Project Finance case on Banda Gas To

Power Project

By

Prateek Goyal (13125039)

Ramswarup Bhaskar (14114019)

To

Dr. Anoop Singh

Assistant Professor, IME Department

IIT Kanpur

March, 2015

DEPARTMENT OF INDUSTRIAL AND MANAGEMENT ENGINEERING

INDIAN INSTITUTE OF TECHNOLOGY, KANPUR

1

Table of Content

Serial No. Topic Page No.

1. Introduction 2

2. The Project 2

3. Power sector performance 3

4. Project Objective 4

5. Project Description 5

6. Project Financing Plan 8

7. Project Agreements 10

8. Key Challenges 13

9. Conclusion 14

10. Appendices 15

11. References 21

2

Introduction:

The Western Africa is facing the daunting energy challenges. In Mauritania only 20% citizen has

access to electricity & only 33% in Mali. Senegal has better number but there also 50%

population is without electricity. In all the three countries electricity supply is unreliable and

demand for power is increasing at 7% to 9% annually. As a result of evolving generation mix,

coupled with high technical and commercial losses, poor efficiency and inefficient national

revenue collection, the national power utilities of all three countries have been incurring financial

deficits and relying on government support. Poor infrastructure and low access to energy have

constrained GDP growth in all three countries.

The finding of the gas fields in Mauritania are a game changer for the sub-region as they can be

used to generate affordable and cleaner power compared to other thermal alternatives. However,

private investors hesitating to invest in gas development because of the high political risks in the

region and lack of creditworthiness of the developer in the sub-region.

The Project:

The Banda gas field is located approximately 55 km offshore Nouakchott and around 20km east

of the Chinguetti oil field, at depths of approximately 200m-325m below sea level. The Banda

Gas Project consists of two sub-sea wells tied back to an onshore gas processing plant via a

subsea production manifold and a 10-inch sub-sea pipeline. The gas processing plant will be

located 14 km north of Nouakchott and 6 km inland. Project cost is estimated to be US$650

million. First gas can be delivered approximately 30 months from the final investment decision,

which is expected to occur by mid-2014.

The gas field's development forms part of the larger Banda Gas to Power project, which

envisions the construction of a 120MW combined cycle power plant and a 180MW dual-fuel

thermal gas-fired power plant, to be located north of Nouakchott, as well as installation of

transmission lines.

3

Figure: The map of the location of the plant

The total cost of this project is estimated to be 467.1 million USD. Gas will be fed from the

Banda field to these power plants to generate electricity.

The gas field was declared commercial in September 2012 and the environmental impact

assessment (EIA) and front end engineering and design (FEED) were completed in the first half

of 2013. The project approval is expected to be granted in the first half of 2015 and first

production is slated for 2016.

Power sector performance:

The power sectors in all three countries suffer to various degrees from similar issues, including

low access rates to electricity, relatively high technical and commercial losses, and high

generation costs due to a dependence on oil-based thermal generation capacity. Tariffs are high

but still insufficient to cover costs, resulting in reliance on government subsidies.

Mauritanias electricity sector is characterized by a fragmented power system, low rates of

electricity access and demand/supply imbalances. Domestic demand, excluding mining demand,

4

is expected to grow at about 9% per annum until 2020, then at 6% per annum after 2020, driven

by progressive connection of load centers to the OMVS grid and economic growth.

Senegal has steadily increased electrification rates (connections and installed capacity have

doubled since 2000) reaching a national average of 50%, with almost fully electrified urban

areas, but only covering about 25% of the rural population. Senegal remains heavily dependent

on imported oil products for its energy supply affecting SENELECs financial and operational

situation. About 90% of electricity is generated using oil products. Power demand in Senegal is

expected to grow at 7% per annum over the period 2013-2020. Total installed generation

capacity, including IPPs, is expected to double over the next seven years from 587 MW in 2013

up to 1,097 MW in 2020.

Malis currently installed capacity is 327 MW on interconnected grid versus 67 MW for isolated

centers and the peak demand is expected to increase up to 457 MW by 2020. Lower cost energy

imports from OMVS to meet increasing demand represent a least-cost solution for the country..

Key power sector indicators

Project Objectives:

The Projects Development Objective (PDO) is to enable production of natural gas for

generation of electricity to reduce the cost and increase the supply for Mauritanian households

and industry, and enable regional integration through exports of electric power from Mauritania

to Senegal and Mali.

