Document of The World Bank & MIGA

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 30335-AFR

PROJECT APPRAISAL DOCUMENT

ON

A PROPOSED IDA PARTIAL RISK GUARANTEE IN THE AMOUNT OF US$50 MILLION FOR GHANA Public Disclosure Authorized

AND

A PROPOSED MIGA GUARANTEE IN THE AVOUNT OF US$75 MILLION FOR SPONSORS EQUITY

TO Public Disclosure Authorized THE WEST AFRICAN GAS PIPELINE COMPANY LIMITED

FOR THE WEST AFRICAN GAS PIPELINE PROJECT

November 2,2004

Energy Group Project Finance and Guarantees Oil & Gas, Chemicals, and Mining Infrastructure Deparlment Infrastructure Economics & Finance Sector Team Africa Region, IDA Infrastructure Vice-presidency, IDA MIGA Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = US Dollar (USD)

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS AG Associated gas AgiP Nigerian Agip Oil Company Limited, a subsidiary ofEni S.p.A. bbl Barrel CAS Country Assistance Strategy CEB CommunautC Electrique du Bknin (Benin Electricity Company) CNL Chevron Nigeria Limited EA Environmental Assessment ECG Electricity Company of Ghana ECOWAS Economic Community of West Afkican States EFA Economic & Financial Assessment EIR Extractive Industries Review EITI Extractive Industries Transparency Initiative Elf Elf Petroleum Nigeria Limited, a subsidiary ofTOTAL S.A. ELPS Escravos-Lagos Pipeline System EMP Environmental Management Plan EPC Engineering, Procurement, and Construction ERR Economic Rate ofReturn ESAP Environmental & Social Advisory Panel FGN Federal Government ofNigeria FID Final Investment Decision Foundation Customers VRA and CEB GCSA Government Consent and Support Agreement GDP Gross Domestic Product GGFR Global Gas Flaring Reduction Public-Private Partnership GHGE Greenhouse gas emissions GSA Gas Sales Agreement GTA Gas Transportation Agreement GWh Gigawatt-hour HSE Health, Safety, and Environment IDA International Development Association IPA International Project Agreement IRR Internal Rate ofReturn MIGA Multilateral Investment Guarantee Agency MMBtu Million British thermal units MMscf Million standard cubic feet MW Megawatts NAG Non-associated gas NEPAD New Partnership for Africa’s Development N-Gas N-Gas Limited NGC Nigerian Gas Company NGO Non-governmental Organization USE Y NNPC Nigerian National Petroleum Corporation NPV Net Present Value OPIC Overseas Private Investment Corporation PDP Pipeline Development Plan PIC Public Information Center Producers NNPC, CNL, SPDC, Elf, and Agip, organized in two joint ventures (NNPC/CNL and NNPC/SPDC/ElEIAgip) PV Present Value R&M Regulating and Metering RAP Resettlement Action Plan RIAS Regional Integration Assistance Strategy RoR Rate ofReturn ROW Right-of-way SoBeGaz Societe Beninoise de Gaz SA (Benin Gas Company) SoToGaz Societe Togolaise de Gaz SA (Togo Gas Company) SPDC Shell Petroleum Development Company ofNigeria Limited Sponsors CNL, NNPC, SPDC, VRA, and, subject to the exercise of options, SoBeGaz and SoToGaz States Benin, Ghana, Nigeria, and Togo Transporters NGC and WAPCo Valco Volta Aluminum Company VRA Volta River Authority WAGP West Afi-ican Gas Pipeline Project WAGPA WAGP Authority WAPCO West Afi-ican Gas Pipeline Company Limited WAPP West Africa Power Market Development Project Zurich Steadfast Insurance Company, a Delaware subsidiary of Zurich Financial Services Group

For IDA: Vice President: Gobind Nankani Country Directors: Mats Karlsson (Ghana), Pedro Alba (Benin and Togo), Hafez Ghanem (Nigeria), Mark Tomlinson (Regional Projects) Sector Manager: Yusupha Crookes Task Team Leader: Michel Layec

For MIGA:

AFRICA West African Gas Pipeline Project PROJECT APPRAISAL DOCUMENT Africa Regional Office AFTEG

Date: November 2,2004 Team Leader: Michel E. Layec Country Directors: Mats Karlsson, Pedro Alba, Sectors: Power (80%), Oil and gas (20%) Hafez Ghanem Themes: Regional integration (P) Sector Manager: Yusupha Crookes Environmental screening category: A Project ID: PO82502 Safeguard screening category: S1 Lending- instrument: IDA Guarantee Project Financing Data [ ] Loan [ ] Credit [ ] Grant K] Guarantee [ ] Other For LoanslCreditslOthers: Amount (USSmk $50.00

Source Local Foreign Total Government of Ghana 0.00 96.00 96.00 __. . --. .- I Nigenan NatIonal Petroleum- Corporation Chevron Nigeria Ltd uction Development Co ofNigeria Ltd

Guarantor: REPUBLIC OF GHANA Responsible Agency: MINISTRY OF ENERGY For Guarantees: [ ] Partial Credit [XI Partial Risk Proposed coverage: partial risk guarantee of payment by Ghana of liquidated damages arising from early termination ofthe Takoradi Gas Sales Agreement due to breach by VRA. Project sponsor: West African Gas Pipeline Company Limited Nature of underlying financing: EquityIShareholder Loan contributions by Sponsors; contingent financing provided by Project Company; investment guarantees by IDA, MIGA, and ZuricWOPIC. Terms of financing for IDA Guarantee: Principal amount (US$m): 50.00 Final maturity: 22 Amortization profile: Standard IDA Credit Financing available without guarantee: [ 1 Yes [XI No

Project implementation period: 2005-2009 Expected effectiveness date: December 3 1,2004 Expected closing date: June 30,2009 Does the project depart from the CAS in content or other significant No respects? Re$ PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 No Have these been approved.. by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated “substantial” or “high”? 1 Yes Re$ PAD C.5 Does the project meet the Regional criteria for readiness for Yes implementation? Ref: PAD D. 7 Project development objective Ref: PAD B.2, Technical Annex 3 (a) To improve the competitiveness ofthe energy sectors ofGhana, Benin, and Togo by promoting the use of cheaper and environmentally cleaner gas from Nigeria in lieu ofliquid fuels for power generation and other industrial and commercial uses; and (b) To foster regional economic and political integration that would support economic growth. Project description Ref: PAD B.3.a, Technical Annex 4 The Project includes: 0 a new pipeline system (678 lan long) that will transport natural gas fromNigeria to Ghana, Togo, and Benin, 0 contracts for the purchase ofnatural gas from the Producers; 0 gas transportation agreements for the transportation ofnatural gas by the Transporters; 0 gas sales agreements for the sales offoundation amounts ofnatural gas to VRA and CEB; and 0 a number of contracts for the design, engineering, construction, ownership, operation and maintenance, oversight, and political risk mitigation ofthe new pipeline. Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Anna 12 OP 4.01, OP 4.04, OP 4.09, OP 4.12, OPN 11.03, OP 7.50 Significant, non-standard conditions, if any, for: Ref: PAD C. 7 Board presentation: None

Loanlcredit effectiveness: Expected December 2004

Covenants applicable to project implementation: None AFRICA West African Gas Pipeline Project

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE...... 1 1. COUNTRY AND SECTOR ISSUES ...... 1 2 . SECTOR ISSUES TO BE ADDRESSED BY THE PROJECT ...... 5 3 . RATIONALE FOR BANKGROUP INVOLVEMENT ...... 6 4 . HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRISUTES ...... 7

B. PROJECT DESCRIPTION...... 7 1. GUARANTEEINSTRUMENTS - IDA AND MIGA ...... 7 2 . PROGRAM OBJECTIVE AND PHASES ...... 10 3 . PROJECT DEVELOPMENT OBJECTIVE AND KEY INDICATORS ...... 10 4 . PROJECT COMPONEN TS ...... 11 5 . LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN ...... 14 6 . ALTERNATIVESCONSIDERED AND REASONS FOR REJECTION ...... 15

C. IMPLEMENTATION ...... 16 1. PARTNERSHIP ARRANGEMENTS ...... 16 2 . INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS ...... 17 3 . MONITORING AND EVALUATION OF OUTCOMES/RESULTS ...... 19 4 . SUSTAINABILITY ...... 20 5 . CRITICAL RISKS AND POSSIBLE CONTROVERSIAL ASPECTS ...... 21 6 . LOAN/CFUZDIT/GUARANTEE CONDITIONS AND COVENANTS...... 24

D. APPRAISAL SUMMARY ...... 25 1. FINANCIALANALYSIS ...... 25 2 . ECONOMIC ANALYSIS ...... 30 3 . TECHNICAL...... 33 4 . FIDUCIARY ...... 33 5 . SOCIAL ...... 33 6 . ENVIRONMENT ...... 34 7 . POLITICAL AND REPUTATIONAL R~SKASSESSMENT ...... 35 8 . SAFEGUARD POLICIES ...... 36 9 . POLICY EXCEPTIONS AND READINESS ...... 39 ANNEX 1: COUNTRIES AND SECTORS BACKGROUND ...... 40

ANNEX 2 : MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER AGENCIES 58

ANNEX 3 : RESULTS FRAMEWORK AND MONITORING...... 59 ANNEX 4 :DETAILED PROJECT DESCRIPTION...... 62 ANNEX 5 :ESTIMATED PROJECT COSTS ...... 73 ANNEX 6 : IMPLEMENTATION ARRANGEMENTS...... 74 ANNEX 7 : FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS ...... 82 ANNEX 8 : PROCUREMENT ARRANGEMENTS...... 83 ANNEX 9 : FINANCIAL ANALYSIS...... 84 ANNEX 10 : ECONOMIC ANALYSIS...... 105 ANNEX 11 : IDA GUARANTEE...... 122 ANNEX 12 : MIGA GUARANTEE...... 130 ANNEX 13 :SAFEGUARD POLICY ISSUES...... 133 ANNEX 14 : PROJECT PREPARATIONAND SUPERVISION...... 159 ANNEX 15 : DOCUMENTS IN THE PROJECT FILE...... 161 ANNEX 16 :STATEMENT OF LOANS AND CREDITS ...... 163 ANNEX 17 :COUNTRY AT A GLANCE ...... 165 ANNEX 18 : MAP ...... 174 A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues The Regional Integration Assistance Strategy The proposed West African Gas Pipeline (WAGP) project - which is designed to substitute abundant and cheap natural gas from Nigeria for expensive altemate fuels used by the power, industrial, mining, and commercial sectors of Ghana, Togo, and Benin - supports the World Bank West Africa Regional Integration Assistance Strategy (the US). The RIAS translates the Bank’s greater focus on regional integration in Africa, and involves 15 countries,’ home to 240 million people, half of whom live in poverty, with annual per capita income ofUS$ 300. The objective ofthe RIAS is to help the West Africa countries to create an open, unified economic space through the integration ofmarkets for goods as well as financial and other services. Well- defined and phased integration efforts focus on key sectors - where countries would benefit significantly from cross-border and regional trade - notably air, road, and sea transport, energy, and telecommunications. The WAGP project complements the West Africa Power Market Development Project (WAPP), which supports increased electricity trade in West Africa. The proposed WAGP project is part of the action plan of the New Partnership for Africa’s Development (NEPAD) and is actively supported by the Economic Community ofWest African States (ECOWAS). Background on Nigeria, Ghana, Benin, and Togo Nigeria. With a population is estimated to be 133 million, making it by far Africa's most populous country. Nigeria is a major world oil and gas exporting country with a large hydrocarbon wealth, likely to become the main energy exporter within the West Africa Region. It has made impressive progress in consolidating the political transition from a military dictatorship to an open and democratic nation. The new economic team has made an expeditious start on an ambitious program ofreforms; progress has been made in the fight against corruption and in improving government accountability. In parallel, significant progress has been made in the preparation ofthe National Economic Empowerment and Development Strategy (NEEDS), Nigeria’s homegrown Poverty Reduction Strategy. After inheriting a legacy ofexpansionary policies from the previous administration, the new leadership team has steered Nigeria towards much improved macroeconomic stability. Economic growth has strengthened in the last four years, rising from an annual average of about 2 percent between 1995 and 1999, to an estimated 4.1 percent between 2000 and 2003. In addition, Nigeria is amongst the very first countries to begin full implementation ofthe Extractive Industries Transparency Initiative (EITI), focusing on transparency ofoil and gas revenues.

’ Benin, Burkina Faso, Cape Verde, C6te d’Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Togo. The EITI was launched by the UK Prime Minister at the World Summit on Sustainable Development, in Johannesburg, September 2002. The UK Department for International Development is developing the Initiative. Nigeria, NNPC, Chevron, Shell, and Total are all participants as ofJune 2003. DFID expects Eni to become a participant well before WAGP begins gas deliveries.

-1- Bank Group assistance to Nigeria will continue to be based on the three pillars ofthe Joint Interim Strategy: (i)improving governance in the Federal Government ofNigeria (FGN) and in selected state govemments; (ii)de-bottlenecking private sector activity in the non-oil economy; and (iii)empowerment for human development and to leverage community engagement in service delivery and local infrastructure. Ghana. With a population of about 20 million and a Gross National Income per capita of US$280 (2002), Ghana has made considerable progress on laying the foundations for sustainable growth and poverty reduction. This has resulted in sustained per capita output growth, averaging 1.6 percent per annum, and increased private sector activity and investment. Social indicators also improved over the period. In parallel with the economic reforms, the country completed the political transition, moving to a firmly democratic form ofGovernment. However, overall outcomes have fallen short ofexpectations, as progress in social and economic development have been periodically interrupted by episodes ofweak macroeconomic management mostly associated with the electoral cycle. The growth outlook for the 2004-06 period is encouraging, with signs ofrobust economic activity that should allow the GPRS target of 5 percent real GDP growth to be achieved, leading to a per capita real GDP growth ofabout 3.0 percent. Benin. With a population of about 7.3 million in 2003, Benin has a per capita income of US$380. Over one third ofthe population lives in poverty with inadequate access to health care, education and other social services. Relative to most other countries in the sub-region, and to its starting point ofeconomic collapse and political crisis in 1989, Benin has achieved remarkable progress in sustaining robust growth while building a pluralist democracy over the past decade. Growth generally exceeded other economies in the region and productivity gains allowed per capita incomes to rise. The Government’s structural adjustment program has been successful in establishing fiscal discipline, opening up the economy, privatizing most public enterprises, and strengthening private sector incentives. The Government’s PRSP sets forth a national development program around four central pillars: (i)consolidating macroeconomic stability through accelerated private-sector-led growth and rigorous public finance management; (ii) improving access to basic education, literacy, primary health care, safe water, and deepening the fight against prevention ofnew HIV/AIDS infections, malaria, and tuberculosis; (iii) strengthening good governance and reinforcing institutional capacities; and (iv) promoting long- term employment and building capacity. Togo. With a population ofabout 5.6 million in 2003, Togo has experienced strong growth from 1960 to the mid-l970s, with real GDP growth ofabout 7 percent annually. After the boom in phosphate prices in 1975, Togo embarked on an ambitious investment program and created a multitude ofpublic enterprises, many ofwhich subsequently became a severe drain on the economy. The government‘s economic reform efforts were severely hampered by unrest in 1992-93. In the aftermath ofthe political turmoil and the 50 percent currency devaluation ofthe CFA franc, Togo launched in mid- 1994 a comprehensive adjustment program aimed at restoring sustained economic growth and achieving financial viability in the medium term. After considerable progress during the first two years ofthe program, the economic situation deteriorated again in 1998 with the four-month energy crisis and the worsening ofthe economic and business climate that accompanied the contested presidential election in June 1998. Since mid- 1998 the macroeconomic situation has remained difficult, owing to political uncertainty, falling cotton prices, and continued problems in phosphate production. The economy recovered slightly in 2001, achieving a real GDP growth rate of2.7 percent, compared with a contraction of

-2- 1.9 percent in 2000. Togo is in arrears to the Bank and, consequentially, Bank lending has been suspended. Given the uncertainties ofthe situation, the preparation of a new CAS has been postponed until there is greater clarity on the direction ofeconomic and social reform. Key Aspects of the Energy Sectors of Nigeria, Ghana, Togo, and Benin Nigeria’s Hydrocarbon Sector. The oil industry is the backbone of the Nigerian economy, accounting for 95% of foreign exchange earnings and over 80% ofNigeria’s Gross Domestic Product (GDP). Estimates ofthe crude oil reserves are 25 billion barrels, although new offshore discoveries are likely to push this figure to 30 billion barrels. Current production is approximately 2.2 million barrels per day, all ofit from the Niger Delta. Nigeria’s gas reserves are estimated in energy terms as twice as large as its oil reserves, with a potential for production of 120 years, compared to that ofoil of 30 years. Owing to a lack ofgas utilization infrastructure, Nigeria flares 75% ofthe gas it produces (2,700 MMscflday). Initially set for 1984, the end ofroutine gas flaring has now be reset for the year 2008; this has been embodied in the National Gas Policy to be formalized in a Gas Act this year. Several projects have been implemented or are under preparation to meet the 2008 deadline. One ofsuch is the proposed WAGP which will initially transport 70+ MMscUday, with volumes increasing over the life of the Project to about 450 MM~cflday.~The WAGP is a relatively small part ofthe overall gas development in the Delta (representing 5 to 10 % ofoverall gas production). The proposed Project will have limited impacts on the Delta as WAGP should have no bearing on oil production and, in the short term, no bearing on gas production. Furthermore, no additional oil or gas wells will be drilled in the first five years following first gas, and all necessary infrastructure for the near-term transport ofgas is already in place. Ghana’s Electric Power Sector. For the past 10 years, Ghana has been struggling to meet an increasing demand for reliable and affordable electricity. From 1988 to 2002, Ghana’s electricity consumption increased at an average rate ofover 8% p.a., which has put enormous pressure on the country’s state-owned electric utilities: Recently, uncertainties have arisen from the closure ofthe Volta Aluminum Company (Valco), which was buying a third of Ghana’s electricity production. This has caused a need to revisit electricity demand assumptions, which was done in the context of assessing the economic and financial viability ofthe proposed Project. Until recently, the sole sources ofpower supply in Ghana were from the hydroelectric plants of Akosombo (900 MW) and Kpong (100 MW) owned by Volta River Authority (VFM) - a 100 percent state-owned integrated power utility - and imports from C8te d’Ivoire. In the early 199Os, it became apparent that future growth in demand would have to be met from non-hydro sources because ofthe limited remaining hydro potential and the need to lower supply risks through diversification ofsupply sources. The 330 MW Takoradi (Tl) power project, located at Aboadze in westem Ghana, was then conceived and prepared. The need for a diversification strategy was demonstrated when power shortages severely disrupted economic performance because ofpoor hydrological conditions in 1997 and 1998. To avert a power supply crisis, the Government contracted out the second unit at Takoradi (T2) and two other private diesel power plants on an emergency basis. In addition, VRA had to operate its own inefficient 30 MW diesel

The pipeline capacity is technically limited to 474,000 MMI3tu/day. 1 MMscf= 1030 MMBtu. These figures exclude electricity demand from Valco’s aluminum smelter which remained approximately constant over that period. If electricity demand from Valco is included, the average growth over the 1988-2002 period is about 4% p.a.

-3- power plant, as well as import power fiom C6te d’Ivoire. In parallel, far-reaching reforms in the electricity sector are underway, including the introduction ofprivate management of distribution and thermal generation facilities. In addition, a large investment program, to be financed by the private sector and by the Government and donor development partners, is contemplated over the next five years to upgrade infiastructure, install additional generation capacity, and expand rural access to energy services. The reforms seek to set the stage for these investments with interventions to enhance efficiency in all aspects ofthe sector and provide a better deal for electricity consumers. Togo and Benin Electric Power Sectors. In Togo and Benin, power demand more than doubled in the last ten years increasing from 5 10 GWh in 1993 to 1054 GWh in 2003 (10% p.a.); the growth in the last five years has been more than 15% per year. The CommunautC Electrique du Bhin (CEB), is the regional entity constituted by Benin and Togo to generate and transport electricity. The electricity requirements ofTogo and Benin are mainly supplied by a hydropower plant located in Togo (Nangbeto - installed capacity of 65 MW) and with imports ofpower from Ghana and CGte d’Ivoire. In addition, there are two thermal plants, one at Cotonou (20 MW) in Benin and the other at Lome (20 MW) in Togo. The main electricity sector issues ofBenin and Togo are: (i)the shortage ofgeneration capacity to meet increasing electricity demand in Benin; (ii)the high dependence on imports through a single interconnection with Ghana; (iii)the high operating costs and the poor quality of service in the northern regions; and (iv) the low level of electricity penetration in urban and rural areas. Energy Sector Issue I:High Cost of Electricity Generation. Currently, the only long-term reliable option for providing the additional electricity required for social and economic development ofGhana, Benin, and Togo is the use ofrelatively expensive thermal plants which also contribute to C02 emissions or socially and environmentally sensitive hydropower projects that have a long maturity period. Energy Sector Issue 2: Capacity Deficit Leading to Unreliable Power Supply. Due to the persistent and severe drought conditions ofthe recent years, several countries in the West Afiica region have had to operate with structural power deficits. One consequence has been pernicious load shedding, leading to an unreliable power supply that affects entire sectors ofthe economy and social sectors as well. Alternatives to failing public utility supplies are expensive, inefficient and costly; small generation units have also shown their limits in terms oflongevity and even medium-to-long-term reliability. This situation crippled the manufacturing and the services sectors, which combined with high costs and tariffs, has contributed to reduced economic competitiveness. Energy Sector Issue 3: Environmental Consequences of Flaring of Gas and Burning of Liquid Fuels. Oil production in Nigeria has led to flaring or venting oflarge quantities of associated gas (AG) for several years, reportedly for lack of adequate infrastructure and ofdomestic or international markets. The FGN, in its effort to develop the energy sector and in particular that ofnatural gas has mandated that all flaring and venting of AG should cease by 2008. The World Bank was requested to assist FGN in designing a Natural Gas Strategy supported by concrete gas utilization projects, to achieve these objectives and address the air pollution and other issues associated with gas flaring. The domestic market for gas and export markets will all be tapped to reduce flaring from the present level of circa 19 BCWyear to naught in 2008; although not as large as other projects, the WAGP project ranks high amongst the projects recommended under the Strategy. It will absorb a portion ofthe AG in Nigeria and will substitute for heavy fuel oil

-4- and gas oil that are consumed in power plants in Ghana, Togo, and Benin, thus contributing to a reduction in greenhouse gas emissions (GHGE) from the producing end in Nigeria as well as in the consuming end. The amount of carbon emissions in Nigeria from gas flaring alone have been estimated at around 43 million tons per year and, by capturing some ofthe flared gas and feeding it into the pipeline, carbon emissions will be reduced in proportion ofthe gas input. Although this will only represent a small fraction ofgas flaring reduction, it will nevertheless contribute to it in a credible and substantial way. On the consuming countries side, the impact of substituting clean burning natural gas for imported oil, heavy fuel oil or gas oil will also reduce substantially air pollution and carbon emissions near the power plants and other industrial installations. Energy Sector Issue 4: Insuflcient Regional Cooperation in Energy Trade due to Physical, Institutional, Regulatory, and Legal Constraints and Political Commitments. The main reasons for insufficient cooperation in energy trading among the ECOWAS member countries are: (a) lack ofregional infrastructure; (b) lack ofconsistent legal and regulatory frameworks; and (c) poor information available at the regional level on the availability and costs ofenergy available in participating countries and on the countries’ energy sector investment programs. The proposed Project would encourage cross-country cooperation and coordination on energy-related issues and encourage regional cooperation. NEPAD, ECOWAS, and the member states have also recognized the importance ofincreasing regional trade to achieve political stability and integration. Energy Sector Issue 5: Power Sector Performance and Reform in Participating Countries. Despite significant efforts to reform the power sectors ofGhana, Togo, and Benin, and more broadly ofWest Africa, there are still issues that constitute an impediment to increasing regional energy trade (notably in natural gas and power). These issues involve inadequate tariffs to meet cost recovery needs, high technical and non-technical system losses (generally ranging between 15 and 30% against less than 5% in developed countries), poor billing methods and revenue collection, public sector arrears, and political interference in day-to-day management ofthe public utilities and in regulatory matters. All three countries benefiting from the gas to be transported by the proposed regional pipeline are at various stages ofreforming their utilities, restructuring their respective markets and setting-up public/private partnerships. Energy Sector Issue 6: Low Access to Modern Energies. Access to modern energies in both urban and rural areas is still very low in West Africa and has progressed only marginally in recent years. This is due in part to the lack ofinvestments in production and distribution of energies, but also to the high costs ofthese energies relative to the populations’ ability to pay, the poor performance ofthe utilities and the lack ofclear strategies.

2. Sector issues to be addressed by the project The proposed WAGP Project will address some ofthe energy sector issues mentioned above, in particular: (i)reducing energy supply costs and improving the reliability of energy systems in Ghana, Togo, and Benin, (ii)reducing gas flaring in Nigeria and substituting for cleaner fuels in Ghana, Togo, and Benin, and (iii)supporting economic and regional integration in West Afiica. More specifically, the proposed Project will:

0 Reduce energy supply costs and improve the reliability of energy systems in Ghana, Benin, and Togo. The proposed Project will provide cheaper and cleaner natural gas available in

-5- Nigeria to the power, industrial, and commercial sectors of Ghana, Benin, and Togo. Because of the size ofits electricity sector, in the first five years Ghana will consume between 75% and 90% ofthe gas exported from Nigeria. Based on the current price forecasts for crude oil and refined products, such gas should reduce he1costs for the existing power generating facilities ofGhana, Benin, and Togo by about 30-60%. The diversification of energy supply sources should also improve the reliability of electricity generation in Ghana, Togo, and Benin. Contribute to reducing gas flaring in Nigeria and reducing environmental costs in Ghana, Benin and Togo. Nigeria’s hydrocarbon sector is presently undergoing a thorough review ofits strengths and weaknesses, to address all the issues that have plagued it for years, including that of access to energy, one ofthe lowest in the region. The National Gas Strategy based on a Gas Master Plan has been designed to help FGN meet two critical goals: (a) to put an end to all gas flaring by 2008 to meet Nigeria’s environmental guidelines for the Niger Delta Region; and (b) to ensure that natural gas significantly boosts the development ofthe Nigerian economy over the next few decades. Initially, the gas sold to the WAGP will be about 60% AG (reducing to about 40% over 20 years), a large portion ofwhich would be flared in the absence ofproductive uses of gas, including the WAGP. Regionally, in coordination with the Project but as a separate operation, Global Gas Flaring Reduction Public-Private Partnership (GGFR) is fimding a project to reduce barriers to development ofthe gas markets in Benin, Togo, and Ghana; GGFR is also actively looking for small-scale projects in the Niger Delta that involve productive uses of natural gas.

0 Increase economic and regional integration in Vest Africa. The proposed Project will be the first project in the West Africa Region to develop regional exports ofnatural gas. It will illustrate and promote regional economic and political integration. Through the normalization of technical and other specifications and ofthe regulatory frameworks, it will also facilitate energy trade among the countries.

