Inside the opportunity cost of Nigeria’s latest N1trn gas pipeline project

Nigeria may be able to find better use for the $2.8 billion (N1trn) to be spent building a gas line that connects its moribund steel facility in Ajaokuta to Kaduna and Kano.

Nigeria’s dwindling revenues make it imperative that the Federal Government is more strategic in its allocation of scarce resources and focus on projects with compelling multiplier effects at the lowest cost.

That message has not caught on in Abuja; however, following the government’s plan to invest as much as $2.8 billion in a gas line project that analysts say does little to stimulate economic growth.

“There are lots of big-ticket projects scattered around the country that can unlock private capital, create an opportunity to diversify revenue of the Nigerian government, strengthen the country’s revenue base,” Niyi Awodeyi, CEO at Subterra Energy Resources Limited, says.

For instance, many projects are still at the planning stage or under some legal hurdles years after initiation, which the government can fast track and allow private investments unlock.
These projects include Shell’s Bonga South-West and Aparo, expected to add about 225,000 barrel per day (bpd) oil production; Bonga North (100,000bpd); Eni’s Zabazaba-Etan (120,000bpd); Chevron’s Nsiko (100,000bpd); ExxonMobil’s Bosi (140,000bpd); Satellite Field Development Phase two (80,000bpd), and Ude (110,000bpd).

These projects are estimated to have the capacity to boost the nation’s production by as high as 875,000bpd and the nation’s revenue by about $1.5 billion annually.

The government however claims there are numerous opportunities attached to the $2.8 billion Ajaokuta-Kaduna-Kano (AKK) gas line project, which will result in the establishment of a connecting pipeline network between the eastern, western and northern regions of Nigeria.

While some industry players, who spoke with BusinessDay, lauded the AKK project initiative, some are equally sceptical about the country getting the best from the project, knowing fully well that similar facilities across the country have remained dormant, either due to failing refineries, as well as repeated attacks on pipelines, or the political colouration of developmental projects.

Already, most analysts and Chief Financial risk officers (CFO) have stressed that Boko Haram crisis, economic viability, timing, global oil and gas market realities, the structure of Chinese loans, political factors, among others, are recent realities not factored in by the Federal Executive Council when the project was conceived and approved in 2008.

Some have also questioned why the government is not investing in the much-expected Port Harcourt-Bonny Island rail line. The rail line along with a deep seaport and an industrial park in Port Harcourt are estimated to cost N80 billion.

Others have also argued about the availability of gas in the southern region as some of the power plants in the region have always complained about inadequate gas supply.

For example, 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, while Dangote Cement plant in Obajana does not get enough gas, so it has to substitute powering that plant with coal.
Despite the numerous opportunities attached to the $2.8 billion AKK gas line project, other risk analysts have raised doubt about its economic assumption.

They predict that the project may face the same challenges the Kaduna Refinery and Ajaokuta Steel Company are currently facing. For example, unlike the Warri and Port Harcourt refineries, built within the vicinity of crude oil exploration, Kaduna Refinery was built almost 700 kilometres away from crude oil.

Just like the uproar that comes with AKK project; in March 1988, when the Kaduna Refining and Petrochemical Company (KRPC) Limited came into being, expectations were sky-high.
Even though the Kaduna Refinery is the newest in the country, it has not only remained largely under-utilised and performed far below capacity, it has also continued to run at a loss perpetually, adding up to the burden of the state-owned oil corporation.

In most cases, the recurring shutdown of the refinery is blamed on the non-availability of crude oil, even as most stakeholders say that the location of the refinery and the dependency on heavy crude were bad business decisions.

“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,” says Lagos-based Alao Abiodun, head of energy research at New Nigeria Foundation.

According to the Federal Government, the project will be financed through 85 percent debt and 15 percent equity with loan facility from the China Export & Credit Insurance Corporation (Sinosure) at London Interbank Offered Rate (LIBOR) interest rate plus 3.7 percent with a 12-year repayment period, while NNPC will cover the remaining 15 percent of the project’s cost.

“NNPC must show Nigerians the numbers of the cash flow details. 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?” a senior risk analyst in the oil and gas sector, who does not want to be named, asks.

Kelvin Atafiri, who runs Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector, is worried about the cost of the project and the numerous opportunity costs of other projects.

“It is more economical to move gas along rails rather than spending over $2.8 billion on vulnerable pipelines,” Atafiri sasys, noting, “Majority of the oil pipelines are bleeding away Nigeria’s oil revenue.”

Latest data from the Nigerian National Oil Spill Detection and Response Agency (NOSDRA) reveal in 2019 oil and gas companies operating in Nigeria spilt nearly 37,000 barrels, approximately 5.8 million litres of crude oil worth over $371 million.

The 2019 oil spillage worth $371 million is capable of building at least seven similar ongoing East-West road project worth $50 million.

The project consists of the construction of a 188km carriageway and the rehabilitation of an already existing one, the building of 29 river bridges of variable lengths ranging from 31m to 260m, and 2 box girder bridges with lengths of 700m and 850m.

The project is a very important infrastructure in Nigeria as it connects the West African country’s two busiest and foremost commercial cities, Port Harcourt in Rivers State and the city of Warri in Delta State.

The 5.8 million litres of oil spilt in 2019 worth N134.3 billion can build over 7,000 libraries (at a cost between N10m to N20m each) across the country.

The 2019 oil spillage loss of N134.3 billion is capable of building at least 7,000 primary health centres that would cost an estimate of N18.42 million.