5

To end extreme poverty and promote shared prosperity by providing the three countries access to

additional, less expensive and cleaner electricity and promoting regional integration. Increased

supply of electricity to households and small businesses in all three countries will ensure more

access to income-generating opportunities leading to improved living standards.

For facilitating electricity access to those households that are presently without (invariably the

poor) and more reliable energy services to small and medium enterprises, which will in turn lead

to economic growth.

Project Description:

The Banda Gas-to-Power Project consists of the following components:

A. The upstream Banda offshore gas field production, transmission and processing

infrastructure (the Banda Gas Project);

B. Power generation from Banda gas in Mauritania (the SPEG Power Project); and

C. Existing and new power transmission lines to evacuate power to the delivery points.

The Banda gas field is located approximately 55 km offshore of Nouakchott. The Banda field

shareholders are Tullow (67%), Petronas (15%), Kufpec (13%) and Premier Oil (5%). Tullow

has prepared a field development plan which provides for production of up to 70 mmscfd per day

of gas over 20 years.

SPEG (Socit de Production dElectricit partir du Gaz) is a special purpose vehicle

incorporated for the purpose of power generation, transmission and sales of power using Banda

gas. SPEGs shareholders are SOMELEC (40%); KG Power, subsidiary of Kinross, an

international gold mining company (34%); and SNIM, the national iron ore mining company

(26%). SPEG Power Project, which will be installed north of Nouakchott, includes:

Dual fuel plant of 180 MW (120 MW currently under construction by Wrtsila with an

option to be extended to 180 MW that was exercised in June 2013); and

Combined cycle gas turbines (CCGT) power plant with a capacity of 120 MW.

Gas from the Banda offshore gas field developed by private developer Tullow will be sold to

SPEG which will transform the gas through a 300 MW power plant. The SPEG electricity will

6

be sold to Mauritanias national utility, SOMELEC, which in turn will sell power to customers in

Mauritania and export power to Senegal and Mali.

Gas and electricity sale of the project

Dual fuel power plant:

The dual fuel power plant of approximately 120 MW capacity is based on dual fuel reciprocating

engines. The plant is currently under construction by Wrtsila under an EPC contract. The plant

consists of 8 engines, each of approximately 15 MW. The plant has the capability to run on

heavy fuel oil (HFO) or Natural Gas. The plant is expected to be fully online by March 2015 and

will initially run on HFO. As soon as natural gas is made available at the gas delivery point, the

plant will then run on natural gas. At site conditions plant efficiency is estimated to be 41.4%

running on HFO and 45.1% running on natural gas.

7

Wartsila is supplying eight 50DF dual-fuel generating sets for the Banda Gas to Power project.

CCGT plant :

The 120 MW CCGT plant will run with GE-6B gas turbines. Net efficiency is calculated to be of

the order of 47% at yearly average site conditions. Units should be able to operate on light fuel

oil (LFO) as backup fuel during (short) periods of unavailability of natural gas. The choice of

LFO as backup fuel is linked to the choice of combustion technology (dry low NOx burners) and

meeting World Bank emissions requirements. Given the high cost of LFO, this fuel 51 is

intended to be used for short periods of time only. The backup fuel functionality is not intended

to cope with the risk of potentially long delay in construction of the gas supply infrastructure. In

such case, running the dual fuel plant on HFO will be more economical.

Power generated by SPEG to SOMELEC will be evacuated through several routes:

8

(i) A greenfield high voltage transmission line to Nouadhibou with a spur to

Tasiast, site of Kinross gold mine (the North HV line) owned and operated by

SOMELEC and financed by the Saudi Fund,

(ii) The existing OMVS high voltage transmission line that will be connected to

the power plant through a short extension (the OMVS HV line and the OMVS

HV extension), funded by SOMELEC and

(iii) A new high voltage transmission line between Mauritania and Senegal, to be

financed by AFD and IsDB, with a wheeling capacity of about 170 MW (the

South HV line) to be built in one phase.

Exports to Senegal will occur through the existing OMVS HV line and the South HV line.

Exports to Mali will transit through the OMVS HV line and will not require additional

transmission lines.

Project Financing Plan:

Banda Gas Project. The estimated investment cost is US$650 million. The Banda Gas JV

partners have indicated that they will raise the necessary financing through equity contributions

and that no commercial project debt will be raised. The Bank has been informed that it is Tullow

9

(as the major JV partner) intends to seek additional equity investors in the Banda Gas Project.

Tullow is well advanced with their plans to secure at least one major investor prior to their

investment decision and ultimately will target an equity level of 30% in the Banda Gas Project

JV, and intends to remain as operator.