3. Rationale for Bank Group involvement The World Bank Group is playing an important role in Benin’s, Ghana’s, and Nigeria’s energy sectors as well as in bringing private sector expertise and financing. Different projects are under implementation or preparation by IDA, and IFC to reform the power sector ofGhana and implement investments. Cheaper, reliable gas supply is one key input in making the power sector self-sustainable in Ghana and less costly in Benin and Togo. MIGA has previously undertaken projects in the services and mining sectors and is currently considering additional projects in the area ofwater services. The proposed project will be MIGA’s first project in the energy sector and should have a demonstration effect for private investments into the more regulated sectors of Ghana. The West Afiican Gas Pipeline Company Limited (WAPCo), led by ChevronTexaco, has advised Benin, Ghana, Nigeria, and Togo (the four States) and the World Bank Group that this Project can be developed only with appropriate risk mitigation, in particular with respect to the gas purchase obligations ofVRA and CEB. Following the request by Ghana for an IDA Guarantee to back Ghana’s obligations to the Project, and in keeping with IDA’S ‘lender of last resort’ role, WAPCo has considered other possible sources ofrisk mitigation for the Project. Following this review ofoptions, WAPCo has proposed a combination ofIDA Guarantee, MIGA Guarantee, and Zurich/OPIC insurance to back the credit risk ofthe Ghana ofRaker

(W)*

-6- World Bank Group participation (IDA and MIGA) will provide financial risk mitigation to allow the proposed Project to proceed, support the implementation ofregional and national frameworks and actions required to kick start the development of gas markets in Ghana, Benin, and Togo, and more broadly will provide comfort to all the stakeholders regarding Project preparation and implementation standards. The work being undertaken by GGFR to facilitate the development of gas markets in Benin, Togo, and Ghana is an important adjunct to the Project. In this regard, the World Bank Group involvement in the proposed Project has also contributed to the sector reform process by helping the policy dialogue with the governments of Ghana and Benin, and by raising the awareness ofthe governments and stakeholders concerning the need for power sector reform. In parallel with the Project, the IDA and IFC are providing technical support to advance credible commitments ofthe Government of Ghana and Nigeria to improve governance.

4. Higher level objectives to which the project contributes The Project is designed to contribute to improving the economic competitiveness ofthe participating countries and accelerating regional economic growth and political integration in West Africa. The Project will provide cheap, efficient, and environmentally friendly fuel to the consuming countries, which will lower the cost ofpower in consuming countries thereby improving the competitiveness ofgoods and services. The WAGP project also complements the proposed WAPP, which supports increased electricity trade in West Africa. The proposed WAGP project is part of the action plan ofNEPAD and is actively supported by ECOWAS.

B. PROJECT DESCRIPTION

1. Guarantee instruments - IDA and MIGA The Government ofGhana has requested the rovision of an IDA Guarantee in support ofits termination payment obligations to WAPCo. 9 In addition, WAPCo has applied to MIGA and ZuricWOPIC for political risk insurance (specifically, breach of contract cover regarding these same payment obligations from Ghana, as well as from Togo and Benin in the case of ZwicWOPIC) to complement the IDA Guarantee. Risk Mitigation Package WAPCo, led by ChevronTexaco, has indicated to the Bank Group that it will not implement the Project without appropriate mitigation ofthe perceived risks of concentrated natural gas sales to power sector parastatals in Ghana, Benin, and Togo. VRA. In regards to Ghana, Government ofGhana has requested in writing consideration of an IDA Guarantee and WAPCo has filed a Definitive Application with MIGA. As confirmed by the Sponsors, the Project is unlikely to go ahead without Bank Group participationbecause ofthe private sector’s perceptions ofpolitical risks involved in the Project, especially payment risk by VRA for gas purchases committed under the Takoradi Gas Sales Agreement (Takoradi GSA). The Sponsors are also in discussions with ZuricWOPIC regarding political risk insurance to back the payment obligations ofthe Government ofGhana.

WAPCo-associated transportationtariffs are paid by FoundationCustomers to the shipper, N-Gas, which transfers such payments to WAPCo.

-7- (XJ. WAPCo is in discussions with Zurich/OPIC to provide risk mitigation on gas sales to CEB. It is anticipated that the Zurich/OPIC will provide a similar package to what these agencies are providing with respect to VRA. Neither ofthe governments ofBenin or Togo have requested IDA assistance for risk mitigation, nor has WAPCo applied to MIGA for coverage of the CEB Gas Sales Agreements (CEB GSAs), in part given the significantly smaller portion of anticipated revenue representedby CEB. Proposed IDA Guarantee The proposed IDA guarantee is limited in coverage. IDA will guarantee a portion ofthe payment due by Ghana to WAPCo in connection with its guarantee ofVRA’s obligations under the Takoradi GSA in the event where failures by VRA to pay N-Gas Limited (N-Gas) for gas results in N-Gas terminating the Takoradi GSA. IDA’s guarantee only covers this payment risk and will not cover breach ofother obligations undertaken by VRA or Ghana under the Project agreements. The details ofthe guarantee structure are as follows: The Takoradi GSA includes a dedicated portion ofVRA’s overall payment obligation to pay WAPCo for the transport ofgas in the event ofcontinuing failure by VRA to pay its obligations resulting in N-Gas’s termination ofthe Takoradi GSA. A termination ofthe Takoradi GSA will result in VRA owing a “termination payment” to N-Gas and to WAPCo, the latter being designed as damages to investors in WAPCo from the loss ofrevenue. Given the concerns regarding VRA’s creditworthiness, Ghana has agreed to guarantee VRA’s termination payment obligation. Ghana and WAPCo have agreed that in the event ofthe termination ofthe Takoradi GSA, Ghana would not be obligated to make an immediate payment to N-Gas (for WAPCo’s portion ofthe termination payment that will be guaranteed by IDA), but rather, Ghana would have the right to repay this amount over a year, thereby converting the immediate payment obligation into a one- year loan from WAPCo to Ghana (the conditions for this loan coming into effect are described below under description ofthe Guarantee Agreement). IDA would guarantee this loan from WAPCo to Ghana, the principal amount ofwhich would be equal to IDA’s pro-rata share ofthe termination payment guaranteed by Ghana which it owes to WAPCo (and not amounts owing to the other Project parties, including N-Gas, Nigerian Gas Company (NGC), or the Producers).6 As in other Bank guarantee operations, the arrangements will be set forth in the following principal documents: Guarantee Agreement between IDA and WAPCo; IDA Project Agreements between IDA and WAPCo and between IDA and N-Gas; and Indemnity Agreement between IDA and Ghana. Guarantee Agreement. In addition to standard guarantee provisions, the obligation ofIDA to make a payment under the IDA Guarantee only arises where the following has occurred:

0 the Takoradi GSA has been terminated by N-Gas due to a payment default by VRA;

IDA can, under its Articles of Agreement, guarantee loans that enables an infrststructure investment in a member country that furthers the development ofthe country, thus satisfying the “productive purposes” test ofArticle I resulting from IDA’s Articles of Agreement.

-8- 0 VRA has failed to make the relevant termination payments to N-Gas that are required under the Takoradi GSA;

0 WAPCo has presented either: o an affidavit ofthe Minister ofFinance of Ghana that VWGhana owes N-Gas and/or WAPCo such component ofthe relevant termination payment; or o a duly authenticated arbitral award in favor ofN-Gas and/or WAPCo for such component ofthe termination payment;

0 Ghana has not made the relevant termination payments required under the Takoradi GSA on behalf ofVU, and in particular the component ofthe relevant termination payment payable to N-Gas that is due from N-Gas to WAPCo under the Takoradi Gas Transportation Agreement (the Loan Amount), in accordance with the terms ofits guarantee under the Government Consent and Support Agreement (GCSA); and

0 Ghana has not paid the Loan Amount plus accrued interest within the maturity period (a period ofabout one year) and after demand. IDA Proiect Ameements. The IDA Project Agreements are expected to be substantially similar for WAPCo and N-Gas and will contain standard covenants, representations, and warranties, including that WAPCo and N-Gas have acted and will continue to act in compliance with applicable World Bank Environmental and Social Safeguard Policies and anti-corruption policies. Indemnitv Ameement. Ghana will indemnify IDA for claims paid under the IDA Guarantee and related expenses. Proposed MIGA Guarantee Although the IDA and MIGA guarantees are ultimately targeted at supporting the payment obligations ofthe Government ofGhana, the MIGA contract ofguarantee will be offered directly to WAPCo. As the Project relies on the cash flows generated from the pipeline derived from the Foundation Customer GSAs, the Sponsors wish to enhance the credit support ofthese obligations guaranteed by the governments ofthe consuming States. MIGA has been requested by WAPCo to consider offering political risk protection in order to mitigate a portion oftheir risks in Ghana. MIGA proposes to offer WAPCo (the Guarantee Holder), a Bermuda incorporated company, guarantees covering its equity investment ofUS$83.4 million, into the WAPCo branch in Ghana. The investment will be made in all four countries, but about 55% ofthe investment will be made in Ghana.7 The investment under consideration relates only to the portion ofWAPCo’s investment in Ghana, currently assessed at US$325 million. MIGA is not considering any other guarantees related to this Project and will not be covering the Togo, Benin, or Nigeria portions of the Project. All commercial risk is assumed by WAPCo. WAPCo has advised MIGA that a portion ofthe equity investment in Ghana may be in the form of shareholder loans. The coverage would be offered for a period ofup to 20 years against the risk ofBreach ofContract

’As the cost of constructing a pipeline is directly proportionate to the length of the pipe, so the amount spent in each country is proportionate to the length of the pipeline in that country. Approximately 55% of the length of the pipeline is in Ghana.

-9- only, MIGA will guarantee 90 percent ofthe equity investment ofUS$83.4 million into Ghana which will translate into MIGA’s gross exposure ofUS$75 million. MIGA’s net exposure under this Project would be US$67.5 million after treaty reinsurance. See Annex 12 for MIGA’s Breach of Contract Risk Assessment.

Term of Contract@) Breach of Contract (in yeers) (in US$ milhoiw} Equity Up to 20 years Total Guarantees Issued (90%) 75.0 Less CUP 0.0 Total MIGA (Gross) 75.0 Facultative Reinsurance 0.0 Treatv Reinsurance 110%) 7.5 Total MIGA met) 67.5

Zurich/OPIC WAPCo is arranging for an undertaking similar to MIGA’s from Zurich, although the structure ofthe coverage will be different. OPIC will reinsure Zurich for a substantial portion of the US$125 million ofcover fronted by Zurich. If and when the Reference Tariff is changed as described in Annex 9, paragraph 19, the amount ofZurich/OPIC cover will be automatically adjusted according to a schedule that ranges from US$75 million to US$ 125 million for the various demand cases. The proposed IDA Guarantee structure is set forth in more detail in Annex 11, the MIGA Guarantee in Annex 12, and the Project’s commercial agreements and implementation arrangements in Annex 6.

2. Program objective and phases This Project is a part ofthe States’ overall strategy to improve the efficiency ofthe energy sector, notably by decreasing input costs and diversifying fuel supply for the power sector, and allowing local industry and enterprises to use natural gas.

3. Project development objective and key indicators The proposed West African Gas Pipeline Project will contribute to: (a) improving the competitiveness ofthe energy sectors in Ghana, Benin, and Togo by promoting the use of cheaper and environmentally cleaner gas from Nigeria in lieu of solid and liquid fuels for power generation and other industrial, commercial uses, and diversifjmg energy supply sources; and (b) fostering regional economic and political integration that would support economic growth, and in particular the development of the West Africa electricity market. The following key indicators will track progress towards the developmental objectives ofthe Project :

- 10- Economic Indicators Decrease in the average wholesale cost of electricity supply in Ghana, Benin, and Togo compared to the "without gas" scenario; Number of large, medium, and small gas customers in Ghana, Benin, and Togo; Physical Indicators Physical completion of regional gas pipeline and of spurs into Ghana, Benin, and Togo, including main connections to target power plants; Expanded volume of energy trade in the region, measured in terms ofgas exports from Nigeria; Institutional and Regulatoly Indicators

0 Harmonization ofthe regional institutional, legal, and regulatory framework to increase private sector participation in the gas sector. The benefits ofthe proposed West African Gas Pipeline Project are premised on the assumption that natural gas would provide consumer countries with a continuous and uninterrupted flow of low-cost, quality, clean-burning fuel for power generation and other energy-dependent economic activities, long-term supply security; and environmental benefits which will be at both ends of the pipeline. The proposed Project will generate substantial savings as well as additional revenues from gas sales in Nigeria and tax and dividend revenues in all countries. Gas will improve access to cheaper and more reliable energy services in all four target countries. This should have significant positive implications for regional economic development by: (i)improving the competitiveness ofdomestic industries thereby facilitating GDP growth and increases in employment; and (ii)providing opportunities for increased regional trade, and fostering regional stability and cooperation. The Project would contribute to poverty reduction through the impact on overall economic improvement and growth and lower energy prices. From the environmental point ofview, the Project will contribute to major commitments that go beyond local impact. Nigeria's gas flaring results in C02 emissions of about 43 million tons per annum, equivalent to about 1% ofglobal C02 emissions. In addition, gas flaring and venting also contribute to local pollution effects (smoke, toxic emissions, noise). In the three consumer countries, the use ofnatural gas for power generation would reduce consumption ofcrude and heavy fuel oil, thereby reducing GHGE by about 100 million tons over the pipeline's 20-year contractual period. These will include converting to natural gas, initially mostly AG, all industrial and commercial activities using liquid or solid fuels. Such environmental benefits will have a positive effect the daily life ofthe people living in the Niger Delta as well as ofthe people living in Ghana, Benin, and Togo.

4. Project components Project Description (See Annex 4 for a detailed description of the Project.) The proposed West African Gas Pipeline Project includes: (a) a new pipeline system (678 km long) that will transport natural gas from Nigeria to Ghana, Togo, and Benin; (b) spurs to provide

- 11 - gas to power generating units in Ghana, Benin, and Togo; (c) conversion of existing power generating units to gas; and (d) as needed additional compression investments (see map below).

-rrmmsaea 0 96 5(1 76 too To meet the expected market potential of about 450 M.Mscf/day, the new pipeline will be 20 inches in diameter. The main trunk ofthe offshore pipeline will be placed on the seabed in 26 to 70 meters water depths at an approximate distance of 15 to 20 kilometers from the shore. At three locations, connections will be made in from the main offshore trunk into 8 inches or more lateral spurs, which will transport gas to delivery points at or near Cotonou (Benin), Lomk (Togo), and Tema (Ghana). The final terminal ofthe proposed pipeline system is at the Takoradi Power Stations (Ghana) with an option to extend the pipeline to other West African states, if feasible in the future. The Project includes a number ofcontracts for the design, engineering, construction, ownership, operation and maintenance, oversight, and political risk mitigation ofthe new pipeline and (a) contracts for the purchases ofnatural gas from the Producers, for the transportation ofnatural gas by the Transporters, for the sales of foundation amounts ofnatural gas to VRA and CEB; and (b) Environmental Assessments (EAs) and Resettlement Action Plans (RAPS). Under the Project, N-Gas will contract for the purchases ofnatural gas at interface points on the Escravos-Lagos Pipeline System (ELPS) from the upstream Producers. NGC will transport the gas on the ELPS. WAPCo will deliver that gas from the interface point with the ELPS pipeline located in westem Nigeria and transport it on to Benin, Togo, and Ghana. The new pipeline project does not include the operation ofthe ELPS nor the extraction ofhydrocarbons from the ground. A parallel project to assist CEB in setting up a new power generating site and transferring some existing generating units to that site is also under preparation.

-12- Pipeline Cost and Financing The Sponsors estimate the new pipeline to cost about US$590 million; additional compression- related costs are estimated to be about US$l10 million over 20 years (which would be needed if the capacity requirement grows from the initial 200,000 MMBtu/day to the 474,000 MMBtu/day target by the Sponsors under the agreed demand forecast*). The initial US$590 million cost will be financed through direct equity and shareholder loans to WAPCo fkom the Sponsors and the subsequent compression-related capital expenditures are expected to be financed by cash flow from operations. WAPCo will recover its investments through gas transportation charges under its Gas Transportation Agreements (GTAs) with N-Gas and other future shippers. From time to time, NGC is expected to incur some expenditure in upgrading ELPS for the additional WAGP volumes ofgas and interconnections for inputs and output, as well as some additional operation and maintenance expenses associated with the additional volumes. NGC will recover its investments and additional costs through transportation charges under its GTAs with N-Gas. After about five years, the Producers are also expected to incur some costs in upgrading and installing gas gathering systems and possibly gas treatment facilities upstream ofELPS, in the oil production areas of the Niger Delta and elsewhere. The Producers will recover their investments and other costs through gas sales under their contracts with N-Gas or any other entity that ships gas through WAGP. Sources of Natural Gas Nigeria’s proven natural gas reserves (associated and non-associated) are conservatively estimated at about 125 tiillion cubic feet. About 1,300 billion cubic feet ofthese reserves are produced annually, ofwhich nearly 75% is AG and most ofwhich is flared (2,500 MMscf/day). This gas could meet much ofthe power generation requirements of Sub-Saharan Africa, outside South Africa. All ofthe gas purchased by N-Gas for delivery in the new pipeline for about the first 10 years ofthe Project (i.e., until the earlier of 10 years or reserved capacity reaches 200 MMscUday, and open access begins) will be purchased from the Producers. All ofthis gas will come from “PC/CNL and “PC/SPDC/Elf/Agip existing operations in the Escravos area on the western side ofthe Niger Delta and will be sold to N-Gas at the seven points ofinterface with the ELPS (Escravos Gas Plant, Escravos Beach, Jones Creek, Odidi, Oben, Utorugu, and Ughelli (future connection to ELPS)). This gas will be about 60% AG initially, declining to about 40% AG after 20 years, much ofwhich would have been flared without the development of productive uses for gas, including WAGP. Uses of Natural Gas The pipeline is being financed based on amounts contracted upfront with the core customers, namely VR4 and CEB. These customers are referred to as “Foundation Customers” and the volumes ofgas they are contracting to purchase are referred to as the “foundation volumes.” The Project financing is structured on the basis ofthese contracted foundation volumes. In the early years, VRA would account for about 92% ofthe Foundation Customer demand and CEB would account for about 8% ofthe Foundation Customer demand. The final physical configuration of

* The demand forecast for gas has been agreed amongst the Sponsors and the four govemments. This forecast has notional probability of occurring of 50% (Pw).

-13- WAGP is based on market growth forecasts. As in most pipeline projects, the economics ofthe Project depend on the amount of gas actually transported through the pipeline, which in turn depends on the degree to which gas market growth is achieved. Consequently, a comprehensive market study has been carried out by the Sponsors and the WAGP Authority (WAGPA) to determine likely fiture growth in demand. In addition, the four States have commissioned their own study ofpotential industrial gas consumers." The studies have concluded that there is likely to be significant growth in demand, primarily in the power sectors, with total quantities contracted for transportation on WAGP peaking at approximately 474,000 MMBtu/day in year 20 ofthe Project. It is also established that well designed, properly coated, protected, and regularly maintained pipelines, including offshore pipelines, can last much longer, up to twice as long as the anticipated initial economic life. There is residual uncertainty over underlying short-term electricity demand in Ghana, particular1 due to the financial problems ofKaiser Aluminum Corporation, the parent company ofValco, IYwhich owns an aluminum smelter near Tema. As a conse uence, the Project is being analyzed both with and without the electric load ofthe Valco smelter?2 (See Annexes 1 and 9 for a detailed description ofthe High and Low Demand Scenarios.) In parallel with the Project, GGFR is fimding a project to identify barriers to development ofthe natural gas markets in Benin, Togo, and Ghana and recommend strategies for implementation, including the possible use ofcarbon credits.

5. Lessons learned and reflected in the project design In preparing the proposed Project, the Project team drew lessons fiom the experience in developing power transmission facilities in the countries ofthe region (Nigeria, SenegaVMauritanialMali) and building ofpetroleum pipeline facilities (ChadCameroon, Mozambique, Bolivia, Argentina). The broad lessons from comparable regional projects and programs include the following: (a) Simplified Project Design. Given the inherent complexities ofcross-border infrastructure projects, the design ofenergy projects within a regional umbrella should be made as simple as practical to ensure their effective implementation. The envisaged Project design has been simplified by employing a single pipeline enterprise operating across the four countries that will begin operations serving only two customers, VRA of Ghana and CEB in BenidTogo.

The Sponsors have contracted an independent market study for the Project (West African Gas Pipeline Project Market Report, prepared by Purvin & Gertz Inc, March 2001 and updated April 2004). See Annex 1 for a more detailed discussion ofthe study and resulting forecasts. loGas Market Promotion Strategies Study, Nexant Limited. On February 12,2002, Kaiser Aluminum Corporation, which has a 90% share in Valco, filed a voluntary petition under Chapter 11 ofthe United States Bankruptcy Code. l2The Low Demand Scenario assumes that Valco operations will never restart, and therefore there will be no demand for electricity ftom Valco operations and therefore a lower demand for gas. The High Demand Scenario assumes that Valco operations will restart before expected first gas in 2007, all four potlines will be operational, and a corresponding incremental demand ofabout 2,540 GWh will have to be met by VRA thermal generation.

-14- Well-defined Institutional and Policy Framework. Regional programs should take place within a well-defined policy and institutional framework, have the full backing ofthe beneficiary governments and move at a pace tailored to each country’s situation. The envisaged Project fits in the framework ofthe RIAS, is part ofa 20-year program for regional integration ofthe powerienergy systems in prospective participating countries to be implemented in phases and is fully supported by NEPAD and ECOWAS. As described above, a comprehensive commercial, legal and regulatory structure is being put in place, which includes a Treaty between the States and a detailed International Project Agreement (PA) between theStates and WAPCo. (c) Combined RegionaVNational Ownership of Project Implementation Arrangements. National and regional stakeholders should have combined ownership ofproject implementation arrangements, buttressed by instruments to promote convergence on reform measures. In particular, ECOWAS has played a key promotional role. As described above, the envisaged Project’s implementation arrangements provide for two new entities (N-Gas and WAPCo) as well as an existing company (NGC). N-Gas and WAPCo are public-private implementation vehicles. (d) Adequate Information/Communication and Consultations. To ensure sustainable implementation ofa regional project in a sensitive infrastructure area, it is crucial to have a strong political and reputational risk assessment undertaken and to develop and implement a corresponding communications and consultations program to mitigate the potential risks and build country ownership. This program ofcommunications and consultations should take place prior to and during project design and implementation with beneficiaries and stakeholders the understandings reached between the groups should be formalized. This risk assessment was undertaken by the Bank and extensive consultations and communication work has been carried out and continue in the context ofthe Environmental Management Plans (EMPs) and a comprehensive communications strategy will be implemented by WAPCo and the WAGP Authority.

6. Alternatives considered and reasons for rejection An analysis has been carried out on the possible alternative energy sources to accommodate the forecast economic growth in the Region including an assessment ofthe environmental impact of these alternatives. The following main alternatives to the proposed Project have been examined by the Sponsors, the States and their advisors and by the Bank team. The conclusion is that the proposed Project is the best alternative to meet the objectives ofimproving competitiveness in the three countries, reducing environmental costs and fostering regional integration. 1. Continuation ofthe existing practices ofpower generation through national generating plants and as feasible imports fkom neighboring countries including non-delivery ofgas to the prospective non-power consumers. This alternative would be more expensive and would not bring the environmental and regional integration benefits;

- 15 - 2. Gas production in Ghana. This would require the development of small gas reserves identified in offshore Ghana waters. Such reserves have not so far met market test, both in terms ofvolumes and development costs, to be a credible alternative to larger volumes ofgas from Nigeria; 3. Gas imports from CBte d’Ivoire have also been considered at times and even Heads ofAgreements signed. However, the certified reserves presently proven to exist in C8te d’Ivoire are barely enough to cover existing long term gas commitments under the Ivorian purchase and sale agreements with the electricity Independent Power Producers (PPs). When more gas is found in large volumes, this may be considered, if only to diversify gas supply sources for Ghana; 4. Imports ofpower to Ghana from CBte d’Ivoire have been ongoing for some time and will very likely continue, as they help meet load requirements in the Ghanaian system. Such imports will however be constrained by the availability of gas in CBte d’Ivoire (see above); 5. Conversion ofgas to electric power in Nigeria and electric transmission to Benin, Togo, and Ghana through the WAPP. Given the very large unmet electricity demand in Nigeria, it is very unlikely that significant quantities ofpower for export would be available even in the medium term. By comparison, Nigeria has an abundance of gas available for export. Nigeria’s power sector and public utility NEPA also need to be reformed. The feasibility ofthis alternative would also depend on the availability ofa reliable regional transmission system between the four countries; and 6. Transport ofnatural gas through onshore routing ofthe pipeline is a possible but much costlier and time consuming option, as land has to be acquired under the same terms in the three States and all economic, environmental, cultural, and social issues would have to be solved before ground-breaking. This option was considered at one time by the Sponsors but abandoned for those reasons. Cross- border, onshore pipelines usually run into these problems which may take years to resolve, while the offshore option is much more cost-effective and less time consuming both in terms ofpreparation and implementation. These alternatives were reviewed in the context ofthe Economic & Financial Assessment (EFA) ofthe Project as well as in the context ofthe EAs (see Annex 10, paragraph 6 and Annex 13, paragraph 4 for more details on the analysis ofalternatives).

C. IMPLEMENTATION

1. Partnership arrangements The political risk guarantees will involve complementary guarantees from IDA, MIGA, and ZuricWOPIC. All will cover payments owing by the Government of Ghana in the event of termination ofthe Takoradi GSA with VRA, although there are differences in application of individual risk coverage. In particular, IDA will not cover arrears owing to WAPCo but MIGA13

l3Up to 1.5 months of arrears to WAPCo under the Takoradi GSA.

- 16- and ZuricWOPIC will. Each of IDA, MIGA, and ZUricWOPIC will have its own contractual undertakings with WAPCo. The basis will be pro rata allocation of claims; however, because of differences in struc e and coverages, detailed mechanics under various scenarios have been agreed by the Sponsors with ZuricWOPIC, MIGA, and IDA. In the event oftermination ofthe Takoradi GSA, different pro-rata allocation of claims have been identified for different demand and tariff scenario^.'^ The allocation ofpayouts in a claim situation would be based on these allocations. l5

2. Institutional and implementation arrangements The WAGP is a cooperative effort ofthe four States (Benin, Ghana, Nigeria, and Togo) the Producers, the Sponsors, the Transporters, the Foundation Customers, and the providers of political risk guarantees. (See Annex 6 for a more detailed description of the commercial agreements comprising the Project and the Project's implementation arrangements.) The implementing agencies for the four States are as follows: Republic ofBenin: Minist6re des Mines, de 1lEnergie et de 1'Hydraulique Cotonou, Benin Republic ofGhana: Ministry ofEnergy Accra, Ghana Federal Republic ofNigeria: Ministry ofPetroleum Resources Abuja, Nigeria Republic ofTogo: Ministkre de I'Equipement, des Mines, de 1'Energie et des Postes et Tklkcommunications Lomk, Togo The four States have established by treaty the WAGP Authority to, inter alia: (a) monitor compliance by WAPCo ofits obligations under the PA; (b) approve pipeline design and construction plans; (c) negotiate and agree with WAPCo the licenses and access code; (d) negotiate and agree the appointment ofa third party operator ofthe pipeline system; (e) negotiate and agree on any expansion plans; (f) coordinate the administration ofthe fiscal laws applying to the WAGP-related activities; (g) negotiate and agree with WAPCo to changes in tariff methodology; and use its best efforts to ensure that each State complies with the PAand applicable enabling legislation. The WAGP Authority does not set tariffs, as these are regulated by contract and the pipeline access code. The Authority has requested the Bank to assist in building capacity; an application for IDF grant is under finalization. Commercially, two new entities and one existing entity will implement the WAGP:

0 N-Gas Limited, a new entity to be owned (directly or indirectly by affiliates) by Nigerian National Petroleum Corporation (NNPC), CNL, and SPDC will contract for the purchase (by N-Gas fi-om "PC/CNL and NNPC/SPDC/EWAgip),

l4See Annex 9, paragraph 16 for more details. '' The guarantee-related legal documentation will reflect this agreement in detail. IDA'Sshare of allocation is expected to be between 20% and 25% of the termination payment. IDA is not covering any interest on termination payments or arrears.

