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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

Table of Content

Serial No.
1.

Topic
Introduction

Page No.
2

2.

The Project

3.

Power sector performance

4.

Project Objective

5.

Project Description

6.

Project Financing Plan

7.

Project Agreements

10

8.

Key Challenges

13

9.

Conclusion

14

10.

Appendices

15

11.

References

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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.

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,
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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.

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
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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.

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:

(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
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(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.

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
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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


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(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.

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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

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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.

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Appendices

Overall Project Map

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ABBREVIATIONS AND ACRONYMS

16

17

SPEG Sources and Uses of Funds

Tariff breakdown for SOMELEC

18

Banda Gas field project Cash Flow

19

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84.05419
227.1735
22.59693
15.90214
349.7267

83.40467
225.418
22.87076
15.77926
347.4727

83.40467
225.418
23.32818
15.77926
347.9301

83.40467
225.418
23.79474
15.77926
348.3967

83.40467
225.418
24.27064
15.77926
348.8726

83.40467
225.418
24.75605
15.77926
349.358

83.40467
225.418
25.25117
15.77926
349.8531

83.40467
225.418
25.75619
15.77926
350.3581

83.40467
225.418
26.27132
15.77926
350.8733

83.40467
225.418
26.79674
15.77926
351.3987

103.3048 29.12832 26.52213 24.79298 21.70973 19.92881 16.74426 13.49909 10.19573 7.882765 4.049847 0.148467 -15.2953 -21.4319

44.27347 12.48356 11.36663 10.62556 9.304169 8.540919 7.176112 5.785322 4.3696 3.378328 1.735649 0.063629

147.5782 41.61188 37.88875 35.41855 31.0139 28.46973 23.92037 19.28441 14.56533 11.26109 5.785496 0.212096 -15.2953 -21.4319

0
-27.69 -36.1802 -42.4194 -48.6488 -54.8684 -63.3194 -69.5186

-27.69 -36.1802 -42.4194 -48.6488 -54.8684 -63.3194 -69.5186

21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925 21.925

$MM

82.40607
222.7191
21.71947
15.59034
342.435

PAT

80.79026
218.3521
20.87607
15.28464
335.303

79.20614
214.0706
20.06543
14.98494
328.3272

Tax

77.65308
209.8732
19.28627
14.69112
321.5036

$MM

76.13047
205.758
18.53736
14.40306
314.8289

Gross Profit

74.63771
201.7235
17.81753
14.12065
308.2994

$MM

73.17423
197.7682
17.12565
13.84377
301.9118

Depreciation

71.73944
193.8904
16.46064
13.57233
295.6628

169.5032 63.53688 59.81375 57.34355 52.9389 50.39473 45.84537 41.20941 36.49033 33.18609 27.7105 22.1371 6.629692 0.49306 -5.76496 -14.2552 -20.4944 -26.7238 -32.9434 -41.3944 -47.5936

70.33278
190.0886
15.82145
13.3062
289.549

$MM

68.95371
186.3614
15.20709
13.0453
283.5675

Operating Profit

67.60168
182.7072
14.61658
12.78951
277.715

91.98 187.026 195.275 202.5714 211.627 219.219 228.636 238.2501 248.0613 256.7994 267.5158 278.4512 289.7166 295.3215 301.0374 308.6586 314.3745 320.0904 325.8063 333.4275 339.1434
16.23176 33.00459 34.46029 35.74789 37.34594 38.68571 40.34753 42.04414 43.77552 45.31754 47.20867 49.13845 51.12645 52.11556 53.12425 54.46916 55.47785 56.48654 57.49523 58.84015 59.84884

$MM
$MM
$MM
$MM
$MM

Revenue
Capital Recovery Component
Fuel Component
Fixed O& M Component
Variable O & M Component
Total Revenue

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036
1827072 1863614 1900886 1938904 1977682 2017235 2057580 2098732 2140706 2183521 2227191 2271735 2254180 2254180 2254180 2254180 2254180 2254180 2254180 2254180 2254180

Fuel Cost
$MM
Other Operating Expenditure $MM

Unit
MWh

Electricity sold

SPEG projected cash flows

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/mauritaniasenegal-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

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