SPEG Power Project. Total SPEG costs are estimated at US$467.1 million, including US$221.2

million for the 180 MW dual fuel plant, US$217.3 million for the 120 MW CCGT plant, and

amounts for administrative, working capital, and financing costs. The total project costs will be

financed through shareholder equity. The dual fuel plant is being financed by SOMELEC, with

funds already sourced for the dual fuel plant from IsDB and Arab Fund for Economic and Social

Development (AFESD). Once the dual fuel plant is completed, SOMELEC will transfer its

ownership to SPEG prior to receiving first gas from the Banda field. Although the CCGT

financing, and working capital and various administrative costs of SPEG have not yet been

secured in full, Kinross and SNIM, as shareholders of SPEG, have confirmed, in writing, that

they will stand by their required equity contributions, enabling SPEG to reach a fully secured

financing plan. In the longer term, SPEG will seek to raise debt at the project company level.

European Investment Bank (EIB) and African Development Bank (AfDB) have each expressed

interest in providing such loans to SPEG to refinance some of the equity, preferably before

completion of SPEGs power plant. For sources and uses of funds refer appendix.

Transmission Infrastructure. This includes three sub-components: (i) North HV line (US$170

million); (ii) OMVS line extension (US$7 million9) which connects the SPEG power plant to the

OMVS substation south of Nouakchott; and (iii) South HV line (US$170 million). SOMELEC

has obtained US$100 million financing for the North HV line from the Saudi Fund and has

received assurance from the Saudi Fund that they are prepared to bridge the funding gap

estimated at US$70 million once procurement is complete. AFD and IsDB are appraising the

financing of the South HV line: IsDB for the Senegal portion only and both institutions for the

Mauritania portion. IsDB has approved financing for the Senegal portion of South HV line on

March 23, 2014, whereas AFD will submit its project for Board approval by the end of May,

2014.

10

Project Agreements:

Gas Sales Agreement

Following extensive negotiations on the price and volume of gas under the GSA, Tullow and

SPEG have agreed on a price of US$12/mmBTU for first year operation with an annual inflation

of 2% for a daily consumption up to 60 BBtu/day and and an annual load factor of 70% on a

take-or-pay basis, which amounts on average to 42 BBtu/day. These gas volumes are sufficient

to power the 300 MW of generation capacity foreseen under the SPEG Power Project.

Power Purchase Agreements

The direct off-taker of electricity generated by the SPEG Power Project is SOMELEC who has

agreed on an umbrella PPA with SPEG that sets forth the terms and conditions for power

purchase and supply. SOMELEC will in turn enter into secondary PPAs to sell power to SNIM

and Kinross, and export a portion of its SPEG off-take to SENELEC and EDM. SENELEC and

EDM agreed with SOMELEC to purchase 125 MW and 50 MW of power respectively. The

electricity tariff is composed of a variable component for fuel, operation and maintenance costs,

a fixed component mainly covering the investment cost of SPEG power plants and a take-or-pay

component in case the purchaser does not offtake the minimum amount of energy. SPEGs sale

of electricity to SOMELEC is conservatively expected to increase at an annual rate of 2%

resulting in an increase of the load factor(it is defined as the ratio of actual power generated to

the maximum power that can be generated under a 90.29% availability factor) from 77% in the

first year of operation up to a capped level of 95%. This is driven by the rising demand on the

national Mauritanian grid at 8% per annum; SENELEC, EDM, Kinross and SNIM were assumed

to have a constant demand over the Projects horizon with a load factor of 85%.

As per the PPA, SOMELECs payment to SPEG is based on the following tariff

structure: (i) a non-escalating component of US$5.6 million per month corresponding to the

investment cost of SPEG plus a fixed O&M cost of US$ 1million per month that is indexed

to inflation; and (ii) a variable component of US 10.7 per kWh reflecting fuel and variable

O&M expenditures. A third component is being considered to ensure that SOMELEC pays

for the minimum amount of electricity corresponding to the gas take-or-pay volume even if

11

this volume has not been off-taken. This tariff structure is expected to be replicated at the

secondary PPA level. Detailed breakdown of tariffs for SOMELEC for first year of operation in

US per kWh is given in the appendices.