- 17 - transportation (by NGC and WAPCo), and sales (to VRA and CEB) ofnatural gas;

0 Nigerian Gas Company (NGC), a wholly owned subsidiary ofNNPC, under contract from N-Gas, will transport natural gas from its sources in Nigeria to a terminal near Lagos over the existing ELPS; and

0 West African Gas Pipeline Company Limited (WAPCo), a newly formed entity owned (directly or indirectly by affiliates) by CNL, NNPC, SPDC, VRA (as shareholder for the Government of Ghana), SoBeGaz, and SOTOGZ’~- referred to as the Sponsors ofthe Project - will build, own, operate, and transport (under contract with N-Gas) natural gas through the new pipeline system from the terminal near Lagos to Takoradi in Ghana, with spurs to Cotonou, LomC, and Tema. The Government of Ghana is expected to borrow approximately US$40 million (from FGN on a concessional basis) and VRA is expected to borrow the remaining US$44 million (from a commercial bank) to make Ghana’s investment in WAPCo (see “Critical Risks and Possible Controversial Aspects” below). NNPC will provide its share ofequity contribution from its own resources. The Foundation Customers are VRA and CEB, which will underwrite the costs ofthe new pipeline. The contractual underpinnings ofthe Project are based on the following simplified value chain: (a) the Producers will sell natural gas to N-Gas under long-term Gas Purchase Agreements; (b) N-Gas will engage the Transporters (i.e., NGC and WAPCo) to move the gas under long-term GTAs; and (c) N-Gas will sell the gas to VRA and CEB under long-term GSAs. The principal Project agreements are:

0 International Proiect Anreement (PA) among the four States and WAPCo, providing for the development, financing, construction, ownership, and operation ofthe WAGP by WAPCo and, as it relates to the IDA Guarantee, containing an undertaking by each ofthe States to guarantee the obligations ofany gas buyer (such as VRA and CEB) wholly owned by the States;

0 Takoradi Gas Sales Agreement (Takoradi GSA) between VRA and N-Gas, providing for the sale by N-Gas and purchase by VR4 ofup to 120 MMscfYday of gas on a take-or-pay and ship-or-pay basis and providing, inter alia, for VRA’s payment of a termination payment to N-Gas in the event ofN-Gas’s termination ofthe Takoradi GSA for VRA’s default;

0 Takoradi Gas Transportation Agreement (Takoradi GTA) between WAPCo and N-Gas for the gas being sold by N-Gas under the Takoradi GSA and providing, inter alia, for the payment ofa termination payment to WAPCo in the event the Takoradi GSA is terminated for W’sdefault;

l6SoBeGaz and SoToGaz are currently not shareholders ofWApCo. However, each of them separately have the option to buy a 2% share in WApCo at the FID date.

-18- VRA Direct Agreement among VRA, WAPCo, and N-Gas whereby N-Gas assigns to WAPCo (as security for N-Gas’s payment obligations to WAPCo under the Takoradi GTA) the component ofthe VRA termination payment and arrears owing to N-Gas under the Takoradi GSA corresponding to the same component payable to WAPCo by N-Gas under the Takoradi GTA; and

0 Government Consent and Support Agreement (GCSA) under which Ghana, in compliance with its undertaking under the IPA, irrevocably and unconditionally guarantees to N-Gas and WAPCo the performance obligations ofVRA under the Takoradi GSA and the VRA Direct Agreement. The Project agreements allocate the risks among the parties (see “Appraisal Summary - Financial Analysis” below for more details on risk assessment). Generally, the private sector participants are taking the construction- and operations-related risks, while the public sector is taking the payment risks under the Foundation Customer GSAs, which are on take-or-pay basis in US Dollars. Events offorce majeure are shared among the parties; however a default by the Producers in delivering gas in Nigeria will result in the payment of liquidated damages to the Foundation Customers.

3. Monitoring and evaluation of outcomes/results Management ofthe construction and ofthe commissioning ofthe WAGP pipeline will be done by ChevronTexaco, which has a long experience of managing such projects. In addition to the local environmental agencies conducting their own environment and social compliance audits, WAPCo will contract with environmental consulting firms to conduct independent audits ofthe implementation ofthe EMF%, at least twice and possibly three times during the 12- to 15-month construction period and once each three years thereafter. The reports ofthe independent audits will be submitted to the Bank and key independent audit reports will be made public. In addition to the World Bank Group’s own extensive supervision, in accordance with OP 4.01, WAPCo will provide fixed financial support for a three-person Environmental & Social Advisory Panel (ESAP) operating under terms ofreference agreed with the World Bank. Its purpose is to provide advice and consultation to government regulatory agencies on health, safety, and environment (HSE) and socioeconomic issues and provide written reports on these efforts and their observations. The expert panel is intended to be an independent panel, essentially a third-party independent review board. This panel will function in this capacity for up to seven years. It is expected that most ofthe consultations will occur during the site preparation and construction phase ofthe Project. The panel’s role and frequency ofoversight will be reassessed following construction and the first year ofoperations. It is suggested that the panel comprise science and policy professionals who are highly regarded by their peers in disciplines that include large marine ecosystems (including fisheries, coastal erosion, and estuarine wetlands), pipeline safety and security, human resettlement planning, and HSE regulatory program design and implementation. The ESAP’s reports will be made public. Furthermore, the four States have established the WAGP Authority to monitor compliance by WAPCo ofits obligations under PA and Access Code and other project-related documents, coordinate actions by the respective tax authorities; negotiate and agree with WAPCo to changes in tariff methodology; and use its best efforts to ensure that each State complies with the IPA and applicable enabling legislation. Reports from the WAGPA to the governments would be

- 19- available to the Bank Group. To enhance the capacity ofWAGPA, USAID and IDA are considering a technical assistance package in support ofWAGPA.I7 Data for monitoring project outcomes and results indicators (as shown in Annex 3) will primarily be generated by the implementing agencies (WAPCo and N-Gas) and by WAGPA through progress reports, annual reports, etc. Evaluation ofresults indicators will be part ofregular IDA supervision missions. The Project mid-term review will thoroughly review project implementation and the indicators. The following table provides an overview of the Project’s monitoring arrangements.

Entity Functions Reporting Requirement Engineering, Procurement, and Monitor implementation of Daily inspections, reported to Construction (EPC) contractors contractors HSE plans. WAPCo; reports available to Bank and regulatory agencies on request. WAPCo Project team inspectors, Monitor implementation of Daily inspections; reports field representatives, and monitors contractors’ HSE plans. available to Bank and regulatory agencies on request. WAPCo Project team HSE staff Monitor implementation ofRAPS Weekly/monthly; reports and EMF% including community available to the Bank and development program; sampling of regulatory agencies on request. effluents and ambient environmental quality. Independent 3rd party HSE auditors Independent review ofall aspects Annually or semiannually during (contracted by WAPCo) ofEMP and RAP implementation, construction, at least once every operational controls. three years thereafter; reports provided to Bank and regulatory agencies. Regulatory agencies Monitor compliance with permits According to their schedules, but and regulations. also welcome to join WAPCo field monitoring visits. Independent panel of experts (ESAP) Review implementation and advise Semiannually during governments and Bank on construction, annually during first effectiveness of all aspects of 5 years ofoperation; reports environmental and social impact public (posted onwebsite). management, RAPS. Bank and MIGA staff Supervision of environmental and At least semiannually during social safeguards implementation. con~tructi011, start-up, and first few years ofoperation.

4. Sustainability The sustainability ofthe Project will be underpinned through a combination ofthe following factors: (i)economic and financial benefits to the four States and to the implementing agencies; (ii)private sector operation backed by financial incentives to the private Sponsors; (iii)regional cooperation, facilitated by ECOWAS, for development ofthe broader West Africa region; and (iv) support fi-om NEPAD as the Project is part ofNEPAD’s short-term action plan.

l7This technical assistance, if implemented, will be provided to WAGPA as a separate project.

- 20 - 5. Critical risks and possible controversial aspects I Risk Risk Mitigation Measure From Outputs to Objective: 1, VRA and CEB fail to meet their payment S Governments’ strategy is to restructure the obligations to N-Gas and Project is electricity sectors and bring private management abandoned. expertise to improve the technical and financial performance of the sectors. The regulators in Ghana, Benin, and Togo must ensure that electricity tariffs are high enough for the gas purchasers to meet their obligations. Specifically, the Bank Group and the IMF are working with the Government ofGhana to prevent possible future subsidization ofthe cost of electricity to the Valco smelter that jeopardizes VRA’s ability to meet its obligations. 2. Brent crude prices average less than M None ofthe long-term crude oil prices forecasts US$9.OO/bbl (the “switching value” for show sustained prices below or at this level. overall Project net present value OVpV) to be Current WB projections are at a sustained US$ zero) 24/bbl over the long term. 3. Demand forecast for gas consumption does M Most ofthe gas demand forecast is power sector not materialize as planned. Power stations are demand. The Sponsors and the four States have not developed timely to meet future demand undertaken detailed studies to determine the in ~hana,Togo, ana Benin. demand for gas in consuming countries. The Bank’s EFA consultants have reviewed these studies and have concurred with the demand assessment. Furthermore, development agencies are supporting the development of electricity sectors through this Project and other national projects, ofthe local gas markets and also ofthe regional interconnections through the WAPP. 4. Power stations in Ghana fail to convert to N The economic benefits ofconverting to gas are use natural gas. substantial and the costs ofsuch conversion systems are marginal in comparison. 5. CEB fails to move its Cotonou plant to M The Bank is in the process ofpreparing a project Maria Gleta and fails to convert its Cotonou to move the CEB plant in Cotonou to Maria and Lome plants to use natural gas. Gleta. CEB facilities in Togo and Benin are dual fuel. I 6. New gas gathering and treatment systems N Such investments are limited. The gas are not completed as needed after about 5 producers are also shareholders in WAGP. years ofstart ofoperations. Under the 2008 deadline, gas flaring is expected to stop in Nigeria and therefore such gathering systems would be needed in any case for all AG. 7. CEB fails to complete the relocation ofthe M The Bank is expected to finance the move ofthe Cotonou power station and interconnection power station under a separate IDA Credit facilities to connect its thermal units to operation. WAPCo has indicated a willingness WAGP. to finance the interconnection costs, so they should not pose significant risk.

-21 - Risk Rlsk Mitigation Measure 8. Other uses ofAG fail to be implemented in M The Project is featured as a means to reduce Nigeria. flaring and is one ofthe instruments proposed to I eliminate gas flaring in Nigeria by 2008. Ifgas flaring is not eliminated as planned, the Project may be criticized. It will therefore be important to monitor carefully how much AG and non- associated gas (NAG) will be transported during the Project life. From Components to Outputs: 1. WAPCo fails to arrange for sufficient M Under the shareholder’s agreement forming funding to meet the cash requirements ofthe WAPCo, each shareholder must contribute its Project. ratable share ofcapital. While Ghana has indicated that it has sourced its participation, this still may lead to delays in project implementation. 2. WAPCo fails to complete and commission M WAPCo is expected to engage competent EPC the Project ontime. Contractors under tumkey contracts that largely transfer completion risks. However,force majeure, resettlement, and other risks will remain with the Sponsors. Communication and consultations with all the stakeholders should be strengthened to ensure broad support during pipeline preparation and construction.

3. Security package fails to provide adequate N The security package has been developed over a incentive for WAPCo to complete the Project. long period oftime through direct negotiations among principals. Sensitivities have been carried out for the adequacy of the security

1 package under various demand scenarios and have been determined as reasonable by the Sponsors. Overall Risk Rating S IRisk Rating - H (High Risk), S (Substantial Risl M (Modest Rir ), N (Negligible or Low Risk) Possible Controversial Aspects Niger Delta Issues: Gas to be delivered to the WAGP Project will be produced in the Niger Delta and some ofthe local non-governmental organizations (NGOs) have tried to use the project to leverage the resolution of larger political and social issues in the Delta. The proposed Project brings many benefits notably environmental benefits to Nigeria, and is not expected to cause any significant investment in the gas field operations in Nigeria for about 5 years. Gas sourcing for the WAGP gas is geographically restricted to a small part ofthe western Delta, and has no direct incidence on most ofthe Delta. The Project will help in using a portion of AG that might otherwise be flared, thus reducing global warming. It is clear that the Delta has considerable problems to overcome, but it should be recognized that the Project has no leverage for implementing governance reform in Nigeria; the revenues to Nigeria from the project are less than 1% ofthe total revenues from oil and gas upstream operations in Nigeria (on average the gross revenue fiom Nigerian gas sales by WAGP are about US$62 millionper year in 2004 dollars, compared to projected revenues from the sale ofoil ofabout US$27 billion in 2004). However, the Bank is in constant dialogue with Nigeria to address some ofthe social issues in

- 22 - the Delta as part of its broader country assistance program, and is preparing the Delta Development Project (P076754) that will begin to address some ofthese concerns. Effective information sharing, communication, and consultations by the Project Sponsors and governments and participating development agencies has been a key to explaining Project rationale and Project benefits. In addition to the consultations conducted by the Sponsors in developing the EA, MIGA has met with affected parties, and IDA is in the process of doing so (in second half of October 2004). Also the ESAP is, under its terms ofreference, required to meet with affected parties in affected communities. Several consultations between the Bank and interested NGOs have also been held. Questions about the potential financial costs and benefits to the four States have been raised in several quarters. The Bank and its consultants assessed these aspects in depth and the detailed EFA was produced. An open door, public consultation was held in Ghana to explain the Bank’s financial and economic evaluation ofthe Project. Continuing communications and consultation programs by IDA and the Sponsors will also continue to be undertaken. WAGP Compatibilitv with the EIR Management Response: The WAGP has been in preparation for a number ofyears prior to the endorsement ofthe Management Response to the Extractive Industries Review (EIR). Although technically by itself the pipeline project is not extracting gas, and is focused as a gas transportation project, the Project is compatible with the broad objectives ofthe WBG in the E1 sector as set out in the Management Response to the EIR and evaluation reports. As a cross-border project that supplies fuel to local offtakers, there is a particularly strong rationale for WBG support and a number ofWBG institutions are engaged together in this respect. The Project will contribute to the WBG’s goal ofincreasing support for gas use, and will, in addition, do so through utilizing currently flared gas (something the WBG has consistently been promoting through, for example, GGFR). While governance will be a factor in how successful the ultimate net benefits of the Project will prove to be, the risks in this respect are considerably reduced by the 70% or more ofProject benefits that will flow to gas offtake countries in the form oflower fuel prices compared to only 30% or less that will accrue to Nigeria in the form ofgas sales and tax revenues. The Project does not fall in the category of “significant projects” that would require full revenue transparency immediately, but Nigeria is now the leading country in making progress to implement the EITI and make its E1 revenues fully transparent. Although the Project is not engaged in the extraction ofnatural gas, the upstream Producers will nonetheless make representations to IDA that they are participants in the EITI as it is being implemented in Nigeria, as will prospective shippers under the Access Code. In addition, N-Gas has agreed to make public its purchases ofnatural gas from FGN andor NNPC, in dollars and MMscf. Benefits should accrue widely in the offtake countries through lower fuel costs and thereby lower electricity costs. Communities in Nigeria will benefit directly through reduced local gas flaring and potentially indirectly through revenues that accrue to the FGN. Through its overview of WAGP’s consultation process and its own recent follow up consultations in Benin, Ghana, and Togo, the Project team is confident that the Project is broadly supported by communities in these countries. In the case ofthe Niger Delta, more recent follow up consultations are not possible because ofsecurity, but the Project team has met with some NGOs in Lagos and believes that in net the Project is a benefit for the region. Project arrangements are designed to have a high degee of disclosure to communities. An independent Environmental & Social Advisory Panel will continue to oversee the Project’s environment and social impacts and will make its reports

-23 - public. In addition, WAPCo will hold ongoing consultation and make regular disclosures to communities about its activities. (See Annex 4 for more information on compatibility with the EIR.) Ghana’s financing plan for funding its shareholdinn in WAPCo: As a 16.3%’* shareholder in WAPCo the Government of Ghana has already invested approximately US$ 12 million in WAPCo and in the absence of concessionary financing, the Government has decided to borrow the additional US$84 million required to be deposited in an escrow account by the final investment decision (FID) date. Under the Poverty Reduction and Growth Facility (PRGF) program with the IMF, the Government has agreed to a limit ofUS$75 million on short-term commercial borrowings and a moratorium on contracting new commercial borrowings longer than one year. It is expected that Government of Ghana will fund its equity contribution from the following sources: (i)a US$40 million borrowing from FGN on concessional terms initially for 2-1/2 years, and (ii)a borrowing by VRA to raise the remaining US$44 million on commercial terms. The Government is yet to finalize these financing arrangements. The Government ofGhana has acknowledged that these plans are short-term in nature and therefore the Government is exploring several options, especially those from the IFC, but has not committed to a long-term financing of the equity investment. As a fallback, the Government of Ghana has secured a line ofcredit from Barclays Bank on commercial terms, which could be used to bridge the VRA portion ofthe equity funding, and will allow WAPCo to begin construction as planned.

6. Loan/credit/guarantee conditions and covenants The Project has been developed with a regional integration theme; considering this, it is proposed that the Project is not subjected to individual country or sector conditionalities. While there are no sector conditionalities imposed in connection with the Project, there are several Project-specific covenants designed to ensure that Bank guidelines and policies will be applied. Other covenants that have been imposed on the Project include: Prior to being allowed to make deliveries ofgas to the Takoradi Power Stations in Ghana, a list of action items identified at Takoradi, as part ofan environmental audit ofthe existing plants, and as a result ofan assessment ofthe impact ofthe conversion ofthe plants to burn gas, will have to be implemented by VRA (and certified by the Ghanaian Environmental Protection Authorities).

0 CEB has made a written commitment that it will cany out an EA and prepare an RAP satisfactory to the Bank for the establishment ofa new generating station with an associated industrial development zone at Maria Gleta. The Cotonou site will be examined in an audit to determine whether there are any “legacy” environmental concerns that should be addressed in conjunction with the relocation ofthe turbine presently operating there. CEB will at the same time conduct an analysis ofthe impacts ofconversion to gas fuel and an environmental audit at the LomC power station, also with Bank review and approval ofthe terms ofreference and reports.

l8Assuming SoBeGaz and SoToGaz exercise their options. The Government of Ghana’s shareholding will be 16.6% if only one option is exercised, and 17% if neither option is exercised.

- 24 - 0 Several undertakings in regards EITI: (a) the upstream Producers in Nigeria will represent to IDA that they are participants in EITI, (b) any future shippers under the Access Code will also have to make a representation to WAGPA that they are participants in EITI, (c) N-Gas will require all its shareholders that have upstream activities to be participants in EITI, (d) N-Gas will covenant to IDA that it will disclose (on the Project's website or other suitable public place) all payments to FGN and NNPC for the purchase ofgas, and (e) WAPCo will covenant not to become a purchaser of natural gas (Le., it will remain strictly a Transporter).

D. APPRAISAL, SUMMARY

1. Financial Analysis The main issues addressed in the Project financial analysis (see Annex 9 for complete financial analysis) are: (a) demand for gas in consuming countries; (b) pricing components ofWAGP gas; (c) financial structure ofthe Project; (d) financial analysis ofthe Project including Rates of Return and risk to Sponsors as well as overall price of gas; and (e) financial impact on the Foundation Customers: VRA and CEB. The World Bank Group has been involved in the power sectors of Ghana and Benin for a long time. In addition to the complete review ofthe demand for gas by the Bank's consultants, the Bank has undertaken a detailed analysis ofthe demand for gas originating from the power sector of Ghana and Benin, The economic and financial analysis ofthe Project is based on the Bank's demand projections for gas in the power sectors of Ghana, Benin, and Togo and the forecast of demand in the industrial sector ofthe consuming countries as agreed between the Sponsors and the four States. A summary ofaggregate gas demand in Ghana, Benin, and Togo and expected WAGP pipeline throughput for the Low Demand Case and for the High Demand Case is provided in tables below. Annex 1 provides details on the composition ofthe demand for gas in the two scenario^.'^

Aggregate Gas Demand in Low Demand Scenario (by Customer Class, in MMBtulday)

Benin & Togo: industrial & Commercial - 19,508 21,286 22,685 23,271 23,738 27,723 Grand Total (MMBtulday) 76,403 84,167 123,372 140,033 181,193 214,580 317,348 38 1,9@

l9 These demand forecasts are limited by the capacity limit ofthe proposed pipeline. See Annex 1 for detailed gas forecasts for individual countries.

- 25 - Aggregate Gas Demand in High Demand Scenario (by Customer Class, in MMBtulday)

9492 9818 10640 11334 12934 15036

The gas tariff to Foundation Customers would consist ofthe following charges:

0 Gas Commodity Price - a fixed charge ofUS$OSO/MMBtu plus an escalated index based on oil prices and US inflation, including a provision for volume incentives;

0 Delivery Fee - a fixed charge ofUS$ 0.1 O/MMBtu delivered;

0 ELPS Transportation Charges - a fixed charge ofUS$0.25/MMBtu escalated annually based on an inflation index;

0 The WAGP Authority Charge - estimated to be about US$ O.Ol/MMBtu to pay for a portion ofthe costs bome by the WAGP Authority;

0 Credit Support Charge - charges related to the multilateral and bilateral guarantees from IDA, MIGA, and ZurichDPIC; and

0 WAGP Tariffs - calculated in accordance with the tariff methodology agreed under the Project agreements to provide the agreed rate ofreturns to the Sponsors (see below) under various demand scenarios (see Annex 9, paragraph 15, for more details) escalated annually based on an inflation index. Reservation Charge is defined as fixed charges paid to WAPCo to cover the fixed and estimated variable costs of construction, operation, maintenance and expansion2' ofthe new pipeline including the returns to the Sponsors at the agreed rates.

The price ofgas is dependent upon the load factor ofthe power stations when compared to the take-or-pay clauses ofthe Foundation Customer GSAs. It is expected that in the Low Demand Scenario, the average rice of gas delivered to Foundation Customers would be about US$ 3.44/MMBtu (to VRA5, ) based on World Bank projections for natural gas demand and ofcrude oil prices - it is expected the average price ofgas will be about US$4.15/MMBtu for the first 5 years, about US$3.48/MMBtu in the second 5 years, and about US$3.05/MMBtu for the remaining 10 years ofthe Foundation Customer GSAs. In the High Demand Scenario, the average price ofgas delivered to Foundation Customers is expected to be about US$ 2.69MMBtu (to VRA) - it is expected the average price ofgas will be about US$3.13/MMBtu for the first 5 years, about US$2.71/MMBtu in the second 5 years, and about US$2.46/MMBtu for the remaining 10 years ofthe Foundation Customer GSAs. The WAGP Tariffs are stipulated so that the Sponsors should achieve a real rate return on total invested capital fiom net cash flows (net ofcapital costs, including cost of future gas

2o As agreed under the PDP to reach a maximum capacity of474,000 MMBtu/day.

21 Gas price per unit is expected to be lower to CEB when compared to VRA as pipeline capacity load factors for CEB offtake is expected to be higher than that ofVRA in the earlier years.

-26- compression to reach the agreed forecast of gas demand derived from all GTAs (i)of exactly 15% real (after-tax), assuming that actual growth in Reserved Capacity exactly equals the agreed projected demand forecast; (ii)of less than 15% real (after tax) if the actual growth in Reserved Capacity is less than the agreed projected demand forecast; and (iii)of more than 15% real (after tax) if the actual growth in Reserved Capacity is greater than the agreed projected demand forecast. Ifdemand for WAGP gas does not materialize beyond the Foundation Customer demand (an unlikely scenario), the Sponsors will make a return on their invested capital (RoR) of about 12% real. It should be noted that the States have not guaranteed these returns to shareholders but as is usual and customary for such offtake transactions, the payements of Reserved Capacity are subject to a “take or pay” clause. The gross transportation revenues from the sale of gas (gross revenues from sale of gas minus cost ofupstream gas; or gross revenues to WAPCo) in the Low Demand Scenario are expected to be about US$5,722 million (nominal). The undiscounted cash flow, net ofoperating and maintenance costs and taxes, are estimated to be about US$3,285 million (nominal) and NPV of cash flow (at a nominal discount rate of 13%”) is expected to be about US$ 311 million. The financial internal rate or return (IRR) for the new pipeline in expected to be 19.0%. The gross revenues from the sale of gas in the High Demand Scenario are expected to be about US$5,529 million (nominal). The undiscounted cash flow, net of operating and maintenance costs and taxes, are estimated to be about US$3,207 million (nominal) and NPV of cash flow (at a discount rate of 13%) is expected to be about US$358 million; the financial IRR ofthe new pipeline in expected to be 20.3%. The private Sponsors would, as a generate a positive NPV (at 10%) ofUS$ 197 million and IRR of 16.6% in the Low Demand Scenario and a positive NPV ofUS$234 million (at 10%) and IRR of 18.2% in the High Demand Scenario, including the benefits that are generated from upstream activities related to the Project.24 The analysis also indicates that the private Sponsors would, as a group, generate a positive NPV ofUS$ 158 million (at 10%) and IRR of 15.5% in the Low Demand Scenario and a positive NPV ofUS$184 million (at 10%) and IRR of 16.8% in the High Demand Scenario, from the new pipeline, i.e., excluding the benefits that are generated from upstream activities related to the project. Sensitivity analysis indicates that the financial viability ofthe Project is insensitive to operating costs, and is marginally sensitive to an increase in capital expenditures (see Annex 9 for details). This Project entails many commercial and political risks, which the Sponsors have taken into account before agreeing with the four States on the above-mentioned tariff methodology. These

22 A real discount rate of 10% is assumed (also used for economic analysis). US$ inflation equivalent of3% is added to the real discount rate to determine the nominal discount rate of 13%.

23 This analysis excludes returns to SoBeGaz and SoToGaz, which are private commercial entities in Togo and Benin. To date, SoBeGaz and SoToGaz are not shareholders in WAPCo, and it is unclear as to how Benin and Togo will arrange for domestic ownership (2% each). Therefore, for the purposes ofthis analysis, it is assumed that SoBeGaz and SoToGaz are public entities and the benefits accruing to them would accrue to Benin and Togo respectively.

24 For the purposes ofthis fiincial analysis, sunk costs have been included as costs incurred by the four sponsors. The Bank‘s Low Demand Scenario is marginally optimistic than that ofthe Sponsors resulting in a ROR of 15.5% from the new pipeline, excluding the upstream benefits generated to the sponsors fkom the pipeline.

- 27 - risks25 include: (a) upstream production and delivery risks, namely that the gas is produced in Nigeria; (b) ELPS operational risks, namely that the ELPS pipeline delivers the gas to WAPCo; (c) completion and operational risks relating to WAPCo itself, including political risks involved in each country and in operating across the three borders, and (d) downstream or offtake risks, namely the risk that VRA and CEB are able to pay for delivered gas and the related “co- completion risk,” namely that they have adapted their generating facilities to use the gas. The first three sets ofrisks are borne by the Sponsors, and the fourth is technically borne by WGhanaand CEBBenidTogo under the Foundation Customer GSAs and GCSAs. One significant risk is that the Sponsors rely initially and primarily on a single customer, the Takoradi Power Stations. There are no other customers ofthis size in the region upon which the pipeline could rely if sales to Takoradi had to be terminated for any reason. It is true that the Project will mitigate this risk through IDA, MIGA, and Zurich/OPIC guarantees, however, the coverage ofthese guarantees is limited to about US$200 which is much lower than the cash flow from Foundation Customers over a period of20 years. The insurance/guarantee package represents approximately 33% oftheir investment on a present value (PV) basis, 28% of their cash flows on a discounted basis, and 12% ofthe pipeline cash flow from Foundation Customers in nominal terms. Furthermore, these guarantees cover only termination events and therefore WAPCo is taking the day-to-day credit risk with the Foundation Customers, which is significant. The Sponsors are likely to achieve their target rates ofreturn when the gas buyers pay WAPCo for its services for 20 years (the duration ofthe primary term) without termination ofthe Project. In addition, there is a significant risk associated with the operation ofthe pipeline across the four countries. For example, any political event affecting the operation ofthe pipeline in a single State will affect the capacity ofthe pipeline to deliver gas. The Sponsors are also taking significant construction and commercial risks in a difficult environment for major developments. If there is a major increase in construction costs, or a significant delay in start-up, or a lower growth in the market than anticipated, that will impact the returns earned by the Sponsors because the tariffs are set before start ofconstruction, using estimates ofthe costs and market growth, not actual values. The following risk matrix delineates in broad terms which party is taking the majority ofrisks by category.

