Dan Kunle: Reopening Ajaokuta-Abuja-Kaduna-Kano Gas Pipeline Project is Uneconomical


Mr. Dan Kunle, an energy finance expert, questions the rationale behind the decision of the Nigerian National Petroleum Corporation to continue the 650 kilometres Ajaokuta-Abuja-Kaduna-Kano gas pipeline project. Kunle says the project is as uneconomical as it is ill-timed, in this interview with Chineme Okafor. Excerpts:

How economically viable is the Ajaokuta-Abuja-Kaduna-Kano gas pipeline?

I am not very happy about the way some of these strategic national projects are being handled. AKK was a dream of the 70s; it was a gas pipeline that would have come long ago, that is Escravos to Oben to Ajaokuta to Abuja to Kaduna, and maybe later to Kano, because it was to follow the crude oil pipeline that was feeding Kaduna refinery. In those days, gas was not a priority in the energy mix of the world, and during the Shagari regime, the line got to Ajaokuta to feed the steel rolling mill there, which had a captive power plant. The line was to continue to Abuja and Kaduna for NAFCON, which was to produce ammonia urea, an active ingredient for fertiliser production. So Nigeria had a good comparative and competitive advantage as at that time because the international gas price was very low and its use was becoming very pronounced for industrial feedstock and energy mix.

But down the line we missed the opportunity between 1983 and 1999. We didn’t move the gas pipeline to Abuja or Kaduna. There is also supposed to be Eket to Umuahia to Ajaokuta gas line to move about 1.5 billion cubic feet of gas per day to Ajaokuta, but where is that leg of the project?
Now, in 1999, President Obasanjo tried to continue the project, and got the Korea National Oil Corporation (KNOC) to form a consortium with POSCO and KEPCO, to move the line from Ajaokuta to Abuja and Kaduna then Kano. He put two upstream assets in the hands of KNOC, and asked them to build the gas line as the midstream and downstream component of their investment, and MoU was signed and executed. KEPCO was to build 1, 000 megawatts power plant in Abuja and another 900MW in Mando, Kaduna, to take gas fuel from the pipeline.

In a way, the dream to build ammonia urea was played down because the cost of gas is a major factor for any fertiliser plants. If the cost of gas is too high, the output would be too expensive and uncompetitive, and the government considered power generation a better option, and it looked politically and economically wise.

Today, I am not sure if we have evaluated the situation with AKK. Is it still viable enough today, tomorrow and 30 years down the line, or is it a transaction that would tie the government to paying subsidy for a long time in the future? And what is the cost of that subsidy? I still ask, should we take raw materials that are 700 kilometres away to the market and through what means, or should we take finished products from that distance to the market?

If we take gas from Niger Delta to Ajaokuta and continue to Kano, and add up the Capex and production cost, what will be the unit cost of whatever product that would be produced. This transaction needs a serious calibration. For instance again, what is the cost of transporting wheat to the milling plants in the North as compared to transporting finished flour for bakeries in the North? Will this affect the prices of bread and other product from the bakeries?
Nigeria has comparative advantage in gas, but do we have competitive advantage to produce and distribute gas across Nigeria? If we can localise gas processing industries within the gas province and utilise them properly, then we can take the products to feed the rest of the country.

Are you suggesting that the demand for gas in the North cannot sustain the line’s construction and maintenance?
Luckily, I am a northerner from Kogi, and grew up in Kaduna. We have vast and good land in the North, but we need cheap fertiliser in the North because we can grow food for Africa. If we can locate huge gas deposits in Borno or Bida basin, we can locate ammonia urea plant there and use the gas from there. But as at today, to pipe gas from the Niger Delta all the way to Kano, and looking at the international price of gas, how would it give me a competitive advantage in agriculture. I need cheap fertiliser but how will the gas that is already priced internationally feed the ammonia urea plant in Kaduna to give me cheap fertiliser and give me competitive advantage in agriculture?
It is better to allow a robust gas infrastructure developed by the government and private investors around the gas provinces, and then get the finished products to support the competitive and comparative advantage of the North in agriculture.

Again, take the form industry, which uses polyol. Why should you truck huge volumes of polyol all the way from the seaport in the South to Kano when you can easily truck the finished products and sell at reduced costs? Why should gas be piped to the North and the subsidy that government could, perhaps, use to subsidise health or education would be used to subsidise gas supply up North?

Beyond cost, how do you see the possibility of adequate gas supply to the AKK pipeline?
Who produces gas and at what cost? We must go back to these fundamental questions because at the moment, the gas reaching Ajaokuta is not enough. There are two big gas power plants of about 430MW each – Geregu 1 and 2 – which are owned by Forte Oil and Niger Delta Power Holdings. These are very good power plants but mostly under-producing because there are no sufficient and qualitative volumes coming to them. If Ajaokuta that is not more than 350 kilometres from Niger Delta cannot get sufficient gas, how would gas get to Kano and at what cost?
We must also amortise the Capex and Opex for the gas pipeline for a number of years, and then calibrate the price of, maybe, power that would be produced with the gas that it would supply to come to terms with the reality. As a northerner, I would advise the federal government to speed up the Mambila hydro plant and other hydro plants in the North.

Do you think the federal government has the funds for this gas pipeline?
My answer is yes; in affirmative because the government has all that it would take to build any project it wants. The question is not really about financial capacity but economic viability. If you run the numbers and it is good, I have nothing against it. But we must really sit down to evaluate the project, is it really worth it?

What about the security issues, as the crude pipeline to Kaduna refinery is almost inoperative due mainly to such issues?
The crude pipeline was to carry heavy crude from Venezuela and Basra in Iraq because it is blend crude that the refinery needs to produce Linear Alkaline Benzene. And Gen. T.Y Danjuma built a petrochemical plant by that refinery to use the by-product from the petrochemical complex of the refinery as feedstock to his petrochemical complex. But the project failed, and that is even a private venture. Crude never got to Kaduna refinery sufficiently and it never worked at an optimal level.

Are you afraid that the fate of the Kaduna refinery may befall the AKK even if it is completed?

Exactly! If you finish the pipeline, you may not have enough gas to put on it because the problems that made us not have enough crude for the refinery are still there staring at us. No government has resolved them. These problems include social problems – the communities and their relationships with the government and oil producers. Government is also still too much involved in the production of oil and gas because the two key companies involved – NGC and NPDC – are still owned by the government and it would be difficult for a third-party to come in and take up the project because when they run the numbers, they will discover the difficulties.

What would you advise the government to, instead, do with the funds it has earmarked for the AKK pipeline project?
I would rather they use the money to develop Mambila, build electricity transmission infrastructure and loop everywhere, and build rail network to connect people and places.

Do you suspect that NNPC is politically pressured on this project?
No, I don’t think so because the NNPC is supposed to be a commercial entity and I expect them to analyse the numbers, run them over the next 30 years and show it to the political leadership to know what is doable and the tolerance levels because what is doable 10 years ago is no longer tenable today. Countries like Israel and Cyprus that had no gas before now have gas and may build floating LNG. I expect NNPC with its crop of brilliant personnel to run the numbers and advise the government appropriately because we really need to rethink this, especially, the cost of taking gas to the North and for what purpose. What is politically expedient may not necessarily be economically rational. Policy is about compromising here and there, give and take, but economic issues are not like that. So NNPC should sit up and analyse the issues.