World Bank Guarantees:

The World Bank Groups proposed intervention in support of the 300 MW Banda Gas-to Power

Project includes support from both IDA and MIGA through:

(i) The IDA instruments being proposed, which include: an IDA Partial Risk Guarantee

(PRG) for ensuring the SPEG's payment obligations towards Banda under the Gas

supply Agreement (GSA), and for supporting SPEG by ensuring the credit worthiness

of two public utilities, SENELEC (of Senegal), and EDM (of Mali), for the payment

of electricity exports received under their respective Power Purchase Agreements

(PPAs) from SPEG.

PRG related agreements

12

(ii) MIGA guarantees covering: (a) equity investment of some of the JV partners against

the risks of Transfer Restriction, Expropriation and War and Civil Disturbance. ( b)

BoC coverage of the Production Sharing Agreement and (c) Termination payment

under Breach of Contract (BoC) of the GSA backstopped by GoMR

MIGA coverings

Both the proposed IDA upstream gas PRG and MIGA guarantees are ultimately designed to

provide credit enhancement and risk mitigation for SPEGs payment obligations under the

GSA.

13

Cash Flow Forecasting:

Revenues to SPEG Power Project are estimated. Cash flows forecasting for 20 years has been

done and shown in the appendices. In terms of priorities, revenues will serve first gas

expenditures, which account for 85% of total operating expenditures, then other operating

expenditures and lastly dividends will be distributed to its shareholders (about US$1.1 billion

over the project lifetime). The expenditure on gas can be found out from the table Banda gas

field projected cashflows given in the appendix.

Key Challenges:

The overall Project risk rating is High:

This reflects the complexity of reaching agreements among stakeholders with different

incentives and securing timely construction of all parts of a project of this magnitude, in a

risky country and sector environment.

Potential for construction delays:

Construction delays and cost overruns in the Banda Gas Project, the SPEG power plant

and/or the transmission lines. There is a risk that the cost of the Project is higher than

estimated once procurement is complete.

Lower electricity demand than projected:

There may be the case when the demand for the electricity is lower than the projected

demand, so this risk is mitigated by the purchase power agreement (PPA).

Assessment and Management of Environmental and Social Risks and Impacts,

Biodiversity Conservation and Sustainable Management of Living Natural

Resources :

South HV line on the Mauritanian side passing through the Diawling National Park, an

important migratory bird nesting place, and on Senegal side passing through Senegal

River delta and sensitive ecological areas such as the Djoudj national Park. An alternative

14

route is proposed in the ESIA in order to minimize the impact, particularly on birds, on

the sensitive ecological zones mentioned as the line crosses the Senegal River.

Resource Efficiency and Pollution Prevention:

Fresh water consumption is a potential impact. The generation of liquid effluents and the

risk of accidental spillage of fuel or chemicals may generate potential impacts on surface

and groundwater. contamination of soil and groundwater by fuel, stored chemicals and

waste.

Political and Security Risk:

Mali has witnessed political and security turbulences over the past two years but now the

situation is getting better and the political risk is not considered a major risk to achieving

the Projects development objective

Community Health, Safety, and Security:

The GHG emissions for the project in terms of CO2 are estimated to be a little below

100,000 t/yr. Depending on the situation, it may be necessary to relocate some residents

to avoid the most significant adverse impacts from air pollution.

Land Acquisition and Involuntary Resettlement

Conclusion:

The Project will enable the GoMR to obtain gas for its power sector thus enabling SOMELEC to

reduce its average cost of production and put the state-owned company on a more financially

sustainable path. It will also enable Senegal and Mali to obtain power at lower cost than

alternatives being considered thus also enhancing the financial health of their respective power

sectors.