25 Most of these risks are not generally present in mature environments like Europe or North America.

26 The Sponsors have requested ZuricWOPIC to increase their portion of insurance from US$75 million to US$125 million in the Low Demand Scenario with Ramp.

- 28 - Project Sponson, and Ghana, Risk Phase RisklPlObligation Mitigation Private Benin, Togo2’ Package2e partici pa nts” - I_ Pre-Construction Project design B Financing B

Construction Cost overruns B Construction delays B

Operation Operation and maintenance B Output quality specifications B Gas tariffs -Foundation Customers N/A (Contractually Agreed at FID) (VRAlCEB)

Gas tariffs - Other Customers B Supply of natural gas B Inability of Foundation Customers to take gas Payments under Foundation B Customer GSAs

Concession Term Currency devaluation H Currency convertibility and B transferability Politicalforce majeure3’ Changes in law Naturalforce majeure” relating to B the Project

Expropriation B

Given the risk associated with a large single asset in West Africa, a real after tax return of 16.6% (including the benefits generated from upstream activities) and 15.5% (excluding the benefits generated from upstream activities) in the Low Demand Scenario appears reasonable. The financial impact on the two power utilities purchasing most ofthe WAGP gas (VRA and CEB) has also been analyzed. The analysis indicates that VR4 would have a zero PV ofbenefits

’’ Including private sector Producers and EPC contractors. ’’ Including potential private buyers ofWAGP gas. ’’ IDA and MIGA are backstopping risks associated with Ghana only. Although not the only triggers ofthe IDA Guarantee, the following principal underlying risks to be borne by the Government ofGhana under the GCSA are worth highlighting: (a) failure by VRA to pay “liquidated damages” and (b) lack ofUS Dollars to pay contractual amounts. As guarantor ofthe Government’s performance, IDA’s underlying Project risks would be a subset ofthe Government’s, although ultimately IDA’s reimbursement risk is the same as for any IDA Credit to Ghana.

30 Politicalforce majeure: political violence, war (declared or undeclared), national and regional strikes, coups d’ttat, etc.

31 Naturalforce majeure: acts of God, earthquakes, fues, typhoons, etc.

- 29 - from WAGP at constant Brent crude oil prices ofUS$17.68/bbl in the Low Demand Scenario and at constant Brent crude oil prices ofUS$12.34/bbl in the High Demand Scenario and therefore will be neutral between the choices ofthe fuel (WAGP gas over imported crude)32. Furthermore, the analysis indicates that CEB would be have a zero PV ofbenefits from WAGP at constant crude oil prices ofUS$7.24/bbl in the Low Demand Scenario and at constant crude oil prices of US$5.91/bbl in the High Demand Scenario and therefore will be neutral between the choices ofthe fuel (WAGP gas over imported crude).33 Given the current outlook for oil prices34the gas pipeline would result in significant savings for both VRA (about 27%) and CEB (about 58%) in the Low Demand Scenario.

2. Economic Analysis The economic analysis assesses the economic benefits ofthe WAGP Project as a whole as well as from the perspectives ofthe countries of Ghana, Nigeria, Benin, and Togo (see Annex 10 for the complete Economic Analysis). Economic benefits from the Project are estimated to be significant. An independent consultane5 for the Bank has also carried out a detailed Economic & Financial Assessment of the Project. The assessment has concluded that the economic benefits are significant and fairly distributed. The analysis presented here is consistent with the assessment conducted by the Bank’s consultants. The main aspects addressed in this Project economic analysis are: (a) an analysis ofthe alternatives to the proposed Project; (b) Project economic costs and benefits; (c) economic costs and benefits to Ghana, Nigeria, Benin, and Togo; (d) environmental benefits from the Project; (e) other economic benefits expected from the Project; and (f) an assessment of the overall reasonableness of the sharing ofProject benefits. The analysis ofvarious alternatives to the Project has concluded that the transportation of Nigerian gas to Ghana, Benin, and Togo via the proposed pipeline is the most cost-effective means ofmeeting the anticipated growth in regional energy demand. Substitution of oil by gas will also yield environmental benefits. Two gas demand scenarios have been designed by the Bank to analyze the economic benefits arising out ofthe WAGP Project36(see Annex 1). These are:

32 This analysis is conducted from VRA’s perspective as a commercial entity and excludes the investment made by Ghana in the pipeline.

33 This analysis is conducted from CEB’s perspective as a commercial entity. CEB’s switching values are lower than those ofVRA for the following reasons: (a) benefits to CEB are compared against the use ofJet Fuel (used currently to generate power) whereas benefits to VRA are calculated against crude oil; the price ofJet FueliMMBtu is higher than that of crude oil; and (b) the “ramp” is being made available to both VRA and CEB (see Annex 9 for details) even though CEB has adequate plant load factors to sustain benefits from the use ofgas; this results in CEB generating proportionately larger benefits (on a per unit basis) when compared to VRA, until 2009 when the ramp is in place.

34 Currently trading over US$50/bbl.

35 IPA Energy Consulting, U.K.

36 These demand scenarios have been developed by the Bank based on the Bank’s and IFC’s view of the power sector in Ghana and Benin. This analysis is also based on the work carried out under the Ghana ESW (dated July 2004) and incorporates CEB’s plans regarding expected power imports from Ghana and CBte d’Ivoire in the medium-term.

-30- Low Demand Scenario, which assumes that Valco operations will never restart, and therefore no demand for power will arise from Valco operations. Because of the power available the existing hydroelectric facilities in Ghana, demand for WAGP gas will be lower. This case is considered to be a less likely scenario given the Government ofGhana’s stated interest and current efforts to restart Valco operations. At the same time, such a scenario tests the economic robustness ofthe Project and therefore is being considered as one ofthe key demand scenarios for the economic analysis. High Demand Scenario, which assumes that Valco operations will restart before first gas (expected in early 2007), all four potlines will be operational, and a demand ofabout 2,540 GWh (Valco demand for 4 potlines) will have to be met by incremental VRA thermal generation. The Project as a whole is economically and commercially viable in both ofthe Bank’s scenarios ofgas demand - Low Demand and High Demand (See Annex 10 for more details) - and using July 2004 World Bank Oil price projections (Nominal forecast starting with US$24.00/bmel in 2007 to US$25.25 in 2015, US$25.75 in 2020 and US$27.25 in 2026). As a whole, the Project3’ shows a positive economic NPV (at a real discount rate of 10%) ofUS$ 1,421 million (excluding the environmental benefits) and an Economic Rate ofReturn (ERR) of 24.9% in the Low Demand Scenario, and a positive NPV (at 10%) ofUS$2,021 million and an ERR of3 1.4% in the High Demand Scenario. The sensitivity analysis indicates that the economic return ofthe Project is fairly insensitive to changes in operating and capital expenditures but is sensitive to significant drops in international price ofcrude oil. The following table provides an overview ofProject’s economics in both demand scenarios.

Undlscounted Project NPV Q Gross Beneflts ffet Benefits 10% Project ERR (US$ Mllliona) (US) Milllon) (US) Millions) (As a Low Demand Scenario 7,453 6,545 1,42 1 24.9 High Demand Scenario 9,100 8,192 2,021 31.4

Switching Values3* have been calculated for the key variable, namely price ofcrude In the Low Demand Scenario, Brent Crude Oil prices ofless than US$8.92 per barrel (constant over the life ofthe project) would result in negative NPVs ofthe Project. In the High Demand Scenario, Brent Crude Oil prices ofless than US$6.12 per barrel (constant over the life ofthe project) would result in negative NPVs of the Project. The sensitivity analysis also indicates that the economic return of the Project is fairly insensitive to changes in operating and capital expenditures but is sensitive to significant drops in intemational price ofcrude oil. The Project will yield significant net economic benefits to each ofthe four participating countries, and such benefits are significant in both gas demand scenarios (see tables below) and

37 For the purposes of the Economic Analysis, the Project is defined to include upstream costs and benefits associated with the production of WAGP gas to all participants as well operations of the new pipeline.

38 Switching Value ofa variable is that value at which the Project’s NPV becomes zero.

39 Assumes that the price of oil remains constant throughout the life of the Project.

-31 - with relatively low prices of crude oil when compared to current oil prices. Annex 10 provides further details on the project economics and Economic NPVs and ERRS as calculated for the benefits accruing to all four participating countries. The following tables summarize the estimated net benefits to the Project participants in the WAGP Project.

Low Demand Scenario - Economic Benefits to Project Participants

FGN Taxation Benefit from 437 437 Commodity Sales Net Gas Commodity Sales & 236 141 377 Shipper Agency Fee Fuel Cost Savings in Power 1,732 476 476 2,684 Sector Fuel Cost Savings in Non- Power, Industrial I 78 162 5 245 Commercial Sector WAPCo Income Taxes 439 77 150 158 825 WAPCo Dividends (net of 324 497 40 40 1,087 1,988 investments) Other Costs and Benefits (6) (1) (4) (10)

Total Net Economic 2,568 1,247 827 675 1,229 6,545 Benefits NPV @ 10% 549 292 192 149 238 1,421 Economic IRR 35.8% 29.6% 66.6% 51.5% 19.5% 24.9%

High Demand Scenario - Economic Benefits to Project Participants Ghana Nigeria logo Benin Private Project as ~&?&.&&& FGN Taxation Benefit from 470 470 Commodity Sales Net Gas Commodity Sales & 278 168 446 Shipper Agency Fee Fuel Cost Savings in Power 3,009 55 1 552 4,112 Sector Fuel Cost Savings in Non- Power, Industrial I 154 234 42 430 Commercial Sector WAPCo Income Taxes 406 71 139 147 764 WAPCo Dividends (net of 323 495 40 40 1,083 1,980 investments) Other Costs and Benefits (6) (1) (4) (10)

Total Net Economic 3,887 1,314 964 776 1,25 1 8,192 Benefits NPV @ 10% 998 33 1 238 178 275 2,021 Economic IRR 64.5% 33.4% 76.2% 57.6% 21.8% 3 1.4%

In addition, environmental benefits from the implementation ofthe proposed Project will be generated due to: (a) a decrease in emissions linked to fuel substitution in Ghana, Benin, and Togo, and (b) the Project contribution to gas flaring reduction in Nigeria. These benefits have

- 32 - been considered in this analysis as global benefits and have not been incorporated in the assessment ofthe net economic benefits to each ofthe participating countries. In addition to the net economic benefits indicated above, there are other benefits to the countries in the region fi-om this Project that are difficult to quantify. These include: establishing a new level ofregional cooperation and economic integration to enhance regional stability; cultivating ECOWAS as a regional economic cooperative agency; increasing the security of energy supply through diversification of supply; and providing additional economic benefits fi-om the construction phase spending in the four countries, including creation ofnew jobs, and technology transfer, both in terms offacilities and in terms ofthe management and regulation of gas projects. Overall, it can be concluded that the Project is economically beneficial to each ofthe four participating countries, that the sharing ofbenefits amongst participants is reasonable, and that the proposed Project is a fair commercial transaction for the participating countries and for the private shareholders.

3. Technical Most ofthe engineering work has been completed and the Sponsors have called for construction- related bids in May 2003; however, major contract awards will be given only after the FID date. A Pipeline Development Plan (PDP) has been prepared by WAPCo and approved by the States and their advisers. The PDP brings together the fi-ont-end engineering design package, the gas market forecast, the tariff model, and the construction and development cost estimates with an objective of finalizing the WAPCo pipeline tariffs.

4. Fiduciary There are no direct fiduciary issues related to the Project as there will be no procurement or procurement-related disbursements from the Bank Group under the Project. Should the IDA Guarantee be called, IDA would disburse the claim amount to WApCo. Under the IDA Indemnity Agreement there would be a corresponding obligation by Ghana to IDA for repayment.

5. Social The WAGP Project is expected to bring a variety ofimportant social development benefits to the four participating countries (Nigeria, Benin, Togo, and Ghana). It is anticipated that the gas will provide a more secure regional energy supply for power generation or direct use by industrial and non-industrial consumers. Households, including the poor, will benefit from enhanced electrical availability. Development ofa new energy fuel source could also lead to secondary economic development in the region and thus create new employment, healthcare, and education opportunities for the affected population. Transportation and access will improve for communities along the pipeline route, since residents will be permitted to operate light vehicles on the pipeline service road, and a pier and other roads constructed or reinforced to handle movement ofmaterials for WAGP will remain in place after construction ends. Pipeline and infrastructure construction will also increase short-term employment opportunities and demand for goods and services in the adjacent communities.

- 33 - WAPCo is committed to sourcing at least 15% of goods and services locally, which would amount to approximately US$80 million. Between 900 and 1500 jobs will be made available to the local labor force during construction, and 63 full-time staff plus approximately US$ 19 million in locally contracted services will be needed during pipeline operations. Finally, WAPCo intends to implement a Community Development Program in the areas affected by the pipeline, emphasizing capacity-building and empowerment rather than direct provision of infrastructure. The program is being developed in consultation with the communities, beginning with the self-assessments ofneeds and priorities that are summarized in the EAs. Once the final investment decision is taken, WAPCo’s community liaison staff will work out a memorandum of understanding with each community describing the specific content ofthe program. The program will likely concentrate on health and education, at least at the outset, but annual work programs will be agreed with the communities as the project proceeds. However, in each ofthe four participating countries, the construction ofpipeline and infrastructure will also have, to varying degrees, a negative effect on a portion ofthe affected population. Potential impacts in the social and economic aspects are related to loss of land or land use, interruptions to means oflivelihood (farming and fishing), disturbances to cultural resources, and influx ofworkers. The EMPs for the Project contain measures to mitigate these potential impacts that include: providing for a work schedule that will avoid disturbing the traditional life ofcommunities; establishing a communication program to inform communities of ongoing work and establish appropriate measures to minimize the disturbance caused by the work; guaranteeing access to private property and the safety of residents and passersby during the course ofthe work; minimizing service interruptions and disruption to road traffic, fishing, forestry, and other activities during the work; and conducting regular and frequent HIV/AIDS awareness training for construction workers, with more frequent and focused training for workers with higher risk (truckers, offshore crew change, etc.). The scope ofresettlement and land acquisition varies from one country to another, the most significant land acquisitions and displacement being in Nigeria, Even there, the Project requires the acquisition ofless than 144 hectares. Altogether, 206 hectares will be acquired, and 2,893 households will be affected, most ofthem losing a small portion (6% or less) ofthe total holdings they own and/or cultivate. The number offamilies to be resettled is also small; 21 residential properties are being acquired in Benin and 143 in Nigeria. Only 37 ofthe Nigerian properties have fully-constructed homes.

6. Environment Overall emissions ofgreenhouse gas and air pollutants will diminish as a result ofWAGP, resulting in improved air quality at global, regional, and local levels, and related improvements in public health and quality oflife. The projected decline in overall emissions of greenhouse gases, according to the EAs, ranges between 86 millionmetric tons and 11 metric tons CO2 equivalent over a 20-year period, depending on the assumptions made about fiture economic growth and associated energy consumption in the four countries. Overall regional emissions of other air pollutants will also decline under either scenario. Emissions of all air pollutants will decrease in Nigeria as currently flared gas is instead sent out ofthe country. Ambient air quality should improve in the gas production areas as routine flaring is eliminated. WAGP will make a

-34- small but meaningful contribution to reduction ofgas flaring.40 Emissions ofair pollutants will either increase or decrease in Benin, Ghana, and Togo, depending on the asswnptions that are made regarding the levels offuture development, but even if increases occur, they will be smaller than would be the case with oil-fired or coal-fired generation. By supplying gas to regional power providers, WAGP will support the WAPP, another regional energy sector initiative that will also bring about substantial cooperation and integration. The natural gas source provided by WAGP will allow the WAPP to make reliable electricity available to many more areas and customers in the region, allow migration to cleaner gas-fired power generation to satisfy regional power demand, and cut power generation costs substantially. WAGP will provide a number ofimportant benefits at the local and national level for the people ofBenin, Ghana, Nigeria, and Togo. WAGP provides a clean, reliable energy source for expanding power generation in Benin, Ghana, and Togo and thus reduces the energy supply gaps in these countries. Monetary benefits to the countries are also realized through taxes paid by WAPCo. The Producers will realize additional revenue from the sale of gas transported by WAGP. Local economies will benefit fiom WAPCo’s commitment to hiring employees and contractors fkom surrounding communities as noted in D.5 above.

7. Political and Reputational Risk Assessment Given the potential political and reputational risks associated with a Project that is both regional and with a large pipeline component, an assessment was made ofthese potential risks and the related communications needs ofthe Project. Extensive one-on-one meetings and focus groups sessions were held in all countries with more than 130 people representing about 70 different organizations. In addition to the large consultation and communications programs being run by WAPCo, extensive meetings and consultations have been held by the Bank with the media, NGOs, and other representatives ofcivil society in all four countries. In particular, larger consultations were held with all NGO and media representatives in Ghana and Togo, and in Nigeria one-on-one meetings were held with all interested groups. A larger consultation with a Nigeria delegation was held in Washington. Communications and discussions have been ongoing, in particular with interested NGO groups. The assessment found that overall there was broad understanding and strong political support for the Project among almost all groups in the four countries with the exception ofa small segment ofthe NGO population mainly located in Nigeria and questions raised by some intemational NGOs. Parliamentarians from all parties in all countries were strongly supportive; the media was all fairly well informed and supportive ofthe Project, as were the various related semiautonomous government organization that provide advice or regulate the oil and gas sectors. The broader issues of concern related to the financial viability ofthe Project and the costs (in Ghana) and the issues of security of supply and broader socio-political issues related to the Niger

40 Global Gas Flaring Reduction Initiative statistics place Nigeria’s annual flaring at 18.9 billion cubic meters. Calculations in Appendix 2 of the EAs indicate that approximately 1.O billion cubic meters of AG, some or all or which is currently flared will be shipped instead through WAGP at the initial pipeline volume projected by WAPCo. Volumes may increase in later years, but the proportion of associated gas will likely decrease at the same time, resulting in a volume of associated gas that remains relatively constant at 1.O billion cubic meters, or 5% of the present flaring volume.

- 35 - Delta (all countries). There were also smaller areas ofrisk associated with information flows to different organizations and the lack ofgovernment communications related to the Project. The review concluded at the political and reputational risks could be mitigated through revisions to Project design and a program ofongoing consultations and communications and were not an impediment to the Project going forward.

8. Safeguard policies

Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [XI 11 Cultural Property (OPN 11.03, being revised as OP 4.11) [XI [I Involuntary Resettlement (OP/BP 4.12) [XI El Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OPBP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60) El [XI Projects on International Waterways (OP/BP/GP 7.50) [XI 11

Safeguards Screening Category: S1 Environmental Screening Category: A Key Safeguards Policy Issues The Sponsors have prepared a regional EA and individual country EAs and EMPs for Benin, Ghana, Nigeria, and Togo. The conclusion ofthe assessments was that no potentially high severity impacts would remain after the planned mitigation measures in the EMPs are applied in accordance with current commitments and plans. All ofthe residual impacts become either moderate or low severity as shown in Annex 13, Table 13.1. Secondarv and Cumulative ImDacts. Environmental and socioeconomic secondary impacts could occur “upstream” or “downstream” ofthe Project. For the initial gas supply to WAGP, wells and infiastructure are already in place, so there will be no significant drilling or gathering system installation upstream, in the Niger Delta, for the first five to ten years ofoperation. To address potential impacts ofhture increases in gas production that may occur, a covenant in the Access Code will require any supplier shipping gas through WAGP to be in compliance with applicable national environmental regulations. Downstream ofthe Project, the most immediate sources ofpotential impacts are modification ofthe electric generating facilities ofthe Foundation Customers. Covenants in the legal documents condition delivery ofgas by WAPCo to the VRA facilities in Ghana on certification that the necessary environmental audits and EAs have been completed and implemented. In Benin and Togo, CEB has delivered to the Bank a written commitment to prepare and EAs, RAPS,and environmental audits satisfactory to the Bank for facilities in Cotonou, Maria Gleta, and LomC.

-36- Beyond the issues ofupstream and downstream development, few indirect or secondary impacts were found to be significant, either in the country EAs or the regional EA, the latter having been designed to examine impacts from a broader perspective. The regional EA did not reveal any significant cumulative impacts - that is, impacts of WAGP construction or operation in conjunction with other planned infrastructure projects or development activities. Adverse impacts can ofcourse result from development that may be induced by the increased supply of electricity and gas if it is not planned and managed in accordance with national environmental regulations. Upstream and downstream impacts are discussed further in Annex 13. Land Acauisition and Involuntarv Resettlement. Land acquisition is summarized below:

Country Area (ha) Households Affected

Benin 39 337 Ghana 13 42 Nigeria 144 2,485 Togo 10 29 Total 206 2,893

For permanent loss ofassets and displacement, adequate compensation measures have been identified within a RAP for each country. Each RAP has been supported by a Participatory Social and Impact Assessment (PSIA) as well as wide public consultation. Annex 13 provides a summary ofRAP provisions. EMPs. Management of environmental and social impacts will be by means ofan EMP included in the EA for each country but published as a free-standing document as well. The regional EA contains a consolidated EMP. The EMPs include monitoring to check whether the WAPCo operational controls and mitigation measures conform to planned arrangements, including regulatory requirements, whether they are being properly implemented, and whether they are effective. Third party monitors from within the Sponsors’ organizations will assist in oversight ofEMP implementation, and WAPCo will contract with environmental firms to conduct independent audits at intervals. WAPCo will develop final arrangements for monitoring and auditing in consultation with the Bank and national regulatory agencies. The audit reports will be made available to regulatory agencies and the Bank, MIGA, and Zurich/OPIC. Virtually all elements ofthe EMPs will be implemented by WAPCo, which is committed to provide the essential personnel and specialized skills. Budgets have been calculated for ENDP implementation during construction and operation (see Annex 13). Government agencies will be welcome to participate in various monitoring and auditing processes. Independent Advisory Panel. In accordance with OP 4.01, the ESAP has been established, with three permanent members covering social and environmental impact management and pipeline safety. The ESAP’s reports will be made public. Consultation and Disclosure. The extensive stakeholder consultations conducted by WAPCo during preparation ofthe EAs and RAPSare summarized in Annex 13. The first consultations actually preceded EA preparation, having begun at the conceptual stage of front end engineering design as early as 2000. Consultations on the EAs were initiated by WAPCo in September 2002 and have continued up to the public hearings held by the environmental agencies of Benin,

- 37 - Ghana, Nigeria and Togo in March and April 2004 as part ofthe national review and clearance procedures. Drafts ofthe EAs were publicly disclosed at a total of 41 locations across the four countries prior to the hearings. The country EAs and RAPs and the Regional EA were subsequently reviewed by the World Bank, revised by WAPCo’s consultants, and cleared in final draft form for disclosure in accordance with Bank policies. The documents were posted on the WAGP website and re- disclosed at the same 41 locations, plus the Public Information Centers in the Bank’s country offices and the InfoShop in Washington. Disclosure was completed on July 7,2004. Final versions ofthe EAs incorporating changes requested by the national governments and additional changes requested by the Bank were prepared and delivered to the Bank during October 2004, along with free-standing Ems. They will replace the previously-disclosed versions at the same locations. No additional work was required on the RAPs, hence re- disclosure is not necessary. The Bank undertook missions in the four countries to independently appraise and validate the consultation process conducted by WAPCo. The results ofthose missions are reported in more detail in Annex 13, but the conclusions are unambiguous and can be summarized as follows. In 15 meetings - five with national NGOs and national chapters ofinternational NGOs - and 10 with chiefs, village notables, and citizens of communities along the pipeline right-of-way (ROW) - Bank staff confirmed that there is broad general support for the Project. Not one ofthe 952 individuals and 11 NGO representatives that attended spoke in opposition to it, and many expressed impatience with the length oftime being taken to get the Project started. There was consensus among the communities that they had received enough information about the Project during the consultations. Community members were generally satisfied with the outcomes ofthe consultations; they had received acceptable responses to most oftheir questions and concerns, and, in two key locations, their advice to WAPCo had directly resulted in design changes. The views ofNGOs were more varied, but the majority expressed favorable opinions ofthe consultations. One NGO in Ghana felt that the consultation process emphasized Project benefits and downplayed potential negative aspects, one in Nigeria criticized the process as not ~ being truly consultative (a point ofview that was not confirmed by the rest ofthe discussion with this and two other Nigerian NGOs, considering that fact that they had not read any ofthe Project documents), whereas three NGOs in Togo were pleased to have been actively involved in EA preparation and to have seen all oftheir recommendations incorporated in the final draft EA. Emphasis during Project preparation, in the minds ofboth NGOs and communities, must be on fulfilling the commitments set out in RAPSand EMPs and expressed by WAPCo in public meetings. Disclosure ofEAs and RAPSconformed to Bank and national requirements, but the information at local government centers was not as easily accessible to individuals in the communities as it should have been because ofsheer volume, complexity, location, language, and, in some cases, bureaucracy. NGOs were more readily able to obtain the documents, although not all had done so. WAPCo has agreed with the appraisal recommendations that short, local-language summaries explaining the obligations ofthe respective parties under RAPs and Emsshould be prepared and distributed in the affected communities. A useful addition would be an information workshop in each group of communities to provide pertinent, practical information on topics such as risks and emergency response. However, this should not be done before the FID date; to

- 38 - provide additional information before the communities can see that the Project has begun will only intensify hstration and bad feeling among people that feel adequately supplied (overloaded in some cases) with information and impatient with inaction. In the longer term, the Bank needs to consider ways to improve the efficacy ofdisclosure for affected communities. MIGA has also carried out its review ofthe Project in collaboration with Bank environmental and social specialists assigned to work on the WAGP Project. Site visits by MIGA environmental and social specialists were carried out as part ofMIGA’s environmental and social due diligence during Project underwriting to verify that the Project will comply with MIGA’s Safeguard Policies and environmental guidelines. The WAGP Project is in conformity with MIGA Safeguard Policies and associated procedures for public involvement and disclosure. GovernmentApprovals The FGN has issued a provisional letter approving the EA and is satisfied with the Sponsors’ responses to the requests it made in its review process. WAPCo expects the final environmental permit to be issued with no new conditions or requirements. In Togo, the review process is finished, and the Government has issued a letter giving provisional environmental approval. The final permit will not be issued until WAPCo submits the EMP, completed in accordance with the comments made by the Government. Ghana has completed its review and has requested and received an independent review ofthe EA by the Netherlands Environmental Impact Assessment Commission. Ghana EPA issued a letter on 15 September 2004 stating its intention to issue an environmental permit for most components ofWAGP once the final EA is received, with its remaining comments addressed. The weight coating plant at Tema and the discharge of hydrotest water were excepted; Ghana EPA will issue separate permits for these once additional studies are submitted. Hearings were held a month later in Benin, hence the review process is not complete. The Government has asked for additional information and, if satisfied, will issue a provisional permit that will be replaced by a final permit only after the detailed elements of the EMP that the contractors must prepare are submitted and accepted.

