Kunle: NNPC’s $2.8bn AKK Pipeline Project Is Economically Unviable


Dan Kunle, an energy finance expert, says, in this interview with Chineme Okafor, that current realities in the international energy market make NNPC’s $2.8 billion Ajaokuta-Kaduna-Kano gas line project a wasteful venture. Excerpts:

The Nigerian National Petroleum Corporation (NNPC) has signed a $2.8 billion contract for the AKK gas line; you had warned against the project before now. What do you think about its progress?

I have maintained that this project has become a bad project. We missed it a long time ago, and the only way to justify gas pipeline from Ajaokuta to upper North of Nigeria is if you have excess gas in the southern gas province and you don’t know what to do with it – that is, you cannot export it for economic value and you cannot use it all in the South province. We have a proven gas reserve in excess of 180 trillion cubic feet, and all the power plants that President Obasanjo was accused of building in that zone are not getting adequate gas supply – both the ones owned by the government and private businesses. The two power plants in Ajaokuta (Geregu 1 and 2), where the line will take off from, are not getting enough gas to operate at full capacity. Even Dangote cement plant in Obajana does not get enough gas, so it has to substitute that plant with coal.

From the history of this project, I am convinced this project is belated. If you look at when crude oil refineries were built in Kaduna, Warri, and Port Harcourt, you will discover that those in Warri and Port Harcourt were built within where crude oil was produced while that of Kaduna was built almost 700 kilometres away from crude oil. As I am talking to you today, the Kaduna refinery has never been profitable. The capex for the crude pipeline to Kaduna, and that of the construction of the refinery could not be recovered, not to talk of profit.

Are your views based on economic realities?

Yes, some of these projects that we think we must politically induce to our zones – I’m from the North – are not economically justifiable because basic economic theory has proved that heavy industries must be located where you have comparative and competitive advantage of raw materials and all other supporting enablers. If you want to build a steel industry, for instance, you have to locate it near shipping routes, and Nigeria is lucky with over 1,000 kilometres of ocean front from Badagry to Bakassi. In that same way, if you want to build gas-based industries today in Nigeria, you have to make it where the gas is abundantly available so that the cost of piping from points would be minimised and you have what is called economy of scale advantage because facilities and infrastructure can be localised for everybody to have common access. But when you want to move gas from over 500 and 1,000 kilometres (from production points), the cost of maintaining the gas line and volume of gas needed would be considered because you must secure the line and guarantee quality and quantity of supplies.

But NNPC argues that the project is economical and timely, stressing that its Public, Private Partnership funding makes it viable.

Then they must show us the numbers – where is the cash flow details, who are the investors that are interested in funding the project, where are they raising their money from, what is the cost of the funds, what is the tariff rate for the line to recover the money, how many years will it take to recover their invested funds, and who is providing the guarantees for the project? NNPC must show Nigerians these numbers. If you move gas at $1 to Ajaokuta, by the time you are moving it from there to Kaduna, it has become $2 per 1000 cubic feet, if you reach Kano, who will buy the gas for $2.5 and what will he use it to manufacture in Kano, who will buy what he will manufacture?

Don’t forget we have moved gas from Escravos all the way to Ghana and others. Togo and Benin Republic ought to be getting gas per day. But today, the gas that is moved by ship could become the same price or even cheaper than that from Escravos to Ghana. Even if the unit price is different, the consistency of the LNG that is fed from ship to power plant in Ghana would force power plant owners in Ghana to jettison gas from Nigeria in pipelines because of the supply inconsistencies.

Nigerians should demand to know the investors because from my experience in this industry, I have a feeling that this $2.8 billion will become $10 billion in 10 years’ time as a claim against this country because the Nigerian government is notorious for defaulting agreements.

I am raising the antennas of everybody in Nigeria that we are walking into another trap that will cost us $10 billion in years to come because we are going to default on this project, which is not viable.

But why are you so certain that Nigeria will default?

Because we cannot meet the conditions that would be tied to the project.

Have you seen the conditions?

The NNPC should show us. I am asking them to show us the numbers. I am curious to know who would finance a project of $2.8 billion in Nigeria today without sovereign guarantee. And, there will be conditions that include claims for defaults. Just tell me one transaction that is 100 per cent contractor financing in this very structure that they are adopting.

Does this mean that contractor financing is not workable even in other climes?

I will answer you with a question: do these climes have the same atmosphere we have in Nigeria, who respects contracts’ sanctity in Nigeria? I am talking from experience because I was involved in projects when I was in government and witnessed how they were thwarted. This AKK was part of them; it was part of the MoU that was signed with Korea National Oil Corporation (KNOC) for two oil blocks. It is a component of the oil blocks for KNOC to build the line and other power plants with their money just like the way Shell built Afam power plant.

Zungeru and Mambila are big hydro power projects, what is the progress of works on them, have we even met our obligation to get Mambila off the table? And these two hydros are, from my experience in energy business, good for Nigeria because they will give you reliability and cheap power. If I have a way with this government, I’ll ask it to take its resources and get Mambila and Zungeru done to support industrialisation in the North and not this pipeline.

I was involved in the plan to privatise Katsina and Jos steel rolling mills, which are the farthest in Nigeria, but at the moment nobody is willing to buy those plants because their locations do not support economic sense for any investor. Shipping steel from Brazil to Nigeria takes just two weeks.

Some have said the North does not have the kind of heavy industries that would support investment in the gas pipeline.

If the motive is to stimulate industrial development in the North or rehabilitate the textile industries I grew up to know in Kaduna and Kano, how would that be done, how many of them can pay for the gas? And, if they are able to pay and use it to produce fabrics, would they be able to compete with fabrics from China. That to me suggests that we may be faced with subsidy because they will scream that the cost of electricity is too high and they need subsidy from the government since the owner of the power plant would not agree to sell at a price below his cost price. I am talking from basic economic sense, I am not sentimental or emotional about these issues because the people who are thinking that they can politically get this project done will eventually plunge all of us into huge debt when some of them would no longer be in office, then when the transaction ends up in the court.