15

Appendices

Overall Project Map

16

ABBREVIATIONS AND ACRONYMS

17

18

SPEG Sources and Uses of Funds

Tariff breakdown for SOMELEC

19

Banda Gas field project Cash Flow

20

SPEG projected cash flows

Unit

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

Electr

icity

sold

MWh

1827

072

1863

614

1900

886

1938

904

1977

682

2017

235

2057

580

2098

732

2140

706

2183

521

2227

191

2271

735

2254

180

2254

180

2254

180

2254

180

2254

180

2254

180

2254

180

2254

180

2254

180

Reve

nue

Capit

al Re

cove

ry Co

mpon

ent

$MM

67.60

168

68.95

371

70.33

278

71.73

944

73.17

423

74.63

771

76.13

047

77.65

308

79.20

614

80.79

026

82.40

607

84.05

419

83.40

467

83.40

467

83.40

467

83.40

467

83.40

467

83.40

467

83.40

467

83.40

467

83.40

467

Fuel

Comp

onen

t$M

M18

2.707

218

6.361

419

0.088

619

3.890

419

7.768

220

1.723

520

5.758

209.8

732

214.0

706

218.3

521

222.7

191

227.1

735

225.4

1822

5.418

225.4

1822

5.418

225.4

1822

5.418

225.4

1822

5.418

225.4

18

Fixed

O& M

Com

pone

nt$M

M14

.6165

815

.2070

915

.8214

516

.4606

417

.1256

517

.8175

318

.5373

619

.2862

720

.0654

320

.8760

721

.7194

722

.5969

322

.8707

623

.3281

823

.7947

424

.2706

424

.7560

525

.2511

725

.7561

926

.2713

226

.7967

4

Varia

ble O

& M

Comp

onen

t$M

M12

.7895

113

.0453

13.30

6213

.5723

313

.8437

714

.1206

514

.4030

614

.6911

214

.9849

415

.2846

415

.5903

415

.9021

415

.7792

615

.7792

615

.7792

615

.7792

615

.7792

615

.7792

615

.7792

615

.7792

615

.7792

6

Total

Rev

enue

$MM

277.7

1528

3.567

528

9.549

295.6

628

301.9

118

308.2

994

314.8

289

321.5

036

328.3

272

335.3

0334

2.435

349.7

267

347.4

727

347.9

301

348.3

967

348.8

726

349.3

5834

9.853

135

0.358

135

0.873

335

1.398

7

Fuel

Cost

$MM

91.98

187.0

2619

5.275

202.5

714

211.6

2721

9.219

228.6

3623

8.250

124

8.061

325

6.799

426

7.515

827

8.451

228

9.716

629

5.321

530

1.037

430

8.658

631

4.374

532

0.090

432

5.806

333

3.427

533

9.143

4

Othe

r Ope

rating

Expe

nditu

re$M

M16

.2317

633

.0045

934

.4602

935

.7478

937

.3459

438

.6857

140

.3475

342

.0441

443

.7755

245

.3175

447

.2086

749

.1384

551

.1264

552

.1155

653

.1242

554

.4691

655

.4778

556

.4865

457

.4952

358

.8401

559

.8488

4

Opera

ting P

rofit

$MM

169.5

032

63.53

688

59.81

375

57.34

355

52.93

8950

.3947

345

.8453

741

.2094

136

.4903

333

.1860

927

.7105

22.13

716.6

2969

20.4

9306

-5.76

496

-14.25

52-20

.4944

-26.72

38-32

.9434

-41.39

44-47

.5936

Depre

ciatio

n$M

M21

.925

21.92

521

.925

21.92

521

.925

21.92

521

.925

21.92

521

.925

21.92

521

.925

21.92

521

.925

21.92

521

.925

21.92

521

.925

21.92

521

.925

21.92

521

.925

Gros

s Pro

fit$M

M14

7.578

241

.6118

837

.8887

535

.4185

531

.0139

28.46

973

23.92

037

19.28

441

14.56

533

11.26

109

5.785

496

0.212

096

-15.29

53-21

.4319

-27.69

-36.18

02-42

.4194

-48.64

88-54

.8684

-63.31

94-69

.5186

Tax

%44

.2734

712

.4835

611

.3666

310

.6255

69.3

0416

98.5

4091

97.1

7611

25.7

8532

24.3

696

3.378

328

1.735

649

0.063

629

00

00

00

00

0

PAT

$MM

103.3

048

29.12

832

26.52

213

24.79

298

21.70

973

19.92

881

16.74

426

13.49

909

10.19

573

7.882

765

4.049

847

0.148

467

-15.29

53-21

.4319

-27.69

-36.18

02-42

.4194

-48.64

88-54

.8684

-63.31

94-69

.5186

21

References:

[1] http://www.miga.org/projects/index.cfm?esrsid=117

[2] http://www.worldbank.org/projects/P145664?lang=en

[3] http://documents.worldbank.org/curated/en/2014/05/19490845/mauritania-

senegal-mali-banda-gas-power-project

[4] http://www.offshore-technology.com/projects/banda-gas-field-development/

[5] http://www-wds.worldbank.org/external/default/WDSContentServer/

WDSP/IB/2014/04/23/000414397_20140425183413/Rendered/PDF/PID0A

ppraisal00s0to0Power0April022.pdf

[6] http://www-wds.worldbank.org/external/default/WDSContentServer/

WDSP/IB/2014/05/13/000442464_20140513092605/Rendered/PDF/830250

PAD0P107010Box385211B00OUO090.pdf