9. Policy exceptions and readiness

No policy exceptions have been taken in the preparation ofthe Project. WAPCo has indicated to the Bank Group that if completion ofthe FID process is after November 30,2004, WAPCo would incur significant cost increases ofup to about US$25 million that are expected on that date under the price escalation clauses ofsome EPC bids. The Sponsors have acknowledged that such an increase in costs may impact the WAGP Reservation Charge by up to about 7 US$/MMBtuof capacity reserved by the Foundation Customers. The Sponsors have stated that FID completion is dependent on a number ofconditionalities, including enactment ofthe enabling legislation in each ofthe four States, final approvals ofthe IDA, MIGA, and Zurich/OPIC guarantees, due authorizations for execution ofcontracts, and funding of (or posting of letters ofcredit to) the escrow account by shareholders. Board approval would be an important milestone in WAPCo’s ability to mitigate price escalation.

- 39 - Annex 1

Annex 1: Countries and Sectors Background AFRICA: West African Gas Pipeline Project

INTRODUCTION 1. This Annex presents briefly information on Nigeria, Ghana, Benin, and Togo, the hydrocarbon sector of Nigeria and the electricity sectors ofGhana, Benin, and Togo, as these electricity sectors provide the foundation upon which the financial and economic feasibility of the Project will be established. In the initial years ofthe Project and as indicated below, Ghana will represent about 80% ofthe WAGP gas offtake and BenidTogo about 20%. As gas to be supplied will come fkom the Niger Delta in Nigeria, a brief review was undertaken as part of Project preparation to determine any impact the West African Gas Pipeline Project would have on the social and environmental conditions in the Delta. The findings ofthis review are also summarized in this Annex.

NIGERIA

Country Background 2. Nigeria is estimated to have a population ofapproximately 133 million, making it by far Africa’s most populous country. (Every fifth person in sub-Saharan Afiica is Nigerian.) Nigeria has made impressive progress in consolidating the political transition fkom a military dictatorship to an open and democratic nation. Also, a committed and professional economic team has made an expeditious start on an ambitious program ofreforms. In parallel, the team has led the preparation ofthe National Economic Empowerment and Development Strategy (NEEDS), Nigeria’s home-grown Poverty Reduction Strategy. After inheriting a legacy ofexpansionary policies fkom the previous administration, the new leadership team has steered Nigeria towards much improved macroeconomic stability. Economic growth has strengthened in the last four years, rising fiom an annual average of about 2 percent between 1995 and 1999, to an estimated 4.1 percent between 2000 and 2003. 3. Most importantly, impressive progress has been made in the fight against corruption and in improving government accountability. The Economic Crimes Commission has achieved dramatic successes in revealing corruption and arresting and sending to trial even high ranking and influential offenders. Also, Nigeria is amongst the very first countries to begin full implementation ofthe EITI, focusing on the oil and gas sector. 4. Bank Group assistance will continue to be based on the three pillars ofthe Joint Interim Strategy: (i)improving governance in the FGN and in selected state governments; (ii)de- bottlenecking private sector activity in the non-oil economy; and (iii)empowerment, for human development and to leverage community engagement in service delivery and local infkastructure.

The Oil Sector 5. The oil industry is the backbone ofthe Nigerian economy, accounting for 95% of foreign exchange earnings and over 80% ofGross Domestic Product. However, no more than 5% of Nigeria’s labor force is employed in the sector. Estimates ofthe total crude oil reserves are 25 billion barrels, although new offshore discoveries are likely to push this figure to 30 billion barrels. Current production is approximately 2.2 millionbbl/day, all ofit from the Delta, with

-40- Annex 1

40% from Delta State and 40% from Rivers State alone. Nigeria is the fifth largest oil producer in the Organization of Petroleum Exporting Countries (OPEC), and sixth largest in the world, uble its output by 2010. The country represents approximately 8% ofUSA imports, and has earned some US$300 billion in oil revenue over the past four decades. 6. Nigeriajoined OPEC in 1971 and established NNPC in 1977, a state-owned and -controlled company that operates in joint ventures (JV)with foreign oil companies in both the upstream and downstream sectors. NNPC further manages four refineries with a total capacity of430,000 bbl/day, a complex petrochemical plant, maintains 21 depots and a network of pipelines across the country, and markets crude oil and petroleum products. It also distributes natural gas through NGC, a wholly owned subsidiary established in 1988. 7. The industry is dominated by five major JV operations managed by affiliates ofa number ofwell-known multinationals: Shell, ExxonMobil, ChevronTexaco, Eni S.p.A., and TOTAL S.A., each in partnership with NNPC. SPDC represents half ofoil production in Nigeria; however, its presence is felt more strongly than other oil companies in Nigeria because its activities are spread uniformly onshore over the entire Delta and because it was the first company established. By contrast, CNL has less than a dozen wells onshore, with all other production offshore. Other foreign company involvement is by British Gas, BP, Conoco, Deminex, Petrobras, Statoil, Sun Oil, and Tenneco. The production ofthe five major operations is as follows, with their approximate geographic distribution (2003 estimate):

Operating Volume Produced % of Total Partner (bbVdey1 (2.2 m bbuday] Approximate Geographic Distribution SPDC 900,000 41% Onshore, spread uniformly throughout Delta ExxonMobil 600,000 32% Offshore shallow and deep water CNL 125,0004' 6% Offshore, around Escravos &iP 200,000 9% Onshore and offshore, Eastem Delta Elf 125,000 6% Offshore Total 5 JVs 1,950,000 89%

8. As a resource rich country, improvements in the transparency ofNigeria's use of revenues can have great development impact, as govemance gains lessen the risks that revenues will not be well used. Nigeria is also the leading country in making progress to implement the EITI and make its E1 revenues hlly transparent. Most ofthe oil and gas producers in Nigeria are also participants in the EITI as it is being implemented in Nigeria. With assistance from the Bank, the Government ofNigeria is strengthening the legal and regulatory frameworks to make them more conducive to civil society participation. Increased freedom ofcitizens to associate; improved access ofcivil society organizations to fulfill their objectives; increased voice, freedom ofthe press and other access to information; and public information and debate will result in more accountable government at all levels.

41 ChevronTexaco saw a considerable reduction in production (75%) in 2003 as a result of the unrest in the Escravos region.

-41 - Annex 1

The Gas Sector 9. Nigeria’s gas reserves are estimated in energy terms at twice as large as its oil reserves, with a potential for production of 120 years, compared to that of oil of30 years. Nigeria has the tenth largest proven gas reserves in the world, approximately 30% of African gas reserves, estimated at about 125 trillion cubic feet (Tcf) with maximum estimates as high as 300 Tcf. Much of this is AG, a by-product ofoil extraction, and is produced both onshore and offshore. 10. Most ofthe gas in the Delta is AG, and is therefore found in the same locations as oil. Currently, around 3,600 MMscf7day of gas are produced in Nigeria. Owing to a lack of gas utilization infrastructure, Nigeria flares 75% ofthe gas it produces (2,700 MMscf7day) through flares located throughout the Delta. Although the amount of gas flared is high, this is significantly below the 98% flared in 1971. Gas is flared through 100 flaring sites,42 which can be horizontal ducts leading to pits (which also discharge fluids), inclined ducts, or vertical towers. Nigeria is the worst offender in terms of flaring in the world, and has the highest ratio of gas flared to oil produced in the world (166 cubic meters of gas flared per ton ofoil equivalent; other nations range from 9 to 118). Nigeria alone flares 16% ofthe world total, but only represents 2.7% ofthe petroleum production (2 out of 78 million bbl/day). 11. Nigeria initially set 1984 as the year to end routine gas flaring, but failed to meet this deadline. It reset the year 2008 as its target for achieving zero routine flaring and embodied this in the National Gas Policy to be formalized in a Gas Act this year. All oil companies have committed to the 2008 zero flaring target, and are developing plans to collect and process the gas. If all plans materialize, some 2,548 MMscflday ofgas would be used, which is close to the amount of gas currently flared. The most significant projects are the LNG projects which will use most ofthe gas. The advent ofLNG is relatively recent in Nigeria and worldwide, and gives producers the ability to supply markets that could otherwise not be reached, or be reached only by pipeline. LNG is carried in tankers that can change directions on the high seas to respond to shifts in demand or prices. According to the Bank’s preliminary report of the EIR, gas is seen as a “clean” fuel, and should be promoted by the World Bank Group (WBG) as a bridging fuel until, as suggested by the report ofthe EIR, the WBG ceases to fund hydrocarbon-based projects altogether. Flaring reduction has been ongoing in the Delta, and it is widely accepted that the situation is improving, albeit slowly. 12. WAGP is one ofseveral projects under preparation to use natural gas. The WAGP will initially ship 70 MMscf/day (Low Demand Scenario; 120 MMscf7day in High Demand Scenario), with the volume increasing over the life ofthe Project to about 450 MMscf/day. The WAGP is a small part ofthe overall gas development in the Delta (representing 5 to 10% of overall gas production in Nigeria). The gas entering the WAGP will be a blended stream ofAG and NAG sourced from all the Producers’ fields interconnected with the ELPS. The initial flow is expected to be about 60% AG and 40% NAG, declining to 40% AG over the 20-year contract period. In the absence ofproductive uses ofgas, including the WAGP, a large portion ofAG has historically been flared or vented in Nigeria.

42 Approximate figure: quantifying gas flares requires definition of whether a flare is continuous, how much gas it bums, and is proportional to oil production (which fluctuates). Number of flares is directly proportional to number of platforms.

- 42 - Annex 1

The Niger Delta Social Conditions 13. The Delta covers 70,000 sq km, and has a population of 14 million, spread over 1,600 communities. Although tremendous oil wealth has been generated in Nigeria, the country remains poor, with the Delta poorer than the rest ofthe country. Comprehensive data on poverty levels in the Niger Delta do not exist, however the percentage ofDelta inhabitants living in poverty was estimated in 1992 at approximately 30%, with 7% living in extreme poverty.43 The Delta as a whole has a very high population density, which is greatly accentuated when one considers that most ofthe land in the Delta is uninhabitable, and the little land available accommodates all the indigenous and immigrant population. Riverbank erosion is causing the loss ofthe most valuable, and the most densely populated, land, intensifylng population pressure. Tenuous property rights, lack of development, stagnant agricultural productivity, negligible opportunities in urban areas, and rapid population growth characterizes rural ~ommunities.~~ 14. Health indicators for the Niger Delta are poorer than for the country as a whole and worse than the mean for the south-eastem region. Water-related diseases are the most critical health problems in the Delta. Potable water is difficult to find. Malaria is the most common cause of morbidity, followed by diarrheal diseases (dysentery, typhoid, and cholera). Community services, including water supply and sanitation are very limited. 15. The Delta has a complex history, starting with its past in slave trading and palm oil trading, and the legacy ofthese activities on today’s social and economic situation. Slavery disrupted life in the Niger Delta and its hinterland, triggered interethnic wars, and led to the displacement ofwhole communities. Deep-rooted interethnic conflict (mainly between Ijaws and Itsekiris) that started during the slave trade is surfacing today in some ofthe conflicts in the Delta among communities, between petroleum companies and communities, and between communities and the federal government. 16. Even before the discovery ofoil, conflicts emerged over the drawing ofadministrative boundaries. With more money at stake since the discovery ofoil, these conflicts have intensified. The most perverse manifestation ofthis is communities engaging in violent conflict over land in the hope that oil will be discovered there. 17. The potential for hydrocarbon resources and their development have increased the underlying tensions between communities. Oil companies differentiate between “oil-producing communities” and “non oil-producing communities,” the former representing 5% ofDelta communities, the latter 95%. The approach ofthe oil companies has been to “compensate” oil- producing communities for environmental damage done to them by oil exploration. This can be in the form ofcommunity programs, schools, hospitals or cash. The level ofcompensation has been challenged by communities, who feel that they have been inadequately compensated. Furthermore, compensation to oil producing communities has caused envy in non oil-producing communities, leading to conflict. Additionally, oil companies sometimes respond to oil leaks by handing out compensation money, or by recruiting local inhabitants for cleaning up the oil,

43 World Bank, 1995, Defining an Environmental Development Strategy for the Niger Delta.

44 Moffat and Linden, 1995, Perception and Reality: Assessing Priorities for Sustainable Development in the Niger River Delta.

-43 - Annex 1 which motivates sabotage. Oil companies also argue that environmental damage not attributable to oil exploration is not their responsibility, whereas communities often view all environmental damage as being butable to oil companies. The relationship between communities and the international oil companies is further complicated by unfortunate accidents. Environmental Conditions 18. The environmental conditions in the Delta are considered to be degraded, with mangroves deforested and serious threats poised against the freshwater swamp forests, the coastal barrier forest and the lowland forests. This degradation has been going on over a long period and the causes for it are many as was summarized in World Bank report dated 1995: “Most stakeholders have concluded that oil companies are the major environmental culprits because their activities are highly visible and create highly visible local ecological impacts. Many residents assign a direct cause-and-effect relationship between oil development and declines in fisheries and agricultural productivity because both phenomena began at roughly the same time. However, the timing may be largely coincidental and other factors such as population increases and migration, as well as the construction ofupstream dams, are more significant causes ofthe productivity declines. Communities in the Niger Delta recognize that whereas many families continue to live in squalor, the petroleum resources exploited in the Niger Delta are enriching other Nigerians and foreigners. Communities also resent the fact that immigrants into the region get the bulk of oil company employment. Residents feel justified taking what compensation they can obtain from the oil companies because they view the companies as having unlimited sources ofmoney and causing environmental damage without creating local benefits. Since they obtain few benefits from oil development and are required to shoulder the environmental and social costs ofexploration and extraction, it is not surprising that they overstate the environmental problems caused by oil activities.” 19. In response to the social and environmental situation, the Government ofNigeria, the oil companies and the international community have to a smaller or greater degree developed programs and taken steps to address the various issues. The impact ofthese initiatives have however not been systematically evaluated. For example, the value and effectiveness ofthe programs ofthe oil companies is not fully known. Despite convincing data, different sources claim that very little development has occurred in the Delta. Furthermore, certain efforts are quickly abandoned. It appears however that the Governments have provided few goods or services to Delta communities in the form ofroads, electricity, running water, sanitation or health care. 20. According to Nigeria’s 1999 Constitution, all mineral resources, including oil, belong to the federal govemment, and at least 13 percent of federal revenue from natural resources is returned to the state from which it came. Although the rule is in place, the degree ofexecution is not known; studies (transparency initiatives) are ongoing to determine the precise amounts that filter back to the states. Furthermore, the FGN, upon allocating 13% ofoil revenues back to the states, is not obliged to ensure that the hdsare distributed evenly among communities within the state. Distribution to communities is particularly problematic in Delta states that straddle the Niger River, and in which the state capital is outside ofthe Delta. 2 1. The last five years have seen two democratic elections and the reforms that are taking place (removal of fuel subsidy, privatization ofrefineries and other public enterprises, adoption

-44- Annex 1 oftransparency initiatives, enactment of“13% Rule”) are all very positive signs; however, they will take years, if not generations, to mature. 22. Overall the WAGP will not have a great impact in Delta. WAGP will have no bearing on oil production and in the short term, no bearing on gas production. No additional oil or gas wells will be drilled, and all necessary infrastructure for the transport ofgas is already in place. Globally, the Project will reduce flaring, which will reduce global warming. For West Africa, the impact ofcheap energy will be highly positive, and may offset the use ofwood as fuel, thereby reducing deforestation. It can be said that WAGP will contribute to some gas flaring reduction to the extent that some ofthe 70+ MMscUday ofgas it will transport, i.e., the AG portion ofthe total transported, will not be flared. 23. It is clear from the study that the Delta has considerable problems to overcome, but that the WAGP is not the vehicle to address them. The Bank is in constant dialogue with Nigeria to address some ofthe social issues in the Delta. A project is currently under preparation that will begin to address some ofthese concerns. 24. Gas sourcing for the WAGP gas is geographically restricted to a small part of the Delta, and has no direct incidence in the Delta. WAGP has little or no impact on the social or environmental condition ofthe Delta, and is either a small part of, or is unrelated to, the main activity of the international oil companies. The solutions to the problems in the Delta are one of law and order, good governance, institutional capacity building, fight against organized crime through means such as oil certification, greater security to prevent kidnappings and long-term vision through an integrated coastal zone management plan (ICZM). It can be concluded that pollution by the international oil companies is only one of a number ofissues, and that the area urgently needs an ICZM.

GHANA

Country Background 25. Since embarking on economic reforms in the mid-l980s, Ghana, with a population of about 20 million and a GMper capita ofUS$280 (2002), has made considerable progress on laying the foundations for sustainable growth and poverty reduction. This has resulted in sustained per capita output growth, averaging 1.6 percent per annum, and increased private sector activity and investment. Social indicators also improved over the period. In parallel with the economic reforms, the country completed the political transition, moving to a firmly democratic form ofGovernment. Overall, outcomes have fallen short of expectations, however, as progress in social and economic developments have been periodically interrupted by episodes o f weak macroeconomic management associated with the electoral cycle. 26. The country’s macroeconomic performance in 2003 exceeded expectations, with a turnaround in fiscal and monetary policies. Improved fiscal management over the last 18 months, coupled with a record cocoa harvest and higher world prices for cocoa and gold resulted in sustained growth and progress in stabilizing the macroeconomic environment. Real GDP growth accelerated to 5.2 percent, up from 4.5 percent in 2002. The improved fiscal and monetary policy mix allowed the easing in inflation in recent months, following a 13 percent spike in February in the aftermath ofthe 95 percent increase in prices o f petroleum retail products. The overall fiscal deficit declined to 4.5 percent ofGDP, down from 6.8 percent in 2002, with the shortfall between revenues and expenditures entirely financed by foreign credits and grants. The

-45 - Annex 1 combination ofa growing economy with fiscal discipline allowed domestic debt reduction to gain momentum, with the debt to GDP ratio estimated to have declined to 19.6 percent by end- 2003, compared o 26.2 percent at end-2002. Lower levels ofdomestic public debt and inflation allowed for interest rates to fall to an annualized rate of 16 percent, early in January 2004, down from a 35 percent peak in June. This, in turn, contributed to increasing credit to the private sector, with its share ofdomestic credit estimated to have reached 5 8 percent by end- 2003, up from 47 percent in the previous year. 27. The growth outlook for the 2004-06 period is positive, with signs ofrobust economic activity that should allow the GPRS target of5 percent real GDP growth to be achieved over the next two years, meaning a per capita real GDP growth in 3.0 percent range. Current industry forecasts project cocoa production in 2004 at levels higher than 2003, which had already reached record levels, exceeding 490 thousand metric tons. There is also evidence of strong investment activity in cement production, mining and ago-processing, as well as continued growth in the service sector (tourism, banking and communication). Finally, expatriate remittances, which are projected to have reached US$780 million in 2003, are expected to remain high on account of a rising number ofGhanaian professionals working abroad. The Electric Power Sector of Ghana 28. The electricity sector is a key driver of economic growth, and is therefore accorded prominence in Ghana’s Poverty Reduction Strategy. Though electric power constitutes only 10% ofGhana’s energy supply mix, it plays an important role in the country’s economy, powering its industrial, commercial and urban development. The industry and services sectors, which together account for nearly 75% of Ghana’s GDP, rely critically on electricity. 29. For the past 10 years, Ghana has been struggling to meet its increasing demand for reliable and affordable electricity. From 1988-2002, Ghana’s electricity consumption increased at an average rate ofover 8% p.a., which has put enormous pressure on the country’s state- owned electric utilities.45 Until only recently, the sole source ofpower supply in Ghana was from hydroelectric power stations owned by VRA. The two hydropower stations are Akosombo (900 MW) and Kpong (100 MW). In the early 1990s, it became apparent that fbture growth in demand would have to be met from non-hydro sources because ofthe limited remaining hydro potential and the need to lower supply risks through diversification of supply sources. Hence, the 330MW Takoradi (Tl) power project, located at Aboadze in western Ghana, was conceived and prepared. The need for a diversification strategy was demonstrated when power shortages severely disrupted economic performance because ofpoor hydrological conditions in 1997 and 1998. To avert a power supply crisis, the Government contracted out two private investors to install and operate diesel power plants on an emergency basis. In addition, IRAhad to operate its own inefficient 30MW diesel power plant, as well as import power from C8te d’Ivoire. 30. The T1 power station is now in commercial operation. An additional 220-MW simple- cycle gas turbine plant (T2) has also been added at the same site by ajoint venture comprising VRA and a private sector sponsor, CMS Energy, and, with the support ofIFC, will be increased

45 These figures exclude demand from a large aluminum smelter, Valco, which remained approximately constant over that period; if demand from Valco is included, the average growth rate is about 4% p.a. over the 1988-2002 period.

-46- Annex 1 to 330 MW after a steam cycle is added. With such diversity in generation capacity, power generation shortages due to low rainfall should be averted. 3 1. VRA sells power to bulk customers and to Electricity Company ofGhana (ECG), which is the utility responsible for distribution ofpower in southern Ghana. In addition to generating power, VRA also distributes electricity in the northem part ofGhana through its Northem Electricity Department (NED). ECGwas originally responsible for distribution and retail supply of electricity to all customers in Ghana. At the beginning ofthe Northern Grid Extension Project in 1987, ECG’s operations and assets in the Brong Ahafo, Northem, Upper East, and Upper West regions ofGhana were transferred to VRA, which in turn created NED to handle those responsibilities. As a result, ECG’s operations currently are restricted to the southem half of Ghana. 32. There are at least two major sector issues and challenges before the Government at the present time. They are: (a) Understanding the electricity demand under various economic scenarios and securing supply resources in the most oDtimal fashion. The uncertainties arising fiom the closure ofValco, which till recently was buying a third of Ghana’s electricity production, has caused a need to revisit electricity demand assumptions, and accordingly develop flexible supply scenarios to cater to higher and lower demand scenarios. The following Charts 1.1 and 1.2 show the demand and supply situation in a low demand and a high demand scenario for power.46 (b) Bringing about financial discitdine and equilibrium in the sector and reversing the buildup ofarrears among entities. The sector institutions are caught in a vicious cycle ofbelow-potential performance, low resource mobilization, and under-investment. The late 1990s and early 2000s was a difficult period for Ghana’s power sector. Structural problems in the sector were exacerbated by a significant deterioration ofthe exchange rate between the Ghanaian cedi and the US dollar, which increased the cost ofpower generation in local currency terms considerably. Moreover, ECG has not been able to match the demand of electricity with the necessary network upgrades and expansions. Also, delays in tariffs adjustments as well as weak management (characterized by high system losses and low collection rates) have placed ECG in a poor financial state. As a result, there has been under-investment in the power distribution system, leading to overloaded transformers and distribution networks, leaving a lot ofobsolete equipment still in operation. The resultant effects are high distribution system losses and poor electricity supply, quality, and reliability. This, in turn, led to customer dissatisfaction and non-payment ofbills.

46 The Low Demand Scenario for power assumes that Valco operations have been shut down completely. The High Demand Scenario assumes that the Valco smelter is in operations, with all 4 potlines, requiring about 2,540 GWh per annum from VRA.

-47- Annex 1

Chart 1.1: Power Demand and Supply - Low Demand Scenario

6.W v 2,m

II

Chart 1.2: Power Demand and Supply - High Demand Scenario

25.000 25,000

20,000 m.Mo a a 3 "B 15,000 1 lS" I ea 1o.m d 1 lo'OOO 5,033 am

,.0',.9,,0",,9++pIpppB~~~BBp BpIpsppp~~ +Q=+@+@+&++ ~@,.0',6-",d.',,2"~~~~~~~~~~~+e++ ++.@+++~&,..?+ n" @-*) nm meam)

OFmignRMn-Danest~llWbmnd OVakoCmmnd Ommulk OWdm Gammtbn .Not Oe~ndfOrThmnl(fisrrccour*k!4 lOlT-Muar)

-48- Annex 1

thermal power generation company while retaining (through a new VRA Act) the reservoir management and hydropower generation functions in the streamlined VRA ~~dr~.~~ Establishment ofan autonomous state-owned entity that the EC is to grant the ETU license, following notification by the Minister ofthe legislative instrument that empowers the ETU to take over from VRA all system operation and dispatch functions. Until such time that the Energy Commission completes the preparation, approval and notification of the “Technical and Operational Rules ofPractice for the National Interconnected System”, the Government has decided that VRA would continue to be responsible for the safe, reliable, economic dispatch ofgrid operations.

0 Implementation ofa proposed Aboadze Thermal Power Joint Venture to complete development ofthe Takoradi Thermal Power Complex (consisting ofT1 and T2). The Government plans to assign CMS Energy as the T1 plant operator under a performance- based contract. Merger ofNED into ECG to form a single distribution company and implementation of a performance-based “Management Support Services Agreement” as a means to improve financial management, commercial, and technical operations at ECG.

0 Parliament ratification ofthe full complement ofEC legislation instruments to underpin EC technical regulation functions, especially: (i)technical and operational rules for the national interconnected system and (ii)standards ofperformance for delivery of electricity supply services. 35. As per the government paper cited in the last paragraph, several actions under the reform program have been completed. These include: establishment ofthe Reform Secretariat and activation ofvarious committees to lead the respective initiatives on restructuring, determination ofjoint venture arrangements, drafting ofthe new VRA Act to replace Act 46, engagement of a consultant to carryout asset revaluation as a prelude to the separation ofthe books ofaccounts for the newly restructured companies, and hiring ofa transaction advisor to assist the Ministry in implementing the performance based contract to put in place the proposed Management Services Provider for the consolidated ECG. In addition, the Government has initiated actions on preparing a comprehensive public education and awareness strategy and the Energy Commission is working towards notification of a series oflegislative instruments to prescribe technical and operational rules for the national interconnected system (“Wholesale Power Supply Market Rules”) and for electricity supply and distribution (“Electricity Distribution Rules”). 36. Action has also been taken towards restructuring and cleaning up ofVRA and ECG balance sheets, including debt restructuring to settle all payables/receivables among Government entities and reduce some ofthe debt burden ofthese companies. Debt relief to the extent of US$ 144.9 million equivalent ofdebt/government receivables for VRA and US$95.06 million equivalent for ECG has been provided.

47 It is not clear whether the new VRA Act would make provision for VR4 to retain its other subsidaries, such as the Volta Lake Transport Company (VLTC), the Akosombo Hotel Ltd, and the Volta Communications Ltd.

-49- hex1

BENIN AND TOGO

Country Background - Benin 37. Relative to most other countries in the sub-region, and to its starting point ofEconomic collapse and political crisis in 1989, Benin has achieved remarkable progress in sustaining robust growth while building a pluralist democracy over the past decade. Growth generally exceeded other economies in the region and productivity gains allowed per capita incomes to rise. The Government's structural adjustment program has been successful in establishing fiscal discipline, opening up the economy, privatizing most public enterprises, and strengthening private sector incentives. Most social indicators improved steadily throughout the 1990s, particularly for education and health. But as Benin's recently completed PRSP explains, these achievements did not translate into significant progress in poverty reduction. The completion ofthe PRSP combined with irrevocable access to debt relief following the March 2003 Enhanced HIPC Completion Point provides Benin with an unparalleled opportunity to pursue and sustain a more poverty focused growth strategy for the wellbeing of all of its people. Benin faces a number of challenges that increase its vulnerability. These include an extreme dependence on cotton, limited competitiveness, weak institutional and administrative capacity, slow progress in administrative reform, high population growth and significant gender inequities, as well as the need to ensure that the prevalence ofHIV/AIDS remains at manageable levels. The Government's PRSP addresses theses challenges and reiterates its commitment to reducing poverty. It sets forth a national development program around four central pillars: (i) consolidating macroeconomic stability through accelerated private-sector-led growth and rigorous public finance management; (ii)improving access to basic education, literacy, primary health care, safe water, and deepening the fight against prevention ofnew HIV/AIDS infections, malaria and tuberculosis, with specific attention to vulnerable groups, especially women; (iii) strengthening good govemance and reinforcing institutional capacities; and (iv) promoting long- term employment and building capacity for poor people to participate in the decision-making process and in implementation.

