas Project, a $550 million investment as Nigeria's first major effort to reduce gas flaring and commercialize the country's vast associated gas resources. The West African Gas Pipeline can be another very positive step.

We hope that Chevron will be designated as the managing partner in the West African Gas Pipeline project. That's the best way for this shared project to take advantage of our experience in project management and our extensive work so far to bring this project to fruition.

Step Two is the predevelopment program, and that's going to take most of 1999. It will involve about $20 million in various costs, including environmental impact assessments and the early engineering and survey work. Also during Step Two we'll need the four countries to negotiate and sign a concession agreement for the project. Here's where a lot of the real work will come, as we have to negotiate reasonable fiscal and tax terms for the project to be included in the laws and regulations of each country. From there, we'll move on to Step Three, which is final engineering, procurement, and construction, all of which will span 2000 and well into 2001.

Three short years, three steps to new, long-term energy. But we must remember that the power plants supported by this project will generate more than electricity, they'll generate opportunity. The energy shortages of 1998 brought needless hardship to millions of West Africans, and I only wish that nature had not sent such a harsh message to so many good neighbors. Fortunately, West African countries have real business options and are blessed with real resources. They have the interest and commitment of strong companies and the friendship of the World Bank.

How often have we heard it said that Africa's greatest resource is its people? And yet, how many can say they have done all they can to connect this great human resource to new commercial enterprise? The West African Gas Pipeline project has the potential to mean as much to the next generation of West Africans as hydroelectric power has meant to the generation in charge today. With a shared commitment to success and our three-step plan, this project can be a commercial success.

Updated: December 1998