Country Background - Togo 38. Togo, with a population of about 5.6 millions in 2003, experienced strong growth from 1960 to the mid-l970s, with real GDP growth of about 7 percent annually. After the boom in phosphate prices in 1975, Togo embarked on an ambitious investment program and created a multitude ofpublic enterprises, many ofwhich subsequently became a severe drain on the economy. Togo's economy depends heavily on subsistence agriculture, which contributes 40 percent ofGDP and employs 75 percent ofthe labor force. Cotton, coffee and cocoa are the main agricultural exports, generating about 35 percent oftotal export earnings. Phosphate mining is the most significant industrial activity (5 percent ofGDP, 26-28 percent of exports). The government's economic reform efforts were severely hampered by the unrest in 1992-93. The modem sector collapsed, the tax base shrunk, transit trade shifted to other countries, external aid virtually disappeared, and GDP fell by 22 percent injust two years. 39. The economic reforms initiated in the late 1980s were not accompanied by a corresponding political transition, resulting in severe turbulence during 1992 and 1993. President EyadCma was re-elected in 1993 in elections boycotted by the opposition, and retained the presidency in the disputed elections of 1998.

-50- Annex 1

Since mid- 1998 the macroeconomic situation has remained difficult, owing to political uncertainty, falling cotton prices, and continued problems in phosphate production. Poverty indicators have also been on the rise. Nevertheless, the economy recovered slightly in 2001, achieving a real GDP growth rate of2.7 percent, compared with a contraction of 1.9 percent in 2000. This recovery was in large part due to the improved performance of the agricultural sector as a result of favorable climatic conditions and higher international prices for cocoa. Despite robust growth in cement production, the secondary sector suffered from the continued contraction ofphosphate exports caused by the decline ofproduction capacity and further deterioration ofthe financial situation ofthe Togolese phosphate company (OPT). Private investment was hampered by a wait-and-see attitude resulting from the unsettled political situation, the accumulation of a large volume ofdomestic arrears, and the inability ofthe banking sector to finance the economy. The public finance situation has also deteriorated since mid-1998, reversing the gradual improvement during 1995-97. Government revenue stagnated at around 14.5 percent ofGDP, and the government has been unable to finance public expenditure without recourse to exceptional financing (domestic and external arrears, bank financing, and advances from public enterprises). 40. Given the uncertainties ofthe situation, the preparation of a new CAS has been postponed until there is greater clarity on the direction ofeconomic and social policies - following the full implementation ofthe Lom6 Framework Agreement (Accord-Cadre de Lome) which lays out the principles for the organization offkee and fair elections - and a more favorable environment for reducing poverty in Togo. Under current circumstances, and because Togo is in arrears, Bank lending to Togo has been suspended.

The Electric Power Sectors of Togo and Benin 41. Electricity plays an important role in the economies ofTogo and Benin. Power demand more than doubled in the last ten years increasing from 510 GWh in 1993 to 1054 GWh in 2003 (10% p.a.), but the growth in the last five years has been more than 15% per year. 42. In 1968, the Governments of Benin and Togo enacted a Treaty establishing a bi-national entity, the Communautc Electrique du Bhin (CEB). The Treaty is still effective and CEB is responsible for electricity generation and transmission in Benin and Togo and supplies electricity in bulk to the two power distribution utilities in the two countries and three high voltage industrial customers. The distribution utility in Togo, Togo Electricit6 (TE) is under a management contract since December 2000, and the distribution utility in Benin will be privatized when market conditions permit. The strategy for both governments, in Benin and Togo, is to open the generation market to Independent Power Producers (IPPs), while maintaining CEB as the single buyer for the two countries. 43. Historically, a large portion of electricity requirements ofTogo and Benin was supplied by a hydropower station located in Togo (Nangbeto) with a capacity of65 MW and with imports ofpower from Ghana and CBte d’Ivoire. In addition, there are two thermal plants, one at Cotonou (20 MW) in Benin and the other at Lam6 (20 MW) in Togo. 44. The main sector issues include: (i)the shortage ofgeneration capacity to meet increasing electricity demand in Benin, and the dependence on imports through a single interconnection with Ghana; (ii)the high operating cost and the poor quality of service in the northern regions; (iii)the low level ofelectricity penetration in urban and rural areas; (iv) the high reliance ofthe

-51 - Annex 1 households and SME sectors on traditional biomass fuels and a correlated high rate ofannual deforestation; (v) the dependence ofthe household sectors on imported petroleum fuels for inter- fuel substitution; (vi) the total dependence ofthe transport sector on imported petroleum fuels; and (vii) sector governance and weak institutions. Chart 1.3 provides details ofthe power demand and supply situation in Togo and Benin.

Chart 1.3: Power Demand and Supply (CEB)

8,000 __

45. To meet the increasing demand for power, the two countries have several projects at various stages ofpreparation. This includes the interconnection with Nigeria and the development ofAdjarala Hydroelectric project (94 MW and 326 GWh), for which negotiations are underway with different potential suppliers for the supply and erection ofthe electrical mechanical equipment, including the financing package, and with the Arab bilateral aids for financing the civil works for the project. The interconnection with Nigeria and the Adjarala hydroelectric project, along with the existing imports fkom Ghana and CGte d’Ivoire, should satisfy CEB needs for power in the near term (Le., the next five years) after which, with the commissioning ofthe West African Gas Pipeline, new opportunities will be present for IPPs to generate electricity as the need for power arises. 46. In order to be able to benefit from the construction ofthe West African Gas Pipeline, CEB has, on behalf ofthe Government ofBenin, requested IDA for assistance to develop a new site at Maria Gleta outside the capital city ofCotonou that will house all future generating capacity. Initially, CEB will transfer its existing power plant located in the capital city of Cotonou to the new site at Maria Gleta. It will then convert the plant so it can run on gas imported from Nigeria, via the West African Gas Pipeline. However to do so, CEB will need assistance to complete a number ofengineering and environmental studies on the new site at Maria Gleta, and will need as well as legal and planning assistance. It has recently requested IDA for a PPF advance to finance these activities.

- 52 - Annex 1

DEMANDFOR WAG€’ GASIN GHANA,BENIN, AND TOGO 47. The demand for natural gas in the three consuming countries or Ghana, Benin, and Togo have been reviewed time and again in the context ofthe West African Gas Pipeline Project. The private Sponsors contracted an independent study on the demand for gas in 2001, which has been recently updated in April 2004.48 In addition, the consuming countries have also hired an independent consultant4’ to review and verify potential total demand, and assist the governments in firming these up. These studies and consultations with the end-users ofgas have resulted in an agreed forecast ofdemand for natural gas, which has been utilized to compile gas tariffs. 48. The World Bank Group has also been involved in the power sectors of Ghana, Benin, and Togo. In addition to the complete review ofthe demand for gas by the Bank’s EFA consultants, the Bank has undertaken a detailed analysis ofthe demand for gas originating from the power sector of Ghana and Benin (see above). The economic and financial analysis ofthe Project is based on the Bank’s demand projections for gas in the power sectors ofGhana, Benin, and Togo and the forecast ofdemand in the industrial sector ofthe consuming countries as agreed between the Sponsors and the four States. Demandfor Gas in Ghana 49. Power Sector Gas Demand. In Ghana, the power generation sector will be the main consumer ofgas. Historically the primary source ofpower demand is the Valco aluminum smelter although, as rural electrification has increased, sales through the low-voltage distribution network have also increased significantly to such an extent that aluminum smelter consumption has declined in terms ofmarket share. Demand fiom consumers supplied by the distribution networks will be the major source offuture electricity consumption growth, although it should be noted that demand is price-sensitive and thus any increase in consumer tariffs will retard the rate at which consumption increases. The mining sector is also a source of significant demand and some ofthese consumers are supplied directly fiom the transmission network. Like Valco, the mining companies are seeking to secure electricity supply at the lowest possible price in order to remain competitive in the global market, a balance that may be difficult to strike as the country seeks to keep tariffs in line with the true cost of generation. 50. There are uncertainties surrounding the fbture ofValco, which has not been operating since May 2003. The Government has agreed to buy Valco fiom Kaiser and is actively looking for an investor to replace Kaiser. It is also widely known that the Government ofGhana is interested in expanding the bauxite-aluminum value chain to be able to use indigenous bauxite. A number ofinvestors, including ALCOA ofthe US have expressed interest in undertaking this venture. This uncertainty about the Valco electric load materially impacts the demand for thermal electricity in Ghana, and therefore the base load demand for gas through WAGP. Because of the uncertainty and importance ofValco as an indirect source ofgas demand, two

48 The Sponsors have completed an independent analysis of gas demand (undertaken by Purvin & Gertz), whlch has been agreed with the four States. The power sector inputs of this probabilistic demand forecast are consistent with the gas demand forecast ofthe Bank. Overall, the Bank‘s demand forecast for gas is conservative when compared to the Sponsors view of gas demand, especially in the Low Demand Scenario.

49 Nexant Limited, an affiliate ofBechtel Corporation.

- 53 - Annex 1 demand scenarios have been designed by the Bank to analyze the economic benefits arising out ofthe WAGP Project.” These are: (a) Low Demand Scenario which assumes that Valco operations will never restart, and therefore there will be no demand from Valco for electricity; and (b) High Demand Scenario which assumes that Valco operations will restart before first gas in 2006, all four potlines will be operational, and a Valco demand of about 2,540 GWh will have to be met by VRA. 5 1. The forecast implementation ofnew capacity shows that gas-fueled thermal plants are the most cost effective source ofsupply. Under the Low Demand Scenario, power generation demand for gas from the WAGP Project is forecast to exceed 85,000 MMBtu/day by 2010, exceed 130,000 MMBtu/day by 2015, reaching nearly 265,000 MMBtu/day by 2025. Under the High Demand Scenario, power generation demand for gas from the WAGP Project is forecast to exceed 135,000 MMBtu/day by 2010, to exceed 180,000 MMBtu/day by 2015, reaching nearly 3 15,000 MMBtu/day by 2025. Chart 1.4 provides details on the gas forecast from the power sector in Ghana.

Chart 1.4: Ghana - Gas Demand from the Power Sector

300,000

250,000 m 200.000 I 3 150.000

100,000

50,000

I HpDemand Scanado o LwDemand Scemm

52. Commercial and Industrial Sector Gas Demand. Gas demand potential from the commercial and industrial sector in Ghana is relatively small (except for Valco). Existing consumers using gas oil as their primary source ofenergy will have a significant incentive to use natural gas, but the incentive is less compelling for fuel oil consumers unless they can benefit fiom the lower industrial development tariff (see Annex 9 for more details on tariffs). Although it is expected that local fuel oil prices will be higher than the delivered price ofnatural gas, this may not always be the case resulting in those consumers having fuel-switching capability and

50 These demand scenarios have been developed by the Bank based on the Bank’s and IFC’s view ofthe power sector in Ghana and Benin. These demand forecasts are based on the work carried out under the Ghana ESW (dated July 2004) and incorporates the expected demand for VRA generated power in Togo and Benin (as per CEB plans on which due diligence has been carried out) in the medium-term. The Bank‘s low demand forecast is more conservative than the forecast provided by the Purvin & Gertz study as contracted by the Sponsors.

- 54 - Annex 1

short -term gas offtake agreements, possibly alternating between the two fuels. Tema has a larger industrial demand potential than Takoradi. 53. The Government of Ghana has implemented many studies examining the development of strategic projects as a way of adding value to the mineral resources ofthe country. These studies have determined that gas consumption from these projects could be as high as 77,500 MMBtu/day. However, there exists considerable uncertainty as to, firstly, whether any ofthem will ever be implemented and, secondly, due to some being located at considerable distances inland, whether gas can be price-competitive against fuel oil although, ifthese projects could be developed together, some economies ofscale could be achieved. The detailed studies undertaken by WAPCo indicate that gas demand for the industrial sector will be relatively small, about 8,000 MMBtu/day by 2010, exceeding 11,000 MMBtu/day by 2015, reaching nearly 14,000 MMBtu/day by 2025. Chart 1.5 provides details on the gas forecast from the industrial sector in Ghana.

Chart 1.5: Ghana - Gas Demand from the Industrial Sector

Mustrial Oemand - AH Sc~n~rios

Demandfor Gas in Benin and Togo 54. Power Sector Gas Demand. Like that ofGhana, the economies ofBenin and Togo are heavily dependent upon subsistence agriculture, and external financial assistance. By comparison to the market in Ghana, the potential for gas demand in Benin and Togo is relatively small. The power generation sector will be the main consumer ofgas although there are a small number ofindustrial consumers that could be offtakers. Power prices in both Benin and Togo are currently sufficiently high to support the cost ofnew power projects using imported natural gas. Like in Ghana, the primary driver ofdemand growth for electricity is anticipated to be improved per capita income, increasing urbanization and expansion ofthe distribution networks. At present, most demand is concentrated in the southern coastal regions of each country, particularly in LomC and Cotonou. However, there are projects in place in both Benin and Togo to connect their respective southern grids with those in the north, thereby accessing customers currently supplied by local diesel generation units. In both Benin and Togo, the governments do not subsidize electricity prices to consumers. 55. The forecast implementation ofnew capacity in Benin and Togo (see above) shows that gas-fueled thermal plants are the most cost effective source ofsupply. Under the base case

- 55 - Annex 1 expansion plan, power generation demand for gas from the WAGP Project is forecast to exceed 19,000 MMBtu/day by 2010, to exceed 34,000 MMBtu/day by 2015, reaching nearly 105,000 MMBtdday by 2025. Chart 1.6 provides details on the gas forecast from the power sector in Benin and Togo.

Chart 1.6: Benin & Togo - Gas Demand from the Power Sector 140,000 -1 I 120.000 I I

56. Commercial and Industrial Sector Gas Demand. Currently, there is limited energy intensive industry in both Benin and Togo with most potential demand concentrated at 3 industrial plants, namely the cement factory at Onigbolo (Benin), the West African Cement (WACEM) plant at Tabligbo (Togo) and the OTP/TFG phosphate manufacturing plant at KpCmC near LomC (Togo).'* Three factors could make capture ofsome ofthese existing energy users by WAGP gas uncertain. First, demand for gas will be sensitive to the price ofcompeting fuels, such as heavy fuel oil. Depending on the delivered cost ofWAGP gas and the current cost of liquid petroleum fuels, gas may not compete. Second, the distances ofboth cement plants from the coast suggest that gas distribution pipelines, ofabout 40 km to Tabligbo and 75 km to Onigbolo, are necessary and will be relatively costly. Third, cement plants do not attach an environmental premium to clean-burning natural gas, which enables them to use the cheapest, and poorest quality fuels making it difficult for gas to compete on price alone. As such, to achieve economies ofscale industrial demand growth is dependent on securing the two cement plants as consumers. 57. Thus, demand is not expected to develop until the WAGP standard tariff (see Annex 9 for more details on tariffs) declines to a level that makes gas competitive with alternative fuels. Excluding the three large industrial energy consumers, the remaining demand potential is small and thus the growth prospects must be considered to be low. Most potential users consume mainly fuel oil, and thus usage ofnatural gas will occur only if the cost ofgas delivered by the distribution systems is price competitive. The detailed studies undertaken by WAPCo indicate

'' Estimated demand potentials are up to 19,000 MMBtu/day for WACEM at Tabligbo; 6,000 MMBtu/day for IFG/OTP at Kpkmk; and 16,000 MMBtu/day for the cement plant at Onigbolo.

- 56 - Annex 1 that gas demand for the industrial sector will be larger when compared to Ghana, about 26,000 MMBtu/day by 2010, exceeding 30,000 MMBtu/day by 2015, reaching nearly 34,000 MMBtu/day by 2025. Chart 1.7 provides details on the gas forecast from the industrial sector in Benin and Togo.

Chart 1.7: Benin & Togo - Gas Demand from the Industrial Sector

Tim (Yean) Wenh Industrial Sector .Two Mustdal Sector

- 57 - Annex 2

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies AFRICA: West African Gas Pipeline Project

Sector issue Name of the Project Project Ratings Latest Supervision (Bank-financed projects only) -- I I" -I I-___ -_ --... .. - rl."__ Implementation Development Progress (IP) Objective (DO) Bank-Financed - Regional Projects Development of petroleum resources ChadCameroon S S in an environmentally sustainable way Petroleum and reducing poverty Development and Pipeline Project Reducing the cost ofpower OMVS - Regional S S Power Project

Development of gas resources in an South Africa Regional NIA (1) N/A (1) environmentally sustainable way and Gas Project reducing poverty Increase competitiveness in electricity Southern African S S market and regional cooperation Power Market Bank-Financed - Country Projects Power sector reform and pricing Ghana - Thermal Power S S Project (P000926) Power sector reform, rural electrification Benin - Electricity S S Services Delivery Project (P079633) Poverty reduction Ghana - Poverty S S Reduction Support Credit Project (P076808)

~- ~ Sector reform, financial management, and Nigeria - Transmission S S electricity pricing issues Development Project (P072018)

Other development agencies IFC Ghana - Takoradi Power Station Equity Refinancing and Expansion IFVDO Ratings: HS (Highly Satisfactory), S (Satisfactory)

(1) Partial Risk Guarantee.

- 58 - Annex 3

Annex 3: Results Framework and Monitoring AFRICA: West African Gas Pipeline Project

Key Performance Critical Assumptions Indicators Sector Indicators:

Improve economic Increased competitiveness Power utilities, Regulatory snproved economic competitiveness ofthe measured by electricity Commissions, :ompetitiveness benefits countries participating in tariffs to commercial and Governments and Bank he poor. the Project and accelerate industrial customers. Economic and sectors regional economic growth reports and political integration in Macro-economic West Africa. 3erformance and economic yowth sustained. Level ofenergy trade in ECOWAS reports. Political commitment to West Africa. increase regional xonomic cooperation maintained. Project Development Outcomellmpact Project Reports: (from Objective to Objective: Indicators: Goal) (a) To improve the (a. 1) Cost ofelectricity (a) W and CEB annual (a. 1) Regulatory competitiveness ofthe production in Ghana and semiannual reports. frameworks in countries energy sectors ofGhana, reduced by 10-20%, and in make sure that fuel costs (b) ECOWAS reports. Benin, and Togo by Togo and Benin by 40% in savings are reflected in promoting the use of 2008 as compared with (c) "F'C, NGC, WAPCo electricity tariffs. cheaper and status quo. and WAGP Authority (a.2) Countries continue to environmentally cleaner annual and semi-annual (a.2) Decrease in the use reform power sectors and gas from Nigeria in lieu of reports. ofoil-fired thermal plants to improve performance. liquid fuels for power in 2008. (d) World Bank generation and other supervision missions. industrial and commercial (a.3) flaring and venting of uses. AG in Nigeria is reduced (e) Periodic surveys of by 200 MMsct7day by regional energy costs and 2008. tariffs. (b) To foster regional (b.1) Expanded volume of (b) Increased trade economic and political energy trade in the between countries leads to integration that would ECOWAS region. political integration. support economic growth. (b.2) active involvement oi WAGP regional Authority in Project monitoring.

- 59 - Annex 3

Output Indicators: Project reports:

(a. 1) WAPCo passes its (a.1) Completion a.1) VRA and CEB meet Pipeline system is performance testing certificate. heir payment obligations specified in the PDP by o N-Gas. 3perational on time and (a.2) Technical, within budget, and meets end CY 2006 Environmental, Financial a.2) Crude oil prices safeguard principles (a.2)WAGP delivers and independent audit iverage above US$lO.OO forecast quantities of reports from WAPCo , 3er barrel. natural gas each year NGas, WAGP Authority, Ia.3) Forecast for gas starting in 2007, within VRA and CEB, as lemand by the power and specifications, at the applicable. ndustriaYcommercia1 delivery points in Ghana, (a.3) World Bank lectors materializes. Togo and Benin. supervision reports and :a.4) Power stations in reports. mid-term Ghana converted to natural gas and VRA completes hook-up ofpower plants to WAGP pipeline. (a.5) CEB moves its Cotonou plant to Maria Gleta and completes hook- up of power plants to WAGP pipeline. (a.6) New upstream gas gathering and treatment systems are completed as needed after about 5 years of start of operations.

- 60 - Annex 3

Project Components1 Inputs: (budget for Subcomponents: each component) Provision of IDA partial US$50 million ofPartial (a. 1) Bid reviews and EPC :a. 1) WAPCo's risk guarantee. Risk Guarantee. contracts. shareholders, particularly VRA, arrange for (a.2) Project supervision rufficient funding WAPCo's progress and [including risk mitigation reports. instruments) to meet the (a.3) ESAP reports on cash requirements of the environment and social Project. compliance. (a.2) WAPCo is able to initiate construction early 2005 and complete construction as scheduled. (a.3) Effective communication and consultation is carried out. (a.4) Security package ensures Project completion.

-61 - Annex 4

Annex 4: Detailed Project Description AFRICA: West African Gas Pipeline Project

Overview of the Pipeline System 1. The West African Gas Pipeline is a regional energy infrastructure project for West Africa. 2. The Project aims to construct a new high-pressure natural gas pipeline, which will supply natural gas from Nigeria to markets in Benin, Ghana, and Togo.

WEST AFRICAN GAS

3. The gas to be transported in the new pipeline will be produced and processed in the western part ofthe Niger Delta in Nigeria. From there, it will be transported via an existing high-pressure gas pipeline, the ELPS, to the existing terminus ofthat system near Lagos, Nigeria, where the new pipeline will commence. 4. From that point, the new pipeline will run about 56 km onshore, to the Nigerian coast, and from there straight out to sea. From there it will run in a westerly direction roughly parallel to the coast, generally about 15 to 20 km offshore, in water depths ranging from about 15 to 70 meters. The initial construction ofthe WAGP will terminate at Aboadze in western Ghana, the site ofthe Takoradi Thermal Power Station. 5. Lateral pipelines will be laid, to permit natural gas to be delivered along the way, at regulation and metering stations to be situated at landing points at Cotonou in Benin, Lomt in Togo, and Tema (near Accra) in Ghana.

- 62 - Annex 4

6. The total length ofthe new pipeline will be approximately 678 km, including the length oflateral pipelines. 7. The estimated initial construction cost of the WAGP is US$ 520 million, commencing construction the Sponsors ofthe Project will have spent about US$70 million. This construction cost estimate has been determined via a competitive bidding process. 8. The initial installed capacity will be about 200 MMscflday. In addition, the pipeline will be sized to cater for expansion to meet anticipated fitture growth in demand, up to a maximum capacity expected to be about 470 MMscflday. The cost ofthe several stages ofexpansion to achieve maximum capacity will be approximately US$ 115 million. An investment decision to construct the new pipeline is expected in late-2004. This would lead to pipeline startup in late- 2006. 9. NGC is expected to incur some expenditures in upgrading ELPS for the additional WAGP volumes ofgas and interconnections for inputs and output, as well as some additional operation and maintenance expenses associated with the additional volumes. NGC will recover its investments and additional costs through transportation charges under its GTAs with N-Gas. 10. The Producers are also expected to incur some costs in upgrading and installing gas gathering systems and gas treatment facilities upstream of ELPS, in the oil production areas of the Niger Delta and elsewhere. The Producers will recover their investments and other costs through gas sales under their contracts with N-Gas.

The Gas Producers 11. The gas to be transported in WAGP will be gas produced fiom the western part ofthe Niger Delta in Nigeria. Two existing oil-producing joint ventures will be producing and processing the gas. One is a joint venture ofNigerian National Petroleum Corporation (60%) and Chevron Nigeria Limited (40%). The other is ajoint venture involving NNPC (55%) and local affiliates ofShell (Le., SPDC) (30%), TOTAL S.A. (i.e., Elf) (lo%), and Eni S.p.A. (i.e., Agip) (5%). 12. Under 20-year contracts, the two joint ventures will each supply 50% ofthe gas to be supplied for WAGP, up to 120 MMscElday. Hence, the total proportions of gas supply are: "PC: 57.50% CNL: 20.00% SPDC: 15.00% Elf: 5 .OO% Agip: 2.50% In addition, backup arrangements are to be implemented between the two joint ventures to provide additional security ofsupply. 13. The contract price ofgas commodity is US$0.50 per MMBtu, escalating with inflation and an oil index.

ELPS 14. The ELPS is an existing onshore high-pressure natural gas pipeline, which is owned by NNPC and operated by its subsidiary, NGC. The ELPS will be used to transport the gas destined

- 63 - Annex 4 for WAGP from the production fields in the western Niger Delta to the WAGP entry point near Lagos. 15. The ELPS was constructed in 1988 by Saipedsnamprogetti ofItaly, to international standards. 16. As a condition of the agreement to use ELPS, the Sponsors are conducting an integrity test on ELPS. To date, no indication ofany problems have arisen. NGC has committed to undertake any upgrading work to ELPS which the integrity study indicates is necessary, and to operate the ELPS in accordance with international practices. Value Chain for Foundation Customers -7 NNPC/SPDC/ NNPC/CNL Joint Venture Elf/Agip Producers Joint Venture

17. Shippers will be required to enter into a transportation agreement with NGC for transportation oftheir gas on ELPS. NGC has committed to an initial price ofUS$0.25 per MM33tu transported, escalating with inflation, subject to a send-or-pay commitment of 65% of capacity reserved.

Ownership of the Pipeline System 18. To date, the Project has been sponsored and hdedby a six-company consortium that in August 1999 was mandated by the Governments ofBenin, Ghana, Nigeria, and Togo to develop the WAGP. Chevron Nigeria Limited, the Nigerian affiliate ofChevronTexaco Corporation, is the managing Sponsor. Those six companies or their affiliates are expected to own the Project company which in turn will own and operate the new pipeline. 19. The pipeline will be owned and operated by a newly formed company, WApCo, which is incorporated in Bermuda. A comprehensive shareholders agreement for WAPCo has been executed, under which each member ofthat six-company consortium has ownership entitlements in WAPCo. Final ownership ofWAPCo will depend on the participants making the necessary capital contributions which are provided for in that agreement, but at this stage the following

- 64 - Annex 4 corporations or their respective affiliates are expected to be the participants in WAPCo in the following percentages: ChevronTexaco Corporation: 36.7% Nigerian National Petroleum Corporation: 25.0% Royal Dutch I’ Shell: 18.0% Government ofGhana: 16.3% Societe Beninoise de Gaz SA: 2.0% Societe Togolaise de Gaz SA: 2.0% The latter two companies are two small private companies based in Benin and Togo, respectively, that are expected to develop local distribution systems for gas transported in the WAGP.

Open Access and Transportation Agreement Arrangements 20. Under the PA, it has been agreed that the WAGP will in due course become an open access pipeline system. For that purpose, a comprehensive Access Code has been agreed between WAPCo and the WAGP Authority. From the outset, however, all GTAs for WAGP (other than the Foundation Customer GTAs, which are being separately negotiated) will be entered into in accordance with the provisions ofthe Access Code, i.e., the Access Code will come on to force immediately, but the open access provisions will be suspended for a period. 2 1. Open access is to apply to the pipeline from the earliest to occur ofcontracted capacities reaching 200 MMscElday, or 10 years after commencement of commercial operation. On current projections, the 200 MMscElday threshold would be reached after about 5 years. In addition, any gas produced in Benin, Togo, or Ghana will have open access available from the outset. In addition, there are other exceptions, which would permit open access if the Producers are not willing to sell gas at or below a reference price. 22. Where open access does not apply, only gas produced by the Nigerian gas producers who are affiliates ofthe Sponsors can obtain access to the pipeline. The Access Code will be capable of being amended from time to time by agreement between the WAGP Authority and WAPCo. Amongst other things, it will contain the detailed terms on which all future GTAs for WAGP are to be entered into. These terms will include the charging oftariffs which are to be derived in accordance with a tariff methodology which is agreed in the PA(the “Approved Tariff Methodology”). 23. Although the Access Code doesn’t strictly apply to the Foundation Customer GTAs, nevertheless the IPA obliges WAPCo to charge tariffs under those agreements in accordance with the Approved Tariff Methodology, which was set out in some detail and can be refined as the Access Code is developed. Consequently, all gas transportation charges to be charged by WAPCo, whether for foundation quantities or additional contracts, are controlled through the Approved Tariff Methodology agreed with the States.

Gas Selling Arrangements 24. It is agreed under the IPA that WAPCo will operate only as a transporter ofgas, i.e., as a provider of an unbundled transportation service. It will not be a seller of gas to customers. Hence, others must act as shippers of gas on WAGP. Neither the Producers ofgas to be sold to the Foundation Customers, nor the Foundation Customers themselves, wish to act as shipper of

- 65 - Annex 4

gas on the two pipeline systems. In other words, the Producers only wanted to sell the gas in Nigeria (at the entry point to ELPS), and the Foundation Customers (VRA and CEB) wanted to have gas sold to them at the entry points of their plants. 25. Consequently, N-Gas will be established to purchase from the Producers the gas for the Foundation Customers, enter into a GTA with NGC for transportation ofthat gas on ELPS, enter into GTAs for transportation ofthat gas on the new pipeline, and sell the gas on a delivered basis to the Foundation Customers. 26. N-Gas is to be incorporated in Bermuda, and owned by the Producers or their respective affiliates. The price to be charged by N-Gas for gas sold on a delivered basis will be a transparent amount comprising the sum ofthe price for purchase of the gas from the Producers, the ELPS transportation price, the WApCo transportation price, plus a negotiated additional amount by way of a risk premium. N-Gas will be available to play the same role in respect of further contracts for additional gas customers, as the market for gas grows. However, such customers might wish to buy the gas in Nigeria and act as shipper on the pipeline systems themselves.

Compatibility with Management Response to the EIR 27. The Project will not own any assets in the Niger Delta and its operations (under WAPCo and N-Gas) will not include the extraction ofgas. Nevertheless, the Project is compatible with the broad objectives ofthe Management Response to the EIR, as follows:

Relevant EIR Management Response WAGP commitment

I Greater focus on support for gas WAGP is a natural gas project - a priority area in the development Management Response - and, fixthennore, it will contribute to reduced GHGE by shipping a high proportion ofAG, a large portion of which would be flared or vented in the absence of productive uses of gas, including WAGP. See other moiects: GGFR is funding a project to reduce barriers to development ofthe gas markets in Benin, Togo, and Ghana GGFR is also actively looking for small-scale projects in the Niger Delta that involve productive uses of natural gas Transparency This Project is not a “significant project” as defined for EIR “Significant projects” (more than 10% purposes. Present Value ofprojected revenues from WAGP to government revenues) should disclose E1 Nigeria is less than 1% of its annual revenues in 2003, but: payments to government and key relevant Nigeria is leading the adoption ofEITI with good progress to full contract terms immediately; all projects to do disclosure of E1 revenues. so within two years The Producers will all be participants in EITI in Nigeria or they will be precluded from selling gas to N-Gas. Any future shippers under the Access Code will have to be participants in EITI. N-Gas will require its shareholders with upstream activities to be participants in EITI. N-Gas has agreed to make public its payments to FGN and NNPC for gas purchases.

- 66 - Annex 4

Relevant EIR Management Response WAGP commitment The Treaty and International Project Agreement (which contains the tariff methodology) will be available to the public. In addition, certain other Project documents, such as the EFA and reports ofthe ESAP and HSE auditors will also be made public. Other agreements such as the gas commodity purchase and sales contracts will not be made public. See other moiects:

0 Nigeria Oil Revenue Management (P085427)

0 EITI ManagemendGas & Oil Policy (P09895) Governance This Project is not a “significant project” as defined for EIR Review governance risks explicitly: purposes. While significant, the risks ofthis Project are manageable and acceptable to IDA. (See C.5 - “Critical risks and 0 Mitigate risks in “significant projects” possible controversial aspects.”) 0 Present assessment in other cases The ESAP has been set up; its reports will be made public. 0 Where balance ofrisks in As required by the EMPs, independent HSE audits will be unacceptable do not support conducted at least two or three times during construction and every three years thereafter, and the reports made public. Principally, the larger issues ofgovernance are being addressed in the Nigeria country assistance program. See other uroiects:

0 Federal Government Economic Reform and Governance (P088150)

0 Delta Development Project (p076754)

0 Petroleum Revenue Management ESW (Report No. 303 16-NG) Disclosure The ESAP reports will be made public and as a part ofits mandate Private investors will be expected to provide it will be required to meet regularly with affected communities. regular information to affected communities As part ofProject supervision, the Bank will communicate about the environmental, social and economic periodically with affected communities to assure that information impacts oftheir projects. is flowing from the Project participants. Also, see “Transparency” above. Community engagement i. broad community support for project This Project’s characteristics make the notion ofaffected will be required for WBG support community more complex than usual. It is expected that a relatively large, diffuse community in each offtake country could benefit from lower cosdmore reliable gas-fired electricity. The pipeline route is largely offshore with relatively low impact spurs to land in each ofthe offtake countries. Directly affected communities are relatively few and where resettlement is needed, full WBG processes will be employed. WBG follow-up meetings in the Niger Delta were not possible because ofsecurity concerns, however, the Bank met with several NGOs and affected groups in Lagos. While oil and gas development are sensitive and politically complex issues in the Niger Delta, this Project involves no new physical investment and no gas field investment for about five years as it utilizes existing

- 67 - Annex 4

Relevant EIR Management Response WAGP commitment production and transport facilities and currently produced natural gas. Overall, based on WBG review ofthe Sponsors’ consultation processes and staff follow up visits to all four counties: Nigeria, Benin, Ghana, and Togo, staff has concluded that there is broad support for the Project in the affected communities. ii. affected communities should, in net, The major part of Project benefits are dispersed among potential benefit from projects that impact them electicity consumers and beneficiaries ofgovernments tax receipts in offtake countries. WAPCo, in conjuction with affected communities, will develop a voluntary Community Development Plan under which WAPCo will finance local projects. Communities in the Niger Delta will benefit from the reduction of GHGE as a result on the Project using currently flared AG. WBG role in E1 will be selective The role ofthe WBG is very strong given the cross-border, local offtaker characteristics, and the WBG is responding with a group approach (that involves IDA and MIGA, and possibly IFC). Resources for WBG project work Project appraisal and future monitoring and supervision (appropriate Bank environmental and social arrangements will ensure adequate engagement ofsocial and resources will be made available for project environmental specialists. Bank staff work will be enhanced by appraisal and supervision) the reports ofthe ESAP and HSE auditors, as well as regular reports from the Project and the WAGP Authority on other matters. Management has agreed to provide adequate resources for the supervision ofthe Project.

Gas Markets 28. The initial (foundation) market for gas transported by WAGP is an existing crude oil- fired power station at Takoradi in Ghana, plus two small existing liquid fuel-fired power stations in Cotonou and Lomt. Substantial growth in the market for gas is projected, with several additional new power generation projects proposed in Ghana, Togo, and Benin. There are also opportunities to develop new industries in the region that would use gas for heat, and for the conversion ofexisting plants which presently use other fuel sources. Takoradi Thermal Power Stations 29. The primary Foundation Customer of gas will be the Takoradi Power Stations. These are existing electricity generating stations that presently are fuelled by Bonny Light crude oil delivered by ship from Nigeria. They have installed capacity of550 MW, with the possibility of adding a further 110 MW steam cycle in the near future. 30. The Takoradi Power Stations are presently owned in a complex structure. The first 330 MW plant (“Tl”) is owned by VRA. The World Bank was a principal financier ofT1. Apart from Takoradi, VRA also owns and operates 2 large hydroelectric facilities on the Volta River (the Akosombo and Kpong Power Stations). 3 1. The second 220 MW plant (“T2”) is owned by Takoradi International Power Company (“TIPCo”), which is a joint venture company between CMS Energy (“CMS”), based in Jackson, Michigan, USA (go%), and VRA (10%).

- 68 - Annex 4

32. VRA presently operates the T1 plant, and offtakes the electricity itself. A local subsidiary ofCMS Energy operates the T2 plant. The electricity T2 produces is sold to VRA under a Power Purchase Agreement. 33. VR4 and CMS Energy are presently negotiating the reconstruction ofthese arrangements, as a result ofwhich VRA will be the sole fuel buyer for all ofTakoradi, and the fuel will be processed and turned into electricity under a tolling arrangement (at least in respect ofthe T2 plant). Hence, VRA will be the buyer ofgas transported in the WAGP. 34. The quantity of gas expected to be taken by VRA in Low and High Demand Scenarios is shown in Annex 9. Communautk Electrique du Bknin 35. CEB operates two small electricity generating stations, each of 25 MW capacity, one in LomC and one in Cotonou. These stations are presently fuelled by jet fuel. 36. It is expected that CEB will be a second Foundation Customer for WAGP. The quantity ofgas expected to be taken by CEB in Low and High Demand Scenarios is shown in Annex 9. Other Potential Foundation Customers 37. The Sponsors are still seeking other Foundation Customers if possible. There is another power station in LomC, which is being refbrbished by Electro Togo S.A. and which has signed a Power Purchase Agreement with CEB to sell electricity to CEB, commencing in 2005. Negotiations are underway for Electro Togo to become a customer for gas transported in the WAGP, and possibly a Foundation Customer. Several other possible Foundation Customers have been identified. Ifthey do not become Foundation Customers, they are expected to become non-Foundation Customers, either by the time that the WAGP commences deliveries or shortly thereafter. Market Growth 38. For the Sponsors, the economics ofWAGP depend on market growth being achieved. This is reflected in the tariff methodology which has been agreed with the States (see below). 39. Consequently, a comprehensive market study was carried out in 2001 by an independent consultant, Purvin & Gertz, to determine likely future growth in demand. At the same time, the four States commissioned their own study. The Purvin & Gertz study was updated in February 2004. All studies have concluded that there is likely to be significant growth in demand, with total quantities contracted for transportation on WAGP reaching at least 450 MMscflday over 20 years.

The Enabling Environment Agreed with the States 40. Extensive negotiations have been held between the Sponsors and the four States in which the Project is to be located, culminating in the signing ofthe PAon 22”d May 2003. This agreement provides for a comprehensive new regime to be implemented for the WAGP, which requires the passage oflegislation in each State. 41. Once implemented, the arrangements agreed with the States will be unique in the world. To facilitate the Project, the States have agreed (subject to the passage oflegislation in each State (“Enabling Legislation”)) to establish a single, harmonized regulatory and fiscal regime for the

- 69 - Annex 4

Project, across the four counties, and to harmonize other important aspects oftheir investment regimes. 42. The new regime is established through a combination of3 separate mechanisms: the PA, a formal treaty which was signed by the States on 31StJanuary 2003 (the “WAGP Treaty”), and the Enabling Legislation. In addition, modern pipeline regulations will be adopted in each State under powers set out in the Enabling Legislation. Regulatory Regime 43. In Nigeria, the pipeline will operate under a license to be granted under the existing Oil Pipelines Act. However the provisions ofthat Act are to be modified slightly, including in relation to the duration of the license (for harmonization reasons). 44. In each other State, all existing laws on gas pipelines are to be disapplied, and the Enabling Legislation in those States will include pipeline licensing provisions. Consequently, a pipeline license will be granted in those States under the new legislation, and this will form the legislative basis for the construction and operation ofthe pipeline. 45. In all States (including Nigeria), all existing pipeline regulations are to be disapplied, and a new, modem set oftechnical regulations appropriate for a high-pressure gas pipeline will be adopted. The regulations in each State will be identical. The consequence ofthis will be to have in effect a single set ofregulations applying to the entire pipeline system across the four countries. 46. The regulations are to be finalized and adopted as law under powers contained in the Enabling Legislation. This must happen prior to an investment decision being made. 47. In addition, the States have established a new international body (the “WAGP Authority”) which will be the organization which administers and enforces those regulations, to the exclusion ofexisting agencies in each State, i. e., no existing agency in a single State will have the authority over WAGP on matters where the WAGP Authority has ju~isdiction~~. 48. The WAGP Authority is established under the WAGP Treaty. Fiscal Regime 49. An entirely new fiscal regime to apply to the WAGP Project to the exclusion of existing tax laws in each State has been agreed in the PA. Principal features ofthis regime are:

0 35% rate oftaxation ofincome

0 25% reducing balance method ofdepreciation

0 5 year tax holiday

0 No import or customs duties or VAT on import of capital goods 50. The agreed fiscal regime is to be implemented as law in each State in the Enabling Legislation, and therefore will apply to the Project to the extent that it is situated in that State. In addition, the States have agreed in the WAGP Treaty and the IPA a fiscal sharing mechanism,

52 Some agencies like the Environmental Protection Agencies and Tax Authorities have kept ruling rights within the provisions of the Enabling Legislation(s).

- 70 - Annex 4 under which the tax revenues are shared between them. The regime also provides that the income and expenditure ofWAPCo are also deemed shared between the States in exactly the same proportions, irrespective ofwhere income was earned or where expenditure was incurred. There is also a single tax filing and assessment process. 5 1. The consequence ofthis is that although as a strict matter of law WAPCo is taxed separately in each State, in effect there is a single fiscal regime applying to the whole ofthe pipeline across its entire length. Other Aspects 52. Other aspects ofthe investment regime for WAGP are also to be harmonized across the four countries, including the exchange control rules, the ability ofWAPCo to be registered and carry on business in these four countries as a foreign company, and the insurance requirements. 53. There is no change required to the existing environmental laws and practices in each State. WAGP will be developed to the highest environmental standards, which is consistent with the prevailing laws in each State.

Agreed Tariff Methodology 54. A comprehensive tariff methodology for transportation ofgas in the WAGP, applying both to Foundation Customers and additional customers, has been agreed in the PA. This “Approved Tariff Methodology” is set out in considerable detail in that agreement, and has been further developed as part of the negotiations for the Access Code. 55. The Approved Tariff Methodology is designed to provide to WAPCo a real, after-tax rate ofreturn of 12% per annum on total capital employed, over about 20 years, from foundation contracts only. 56. If additional contracts for gas transportation are entered into exactly as predicted in an agreed market forecast, the overall rate ofreturn will increase to 15%. Hence, WAPCo is at risk for part ofits expected return on the growth in the market for gas, but there is a floor of 12%. 57. The tariff methodology which has been agreed is designed to provide the anticipated returns over an initial period of approximately 20 years. However, WAPCo will continue to own the pipeline thereafter. It has been agreed in the IPA that after the initial period, the tariff methodology will change, and will be renegotiated between WAPCo and the WAGP Authority. However the principle which will guide the negotiation will be that WAPCo will be entitled to earn a target rate ofreturn of 15% only on additional capital expenditure, and to recover operating expenses plus a reasonable profit thereon.

Credit Support Requirements 58. A regime for credit support for Foundation Customers has been agreed. This requires the establishment of letters of credit covering the value ofapproximately 3 months ofgas deliveries, plus additional long-term credit support. 59. For long-term credit support, WAPCo requires that Foundation Customers provide creditworthy guarantees or other security covering at least the amount which would be payable by the customers as agreed termination payments under their agreements should the agreements be terminated due to default by those customers.

-71 - Annex 4

60. In the case ofVU, this means a guarantee ofinitially approximately US$250 million, to be obtained from IDA, MIGA, and Zurich/OPIC together. This amount is very much less than the cash flows which are required to enable WApCo to achieve its expected rate ofreturn, and is even significantly less than the capital investment it is making in the pipeline. Instead it is a “safety net,” providing limited security to cover part ofits investment.

Technical Information 61. The pipeline will be a 20-inch lined pipeline. Initial installed capacity will be about 200 MMscYday, with incremental expansion ofcapacity planned, up to an expected ultimate design capacity of 470 MMscUday. The pipeline size has been chosen on the basis of overall minimum transportation cost (using the concept ofthe weighted average tariff detailed in the PA) and other aspects including operational considerations. 62. The development plan envisages a compression station being constructed at Lagos Beach, the last point where the pipeline is onshore in Nigeria before heading offshore. This compression station will subsequently be expanded as the pipeline capacity is increased in future years to meet additional demand. 63. The compression installed initially will be 2 x 12,500 horsepower centrifugal units (one unit as 100% standby). This will be capable ofbeing increased by adding an additional four more 12,500 horsepower units in future years to gain the ultimate expected capacity of 470 MMscflday.

- 72 - Annex 5

Annex 5: Estimated Project Costs AFRICA: West African Gas Pipeline Project

Project Cost US$ % Financing Pian US$ % millions millions

EPC 517.7 87.8 Equity Development Expenditures 71.9 12.2 Government ofGhana 28.8 4.9 ~ontingencies'~ 0.00 0.0 NNPC 44.2 7.5 CNL 64.9 11.0 SPDC 31.8 5.4 SoBeGaz 3.5 0.6 SoToGaz 3.5 0.6 Shareholder Load Government of Ghana 67.3 11.4 "PC 103.2 17.5 CNL 151.5 25.7 SPDC 74.3 12.6 SoBeGaz 8.3 1.4 SoToGaz 8.3 1.4 Total 589.6 100.0% Total 589.6 100.0%

53 Includes WAPCo Project Management Costs, WAPCo creation costs and WAPCo-specific contingencies and risk associated fees.

54 The EPC contracts have been tendered on a turnkey basis. Each contract has a built in contingency amount. If costs ofthe contracts go over the contingency amounts already factored in the price ofthe contract, the risk is being taken by the EPC contractor. Ifthe additional costs go over 10% of the cost ofthe pipeline, the risk is being shared with the Sponsors of the pipeline. As noted in Annex 8, WAPCo has adopted good private-sector procurement practices resulting in a competitive, economical, and efficient procurement of the pipeline. As in the case ofother private-sector procurement and installation ofoil and gas pipelines, it is expected that the capital costs ofthe pipeline are not likely to exceed the base case of US$518 million.

55 The Shareholder Loans are being provided by the Sponsors for a maturity of22 years at an interest rate of 10% per annum.

- 73 - Annex 6

Annex 6: Implementation Arrangements AFRICA: West African Gas Pipeline Project

1, The WAGP is a cooperative effort ofthe four States, the Producers, the Sponsors, the Transporters, the Foundation Customers, and the providers ofpolitical risk guarantees. 2. The implementing agencies for the four States are as follows: Ministh-edes Mines, de l'Energie et de 1'Hydraulique Republic ofBenin: Cotonou, Benin Ministry ofEnergy Republic ofGhana: Accra, Ghana Ministry ofPetroleum Resources Federal Republic ofNigeria: Abuja, Nigeria Ministhre de I'Equipement, des Mines, de I'Energie et des Republic ofTogo: Postes et T616communications Lom6, Togo

3. As evidence of their agreement to develop the Project, the four States have entered into the Treaty on the West African Gas Pipeline Project (January 3 1,2003) and the PA(May 22, 2003), establishing harmonized legal and fiscal regimes in the States for the WAGP and the principles for the development, ownership and operation ofthe WAGP by WAPCo. The following chart summarizes the organizational basis for the Project.

Basic WAPCo Organizational Scheme

Intern0tiorml Treatycreates Project Agreement Authority creates concession (Regulator)

I

Republic

Ghana

- 74 - Annex 6

Regulatory Oversight 4. In the Treaty, the four States have established the WAGP Authority to, inter alia: monitor compliance by WAPCo ofits obligations under PA; approve pipeline design and construction plans; negotiate and agree with WAPCo the licenses and access code; negotiate and agree the appointment of a third party operator ofthe pipeline system; negotiate and agree on any expansion plans; coordinate the administration ofthe fiscal laws applying to the WAGP-related activities; negotiate and agree with WAPCo to changes in tariff methodology; and use its best efforts to ensure that each State complies with the PAand applicable enabling legislation.

The Producers 5. The Producers are CNL, NNPC, SPDC, Elf, and Agip, organized in two joint ventures, NNPC/CNL, and NNPC/SPDC/ElffAgip. The NNPC/CNL and NNPC/SPDC/ElfYAgip joint ventures will sell equal amounts of gas to N-Gas under their Gas Purchase Agreements; the two joint ventures are expected to back each other up in the event ofsupply intermptions from one or the other, so as to maintain the required deliveries of gas.

Ownership of the Commercial Entities 6. Commercially, two new entities and one existing entity will implement the WAGP: N-Gas Limited, a newly formed entity expected to be owned (directly or indirectly by affiliates) by NNPC, CNL, and SPDC; Nigerian Gas Company (NGC), a wholly owned subsidiary ofNNPC; and West African Gas Pipeline Company Limited (WAPCo), a newly formed entity expected to be owned (directly or indirectly by affiliates) by CNL (36.7%), NNPC (25%), SPDC (18%), VRA (as shareholder for the Government ofGhana) (16.3%), SoBeGaz (2%), and SoToGaz (2%). 7. The Government ofGhana's interest (equity and shareholder loans) in WAPCo will be held by Takoradi Power Company Limited (TAPCO), a wholly owned subsidiary ofVU. TAPCO also holds a minority interest in the Takoradi-2 power station, which is majority-owned by CMS Energy Corporation ofthe United States. Ghana's financing plan for funding its shareholding in WAPCo: As a 16.3% shareholder in WAPCo the Government ofGhana has already invested approximately US$ 12 million in WAPCo and in the absence of concessionary financing fiom multilaterals, the Government has decided to borrow the additional US$ 84 million required. It is expected that Government ofGhana will fund its equity contribution from the following sources: (i)a US$40 million borrowing from the FGN on concessional terms for 3-4 years, and (ii)a borrowing by VRA to raise the remaining US$44 million on commercial terms. At the same time, the Government of Ghana has secured a line ofcredit for US$ 100 million from Barclays Bank on commercial terms, which could be used to bridge the VRA portion of the equity funding, and will allow WAPCo to take FID as planned. The Government

-75 - Annex 6 of Ghana has acknowledged that these plans are short-term in nature and therefore the Government is exploring several options, especially those from the IFC, but has not committed to a long-term financing ofthe equity investment. NNPC will provide its share of equity contribution from its own resources. 8. Distributions from WAPCo to TAPCO will be in the form ofdividends and interest and principal payments on shareholder loans. These distributions will be passed to the Government of Ghana for use in the power sector or elsewhere. 9. The following chart shows the expected ownership ofthese implementing entities:

Ownership Scheme for WAGP , 1 I Republic

Volto River Authority

The Commercial Agreements 10. A number of commercial agreements are being entered into by N-Gas, NGC, and WAPCo. The following chart shows the key commercial agreements for the purchase, Basic Commercial Scheme for Foundation Customers

- 76 - Annex 6 transportation, and sale of natural gas. (Please note that the chart only includes the basic purchase and sales contracts for the “foundation” volumes and customers, VRA and CEB. It does not include the contracts for subsequent customers or volumes expected as the markets for natural gas grow.) 11. A diagram showing all the major commercial agreements, overlaid with the WAGP Treaty and the PA, is shown below. Please note that this only includes the foundation contracts for VRA. It does not include the foundation contracts for CEB, nor the contracts for subsequent customers as the markets expected for natural gas grow. The final terms ofa number ofthese agreements are still being negotiated, so this list should not be considered definitive.

Commercial Contractual Framework

12. The major Project agreements are as follows:

Access Code administered by WAGP Authority Delineates requirements for new shippers to use the new WAPCo pipeline. CEB Direct Anreement among CEB, WAPCo, and Among other things, provides for direct CEB N-Gas payments to WAPCo in the event ofdefault under the CEB GSAs. CEB Gas Purchase Agreement between N-Gas and Provides for the purchase of 50% of the natural gas NNPC/CNL for the CEB GSAs on a take-or-pay basis. CEB Gas Purchase Anreement between N-Gas and Provides for the purchase of 50% ofthe natural gas NNPC/SPDC/Elf/Agip for the CEB GSAs on a take-or-pay basis.

- 77 - Annex 6

Contract CEB Gas Sales Aaeement (Benin) between CEB Provides for the sales ofBenin foundation volumes and N-Gas to CEB on a take-or-pay basis. CEB Gas Sales Aaeement (Togo) between CEB Provides for the sales ofTogo foundation volumes and N-Gas to CEB on a take-or-pay basis. CEB Gas TransDortation Ameement (Benin) Provides for gas transportation services to CEB on between N-Gas and WAPCo the new WAPCo pipeline on a ship-or-pay basis. CEB Gas TransDort?ion Ageement (Togo) Provides for gas transportation services to CEB on between N-Gas and WAPCo the new WAPCo pipeline on a ship-or-pay basis. Construction Contracts between WAPCo and Four large turnkey contracts will provide for various engineering, procurement, and completion ofthe Project. construction companies ELPS Gas Tranmortation Ameement between Provides for gas transportation services on the %Gas and NGC ELPS on a ship-or-pay basis. Escrow Anreement among, directly or indirectly, Provides a mechanism investing undisbursed equity CNL, NNPC, SPDC, VRA (as shareholder for funds and for disbursing to contractors during the Government of Ghana), WAPCo, and construction. Standard Chartered Bank Government Consent & Su~portAmeement among Guarantees the performance (including payment Benin, N-Gas, and WAPCo performance) ofCEB under the CEB GSA (Benin) and CEB Direct Agreement. Government Consent & Su~~ortAmeement among Guarantees the performance (including payment Ghana, N-Gas, and WAPCo performance) of VRA under the Takoradi GSA and VRA Direct Agreement. Government Consent & Sup~ojAmeement among Guarantees the performance (including payment Togo, N-Gas, and WAPCo performance) of CEB under the CEB GSA (Togo) and CEB Direct Agreement. Insurance Policies between WAPCo and various Liability, casualty, automobile, etc policies as insurance providers, and between N-Gas and required by law and industry. various insurance providers Interconnection Ameement between NGC and Establishes technical parameters for the operation WAPCO ofthe interface between the ELPS and the new WAPCo pipelines. International Proiect Anreement among Benin, Implements the WAGP Treaty and sets forth Ghana, Nigeria, Togo, and WAPCo principles for WAPCo's development, ownership, and operation ofthe WAGP, including establishing the Agreed Fiscal Regime, the Agreed Design Standards, the Access Code applicable to all GTAs, and the Approved Tariff Methodology. Proiect Management Ameement between CNL and WAPCo Shareholder Anreegent among CNL, NNPC, Defines the rights and responsibilities ofthe SPDC, and N-Gas shareholders ofN-Gas.

- 78 - Annex 6

Shareholder Ameement among, directly or Refines the rights and responsibilities ofthe indirectly, CNL, NNPC, SPDC, VRA (as shareholders ofWAPCo; grants options to shareholder for the Government of Ghana), and SoBeGaz and SoToGaz to become shareholders. WAPCo Takoradi Gas Purchase Ameement between N-Gas Provides for the purchase of 50% ofthe natural gas and NNPC/CNL for the Takoradi GSA on a take-or-pay basis. Takoradi Gas Purchase Ameement between N-Gas Provides for the purchase of 50% ofthe natural gas and NNPC/SPDC/Elf/Agip for the Takoradi GSA on a take-or-pay basis. Takoradi Gas Sales Ameement between VRA and Provides for the sales offoundation volumes to N-Gas VRA on a take-or-pay basis. Takoradi Gas Transuortation APreement between Provides for gas transportation services to Takoradi N-Gas and WAPCo on the new WAPCo pipeline on a ship-or-pay basis. Technical Services Ameement between WAPCo (to follow) and [CNL] Treaty among Benin, Ghana, Nigeria, and Togo Establishes the WAGP Authority as the regulator for the Project, commits the States to observe the PA, establishes a Fiscal Review Board, and provides for governance and appeal. Trust Accounts & Securitv Deed among N-Gas, Among other things, creates a Proceeds Account NGC, NNPC, CNL, SPDC, Elf, Agip, and and other Trust Accounts into which CEB GSAs WAPCo, and CEB payments and other obligations will be deposited for the benefit ofWAPCo, N-Gas, the Producers, NGC, and CEB (as their interest may appear). Trust Accounts & Security Deed among N-Gas, Among other things, creates a Proceeds Account NGC, NNPC, CNL, SPDC, Elf, Agip, and and other Trust Accounts into which Takoradi GSA WAPCo, and VRA payments and other obligations will be deposited for the benefit ofWAPCo, N-Gas, the Producers, NGC, and VRA (as their interest may appear). VRA Direct Arrreement among VRA, WAPCo, and Among other things, provides for direct VRA N-Gas payments to WAPCo in the event ofdefault under the Takoradi GSA.

13. The providers of political risk guarantees are IDA, MIGA, and ZuricWOPIC, which will enter into the following contracts:

Contract Short Description [political Risk Guarantee] between Zurich/OPIC Tbd, but likely to include a guarantee of a and WAPCo component ofthe WAPCo termination payment and arrears, up to US$ 125 million.

- 79 - Annex 6

Contract Short Description Contract of Guarantee for Eauitv Investments Breach ofContract cover for WGhana’s between MIGA and WAPCo payment of MIGA’s share ofWAPCo termination payment and a limited amount ofarrears, up to US$75 million. Guarantee Agreement between IDA and WAPCo Guarantees payment ofIDA’S share ofWAPCo termination payment (for Ghana’s failure to pay a loan to WAPCo for such amount, up to US$ 50 million).

IDA Project Ameement between IDA and N-Gas Provides representations, warranties, and covenants by N-Gas. IDA Project Agreement between IDA and WAPCo Provides representations, warranties, and covenants, and fees, by WAPCo. Indemnity Agreement between Ghana and IDA Requires Ghana to reimburse IDA for claims paid under the IDA Guarantee and related expenses.

Risk Allocation 14. The primary risks undertaken by the private sector participant^^^ in the Project are: (a) construction-related risks (design, engineering, installation, procurement, force majeure, delays, labor, environmental, resettlement, etc.); (b) operations and maintenance risks; (c) oil price risk; (d) credit risk (VRA and CEB); (e) market growth risk; (0 gas production risks. These risks have been allocated in the Project agreements among the participants, including EPC contractors. (See D. 1 for a risk allocation matrix.) Furthermore, the Sponsors will mitigate their risks through short-term letters ofcredit and contracts ofinsurance, including the IDA, MIGA, and ZuricWOPIC guarantees. 15. The public sector is assuming principally the take-or-pay obligations in the Foundation Customer GSAs. As is customary in international fuel markets, these are USDollar obligations. The government guarantees in the GCSAs would be most likely triggered if VRA or CEB becomes insolvent. 16. Political and natural events offorce majeure are shared risks under the Project agreements. Thus, most operational problems outside the control of the operators will result in a standstill period during which take-or-pay and ship-and-pay payments are suspended. On the

56 Includingthe private sector Producers,

- 80 - Annex 6 other hand, if a party defaults in its performance, that party will owe liquidated damages to the other parties to compensate for the additional costs such parties incur.

- 81 - Annex 7

Annex 7: Financial Management and Disbursement Arrangements GHANA: West African Gas Pipeline Project

N-Gas and WAPCo are privately operated companies that have been established to develop, construct, and operate the WAGP pipeline and sell gas to consumers in the three consuming countries (see Annex 4 - Detailed Project Description). VRA, an integrated power utility company owned 100% by the Government ofGhana, is one ofthe Foundation Customers ofN- Gas and WAPCo. CEB, an integrated power utility company owned 100% by the Government ofBenin and Government ofTogo, is the other Foundation Customer ofN-Gas and WAPCo. It is expected that N-Gas, WAPCo, VRA, and CEB will install and maintain adequate financial management systems, including the system of accounting, reporting, auditing, and internal controls, and relevantly qualified staff. The annual financial statements will be prepared using internationally accepted accounting principles. Also, they will be audited in accordance with international standards on auditing. The performance ofthe Project, N-Gas, WAPCo, VRA, and CEB will be monitored through, inter alia, regular progress reports and audited annual financial statements to be submitted by N-Gas, WAPCo, CEB, and VRA. Where an obligation for IDA to make a payment arises under the guarantee (see Annex 11 for the relevant conditions), WAPCo will make a demand on IDA in the requisite form, following which IDA will be entitled to demand reimbursement &om Ghana under the Indemnity Agreement between Ghana and IDA.

- 82 - Annex 8

Annex 8: Procurement Arrangements AFRICA: West African Gas Pipeline Project

1. The Bank’s procurement guidelines for IDA guarantees require that goods and services must be procured with due regard to economy and efficiency (para 1.5 and 3.14 ofthe guidelines). WAPCo, as the Project implementing agency for the new pipeline, is responsible for selecting the contractors for constructing the pipeline. WApCo has prepared recommendations for the award ofthe contracts to its board ofdirectors but the recommendations have not yet been approved, pending final approval ofthe investment decision. 2. There are four construction packages for the new pipeline. The final contract prices, as per the recommendations based on the lowest evaluated prices, are slightly lower than WApCo’s original estimates. A review ofthe procurement documentation was carried out both by the Bank as well as the Bank’s consultant^.^^ This review has indicated that the procurement has been carried out in a fair and transparent manner with due regard to economy and efficiency. 3. Although not required for the IDA Guarantee, the Operations Procurement Review Committee (OPRC) reviewed the procurement because, at the time, IDA financing was under consideration for a portion ofthe Government ofGhana’s participation in WAPCo. Based on this review, the OPRC agrees that this Project meets the guidelines set for providing guarantees. In addition, the OPRC has also recommended that since the procurement ofthe pipelines and other hardware is very much in line with best practices ofthe private sector and the World Bank, it could potentially be supported by an IDA Credit, against the proposed contracts to be awarded competitively at a total contract amount ofabout US$400 million, if needed. The final evaluation (as approved by the WAPCo Board) will be reviewed by the Bank to confirm that there are no changes to the recommendations as per the review conducted by Bank staff.

57 Mott MacDonald Limited, under contract from PAEnergy Consulting, under the Economic & Financial Assessment ofthe Project.

- 83 - Annex 9

Annex 9: Financial Analysis AFRICA: West African Gas Pipeline Project

Summary of Financial Analysis 1. The main issues addressed in this financial analysis ofthe Project are: (a) overall demand for natural gas in the three consuming countries; (b) pricing components of WAGP gas; (c) financial structure of the Project; (d) financial analysis ofthe pipeline project including Rates of Return and Risk taken by Sponsors and the overall pricing ofWAGP gas; and (e) financial impact on the Foundation Customers: VRA and CEB. 2. In summary, the new pipeline is financially sustainable and commercially viable in both scenarios developed by the Bank for the demand for natural gas - Low Demand Scenario and High Demand Scenario (see Annex 1 for more details on these demand scenarios). The pipeline investment ofabout US$ 590 million has a positive NPV (at a nominal discount rate of 13%58)of US$311 million and an IRR of 19.0%59 in the Low Demand Scenario, and a positive NPV (at a nominal discount rate of 13%) ofUS$358 million and an IRR of20.3% in the High Demand Scenario.6o Sensitivity analysis as carried out indicates that the financial viability ofthe Project is insensitive to operating costs, and is reasonably sensitive to an increase in capital expenditures.61 3. WApCo has indicated to the Bank Group that if completion ofthe FID process is after November 30,2004, WApCo would incur significant cost increases ofup to about US$25 million that are expected on that date under the price escalation clauses of some EPC bids. The Sponsors have acknowledged that such an increase in costs may impact the WAGP Reservation Charge by up to about 7 USgYMhlBtu ofcapacity reserved by the Foundation Customers. The Sponsors have stated that FID completion is dependent on a number of conditionalities, including enactment of the enabling legislation in each ofthe four States, final approvals ofthe IDA, MIGA, and ZuricWOPIC guarantees, due authorizations for execution of contracts, and hding of(or posting ofletters ofcredit to) the escrow account by shareholders. Board approval would be an important milestone in WAPCo’s ability to mitigate price escalation. 4. The financial structure provides for 100% ofshareholder funding in the form ofequity and shareholder loans, with no private commercial debt ofthe Project has been assessed by the Sponsors and a cost-benefit analysis62was also carried out by the Sponsors on the choice ofthe financial structure of the Project, which was reviewed by the consultants advising the four

** A real discount rate of 10% is assumed (also used for economic analysis). US$ inflation equivalent of3% is added to the real discount rate to determine the nominal discount rate of 13%.

59 Based on the after-tax cash flow to WAPCo. The pipeline tariffs are designed to generate a 15% real return if expected sponsor demand scenarios materialize. The Bank’s Low and High Demand Scenarios vary from those ofthe sponsors, and therefore the returns from the pipeline are not equal to 18% nominal, assuming US inflation of 3%. Ithas been concluded that because ofthe turn-key nature of the contracts it is unlikely that the cost ofthe new pipeline will be higher than presently expected.

62 Carried out by Credit Suisse First Boston.

- 84 - Annex 9

States.63 All ofthese reviews, along with those carried out by the Bank’s consultants for the EFA have concluded that the financial structure ofthe Project is cost efficient and reasonable in the current environment for commercial project financing. 5. The financial impact on the two power utilities purchasing most ofthe WAGP gas (VRA and CEB) has also been analyzed. It is expected that the use ofgas by both VRA and CEB would result in substantial fuel savings to them (27% to VRA and about 58% to CEB)64 over the currently used alternative fuels for power generation (in the Low Demand Scenario). For VRA, if crude oil prices fall below US$ 17.68hbl over the life ofthe project (in the Low Demand Scenario), the use ofgas would not result in savings over For CEB, if crude oil prices fall below US$7.24/bbl over the life ofthe project (in the Low Demand Scenario), the use of gas would not result in savings over Given the current outlook for oil prices,67 the Project is expected to generate significant fuel savings for both VRA and CEB.

Gas Demand in Ghana, Benin, and Togo 6. A summary of aggregate gas demand in Ghana, Benin, and Togo and expected WAGP pipeline throughput for the Low Demand Scenario is provided in Table 9.1 and for the High Demand Scenario is provided in Table 9.2. The demand for gas is represented by the projected throughput in the pipeline over the next 20 years. The pipeline is limited to a capacity of 474,000 MMBtu per day. The projected throughput is expected to be less than the maximum capacity ofthe pipeline to take account for the load factors of each individual customer (generally expected to be about 80%). The key difference in the two scenarios, as noted in Annex 1, is the demand originating from the smelter operations in Ghana. Over the medium term, the smelter demand is overtaken by domestic and industrialhommercial sector demand, which reduces the difference in demand for gas between the two scenarios in the latter years. Annex 1 provides details on the composition ofthe demand for gas in the two scenarios.

Table 9.1: Aggregate Gas Demand in Low Demand Scenario (by Customer Class, in MMBtulday)

5739 6009 6882 7594 273 11 447

63 On behalf ofthe four States, Nexant Limited (an affiliate ofBechtel Corporation) reviewed the financial structure ofWAPCo under financing from USAID.

64 In the Low Demand Scenario.

65 At this constant price of oil, the NPV to VRA as a foundation customer is zero. This does not represent that NPV to Ghana is zero at this price ofoil. Switching values to Ghana are calculated separately in Annex 10.

@ At this constant price of crude oil, the NPV to CEB itom the Project is zero.

67 Currently trading in the range ofUS$45-52/bbI.

- 85 - Annex 9

Table 9.2: Aggregate Gas Demand in High Demand Scenario (by Customer Class, in MMBtulday)

Ghana: Industrial & Commerdai 9,492 9,818 10,640 11,334 12,934 15,036 Benin &Togo: Power 8,BO 17,325 26,124 34,773 46,403 85,118 92,673 Benin & T&: industrial & Commercial - 19,976 21,272 22,614 23,203 23,691 35,487 srand Total (MMBtuldav 7. .9 6 26 , 65 360.7 385.50

Gas Pricing Components Classes of Customers 7. There are three different classes ofWAGP customers that would be charged a different Reservation Charge. Reservation Charge is defined as charges paid to WAPCo to cover the fixed and estimated variable costs ofconstruction, operation, maintenance and expansion6*of the new pipeline including the returns to the Sponsors at the agreed rates. These classes and associated charges are: Foundation Reservation Chqge. The Foundation Reservation Charge is charged in respect of all Reserved Capacity that is reserved under Foundation Customer GTAs, i.e., customers that have signed GSAs before the investment decision, At present, it is expected that VRA and CEB would be the only Foundation Customers. Standard Reservation Charge. The Standard Reservation Charge is charged in respect of all Reserved Capacity, which is reserved under Standard GTAs, except to the extent that quantities ofReserved Capacity qualify for the Industrial Development Reservation Charge. The Standard Reservation Charge is set so that at all times during the Primary Transportation Term it will be US$ O.lO/MMBtu in nominal terms greater than the Foundation Reservation Charge. Industrial DeveloDment Reservation Charge. The Industrial Development Reservation Charge is available in respect ofReserved Capacity for the transportation ofnatural gas for consumption by industrial users ofnatural gas (to the exclusion ofpower generation). The Industrial Development Reservation Charge is only available in respect of a total maximum Reserved Capacity equal to 10% ofthe Maximum Capacity ofthe Pipeline System. Once that maximum total Reserved Capacity for the Industrial Development Reservation Charge has been reserved by Shippers, Reserved Capacity which would otherwise qualiQ for the Industrial Development Reservation Charge will be subject to the Standard Reservation Charge. Pricing of WAGP Gas 8. A chain ofcontracts and relevant charges will cover the purchase ofgas in Nigeria, transportation through the ELPS and WAPCo pipelines, and delivery to customers in Benin, Togo, and Ghana. N-Gas, has been established to act as the contracting party for each ofthe core agreements in order to provide an arms-length relationship between the Producers,

68 As agreed under the PDP to reach a maximum capacity of 474,000 MMBtUlday.

- 86 - Annex 9

Transporters, and Foundation Customers. The services provided by N-Gas and charged to gas consumers in Ghana, Benin, and Togo under the WAGP charging regime are provided below: 9. Gas Commodity: Gas purchase agreement(s) will be entered into between N-Gas and the Producers. The gas price paid by WAGP customers6' is a pass-through ofthe price that N-Gas has agreed to pay the WC/CNL and WC/SPDC/ElE/Agip joint ventures for the gas in Nigeria. The Gas Contract Price (GCP) is expressed in US Dollars per MMBtu and is the same for all Foundation customer^.^' 10. The price ofgas of US$0.50 per MMBtu varies with US inflation and with crude oil prices.71 Oil price indexation is a conventional escalator for gas contracts, and in this case, as oil prices increase, it has the effect ofsharing a proportion ofthe consumers' 'upside' savings with the producers, i. e., the savings from switching from oil-based products to gas. It thus reflects consumers' avoided costs. The impact ofthe oil index supplement on the gas price is depicted in Chart 9.1 below. The gas price has a minimum value fixed at US$0.37/MMBtu and reaches about US$ 1.23flMMBtu at a Bonny Light (Nigerian Oil) price ofUS$40/bbl.

69 See discussion below for details on various classes ofWAGP customers.

70 Contractually, standard and industrial customers will enter into a separate gas sales agreement with N-Gas. It is expected that these agreements would mirror agreements reached with the foundation customers.

71 The gas price for Foundation Customers is determined according to the following formula: GCP = BGP x (0.33 x MI0+ 0.67) + Oil Index, where: BGP = Base Gas Price ofUS$0.50 per MMBtu. Io = Inflation index base value. This is the average of the inflation index for the twelve months to 3 1 October in the calendar year in which FID occurs. The inflation indicator chosen is the US CPI for all Urban Consumers. In = the average ofthe Inflation Index for the Index Period for the Contract Year (which is the average value ofthe index over the twelve months up to the preceding October). Inflation values are recalculated annually. Oil Index: a charge related to the prevailing price ofBonny Light, compared with a base value. Five oil price bands are distinguished. Within each band, as the oil price varies, the gas price is adjusted by a percentage ofthe variation ofthe oilprice. For example, for crude oil prices of more than US$20/bbl and less than US$35/bbl, the gas price rises by 25% ofthe increase in the crude oil price above the relevant base price (VS$20/bbl in this case) expressed in US$/MMBtu. The oil index part ofthe gas price is recalculated and applied every six months. Oil Index = (0.25 x (P - Po)/5.82) when P is less than USDollar 35.00 per barrel; or (0.25 x (35-Po)/5.82 + 0.10 x (P -35)/5.82) when P is equal to or greater than US Dollar 35.00 per barrel, except that Oil Index = US Dollar 0.00 when P is between USDollar 18.00 per barrel and US Dollar 20.00 per barrel; where: P = the average price ofBonny Light crude oil in US Dollar per barrel. P shall be determined:(i) in December based on the arithmetic average ofthe mean ofPlatt's assessments (the daily effective quotations in "Platt's Crude Assessments") for the period 1 June to 30 November and shall be applicable for the period 1 January to 30 June; and (ii)in June based on the arithmetic average ofthe mean ofPlatt's assessments (the daily effective quotations in "Platt's Crude Assessments") for the period 1 December to 3 1 May and shall be applicable for the period 1 July to 3 1 December. When the calculated value ofP is less than US Dollar 15.00 per barrel, P shall be deemed to be USDollar 15.00 per barrel, Po = US Dollar 18.00 per barrel when P is below US Dollar 18.00; and US Dollar 20.00 per barrel when P is above US Dollar 20.00.

- 87 - Annex 9

Chart 9.1: Impact of Oil Indexation of Base Gas Price of US$O.5O/MMBtu

130 120 I10 100 0 90 3 080 070 6 ::: 0 40 0 30 0 20 0 IO 0 00 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 Bonny Light Oil Price ($/bbl)

Source: Takoradi Gas Purchase Agreement 11. Deliverv Fee: In addition to the charge for the units ofgas purchased, N-Gas charges a “delivery fee,” which covers the costs ofputting in place the contractual arrangements for procuring gas and transporting it to the customer’s premises, and then managing the process once the contracts are in place. This N-Gas delivery fee is US$ O.lO/MMBtu, for all quantities of delivered gas. It will remain fixed at this level in nominal terms, and will not be escalated with inflation. 12. ELPS Transportation charges: An ELPS Transportation Fee will be charged at a base price ofUS$0.25/MMBtu ofreserved capacity. It will be escalated fully each year by U.S. inflation. The ELPS transportation charge is the same rate for all WAGP Foundation Customers, and is passed through to the Buyers within the N-Gas charges. The ELPS transportation charges are subject to ship-or-pay clauses. 13. The WAGP Au,thority Charge: The cost ofrunning the WAGP Authority, the pipeline’s regulator, is charged entirely to the WAPCo. Under the terms ofthe PA, WAPCo is allowed to recover this cost fkom shippers in proportion to their Reserved Capacity. In the first ten years, the charge is expected to be no more than US$O.O13NM€3tu and thereafter US$O.O07/MMBtu (both in real terms). 14. Credit Support CharPe: Foundation shippers will be charged, in respect of Foundation Customer GTAs, credit support charges to be agreed between WAPCo and the Foundation shipper for the cost ofWAPCo procuring and providing credit support for the obligations ofthe shipper or its buyers. The charges are recurring charges that WAPCo will accrue with respect to guarantees on offtake agreements that are being requested from the World Bank Group and Zurich/OPIC. 15. WAGP Tariffs: All customers ofWAGP gas or Shippers will be charged a WAGP tariff (in US$) which have two parts: (a) Reservation Charge, which is a charge for the Reserved Capacity reserved by the Shipper (the charge is payable by the Shipper irrespective ofwhether, or to what extent, that Reserved Capacity is used); and

-88- Annex 9

(b) Usane Charge, which is a charge that varies in direct proportion to actual throughput ofnatural gas by the Shipper. 16. The WAGP tariff is designed to be charged on a “postage stamp” basis; i.e., they are non- distance-sensitive tariffs having only one single tariff rate for the class oftariff, regardless ofthe distance that gas is transported along the pipeline system. The actual WAGP reservation charges charged to Shippers are calculated as follows. The starting point for the calculation ofthe reservation charges is the Reference Tariffs, which will be established at the time ofthe FID by the Sponsors ofthe pipeline. From these Reference Tariffs, Real Tariffs in 2004 dollars are calculated for each calendar year. These Real Tariffs are adjusted for inflation to determine the actual reservation charges to be charged during the calendar year in question. Finally, at the end of each operational calendar year there will be a recalculation and reconciliation, with adjustments payable to or by Shippers. 17. Given the uncertainty regarding the aluminum smelter operations (Valco), the Sponsors of the Project, in conjunction with the four governments, have agreed on seven (7) sets of Reference Tariffs, denoted as Cases A to G. These have been established based on the varying demand scenarios (depending upon the availability ofValco demand in the near term). Noting that Valco operations have a material impact on the demand for WAGP gas (see Annex 1, paragraph 49), the Sponsors and WAGPA (on behalf ofthe four States) have agreed that the Valco demand would be treated as a pass-through, so that WAPCo receives similar return on its investment irrespective ofwhether the smelter is restarted before 201072. In this context, the Sponsors have designed a “ramp” to the foundation contract; the overall impact ofthis “ramp” is to lowkr the WAGP related charges to the Foundation Customers in the near term in a low demand scenario. At first gas, unless a high demand scenario materializes, reservation charges payable by Foundation Customers would be lower (on an absolute basis, i.e., tariffs x low demand throughput) and these lower charges are compensated through higher reservation chargedunit in latter years, when it is expected that the gas demand would have increased. 18. Case A is the low demand with a ramp (Sponsors’ base case). Case B is the high demand case.73 Case D through G are intermediate tariff calculation scenarios, depending upon the date of return of Valco to full operations. These four Cases (D, E, F, and G) have been achieved by increasing the level ofReference Tariffs from that in Case C (low case without any ramp), in such a manner that under these cases the Foundation Customers (VRA and CEB) still manage to achieve savings over projected crude oil price. These are also designed to enable WAPCo to reduce WAGP tariffs as and when the demand for gas increases due to Valco operations or otherwise, allowing all gas consumers to reap the benefit ofhigh gas demand. Therefore, in Case A (low demand with ramp), the Reference Tariffs are the highest and in Case B, (high demand, without ramp), the Reference Tariffs are the lowest. Foundation Customers can, however, still draw up their full contract amount without paying any extra reservation charges. 19. The determination ofwhich set ofReference Tariffs should be applied, and in the case of Foundation customers whether the Reserved Capacity should be subject to a corresponding adjustment, or ramp, would depend upon the application ofa pre-determined set ofcriteria. These criteria determine whether removal ofthe ramp (before 2009) would result in savings for

72 Under such scenarios, WAPCo shareholders make a after tax real ROR ofbetween 15% and 15.5%.

73 Includes demand from Valco smelter as an input to the probabilistic demand model.

- 89 - Annex 9 the Foundation Customers, and if it does, then the ramp would be removed, as per the Project agreements, resulting in a lower price ofgas to all customers. Primarily the one time switch to lower tariffs is designed to take place with return ofValco operations, however the switch can also happen if Takoradi load factor is high because ofhigh demand for power, or if oil prices are high enough that WAGP gas is cheaper even with higher Reserved Capacity. The Reference Tariffs, expressed in units of2004 dollars per day per MMBtu/day ofreserved capacity, are provided in Table 9.3.

Table 9.3: Reference Tariffs under Sponsors Demand Cases A - G (in 2004 US$IMMB~U)’~

Foundation Reference 2.461 2.113 2.113 2.214 2.329 2.392 2.442 Tariff Standard Reference 1.241 0.755 1.152 1.168 1.207 1.224 1.236 Tariff

20. Declining Tariff Methodology: The tariff paid in any year by all customers apart from the Industrial Development customers would depend upon the volume ofcapacity in the pipeline that has actually been reserved by customers in that year. If only Foundation Customers reserved capacity, then the tariff would remain the same in real terms for the life oftheir contracts. However, as large industrial customers and later power generators decide to buy gas and book capacity in WAGP after FID, both Foundation and Standard tariffs will fall in real terms because the Standard Reference Tariff is lower than the Foundation Reference Tariff. The rate at which the tariff will decline depends only on the rate at which booked capacity grows, subject to the cap on total reserved capacity set by the size ofthe pipeline.

Financial Structure of the Project 21. Oil and gas projects are generally financed with a high level of equity. In the same spirit, construction financing for the new WAPCo pipeline will be mobilized from the Sponsors and will be hlly committed75or fimded at the time ofFID. The financing plan for WAPCo is conceptually fairly straightforward. WAPCo’s investment will be funded entirely by shareholders’ equity and shareholder loans in a ratio of30:70. In addition, the WAPCo Shareholder Agreement provides for obligatory additional equity funding by each shareholder for cost overruns ofup to What is perceived to be the main Project risk, the long-tenn sales credit ofFoundation Customers, will be partly underpinned by the Buyer Payment Security

74 These reference tariffs are subject to change depending upon finalization to project costs and other matters relating to the PDP.

75 It is expected that all or some ofthe sponsors may provide irrevocable L/Cs instead ofcash at FJD, which would be drawn upon during construction.

76 For additional funding for overruns greater than lo%, the shareholders have agreed to dilution provisions for defaulting or delinquent shareholders.

- 90 - Annex 9

Package - GSA termination amount and arrears guarantees from IDA,77MIGA, and ZuricWOPIC for the two Foundation Customer GSAs. 22. Under the Shareholder Agreement, WAPCo has the flexibility to re-finance shareholder loans for up to 70% ofthe total investment costs at any time. The agreed tariff methodology is based on 70% debt leveraging ofWAPCo, at commissioning ofthe pipeline in 2006, with 20- year loans at a 10% interest rate. Ifthe capitaVloan markets are attractive, WAPCo may seek external financing. As a trading company, N-Gas is expected to always be thinly capitalized. 23. It might be argued that since international project financing has been successfully arranged for other West Afiican hydrocarbon projects, notably for the Chad-Cameroon Pipeline project and for Nigeria LNG, then it should be possible for WAPCo. This would be a false comparison. What is overwhelmingly the single biggest financial risk facing the overall WAGP Project, name1 the gas buyer credit, is largely absent from both the Chad-Cameroon and Nigeria LNG projects. Y, 24. Overall, considering the fact that the Project needed to achieve an “investment-grade” or equivalent strong credit profile to support a project financing in the commercial markets and that even with such a credit profile, there was no assurance that an acceptable project financing could be put in place in a reasonable time, it is reasonable to expect that Sponsors have chosen to put in place a financing structure that includes equity and shareholder loans for now, and has an option to place commercial debt when the market is ready to accept the credit risk ofthe Project. The main benefit foregone by the investors in not project financing is the possible reduction in the amount ofequity capital invested in the Project. Consequently their investment exposure may be at a much higher level than they might otherwise have wished. For Ghana, the Project requires an equity investment, paid up front, in the order ofUS$90 million instead ofperhaps a US$30 million investment, if a project financing were put in place. 25. It is possible that the Sponsors may replace some or all ofthe shareholder loans with external debt, The 15% Real RoR anticipated by the Sponsors can then be viewed as the aggregate ofa ‘true equity’ RoR of26.7% and a debt RoR of 10%. It is not likely, however, that the Sponsors would be able to find commercial loans for WAPCo (for all ofthe shareholder loans) in the near future at these attractive terms (10% for 22 years maturity with no front-end fees or charges) and amounts, even with credit guarantees in place and particularly not prior to “first gas”. However, in the case such highly attractive commercial debt materializes, in theory the shareholders’ RoRs could reach as high as 30% if such refinancing were to close at “first gas. ,,19

77 IDA will not guarantee arrears to WAPCo.

78 In the case ofthe Chad-Cameroon pipeline the product being exported at the end ofthe pipeline is oil, an internationally traded hard-currency commodity whose sale presents no credit problems other than price (which is at a level which should not affect the viability ofthe pipeline tarifQ. In the case of Nigeria LNG, the project has the backing oflong-term hard-currency sales contracts of LNG with overseas buyers of strong credit standing, which sell in the international commodity markets.

79 The true equity rate of return would depend upon materialization of gas demand, all-in cost of the commercial debt, fees, and other charges paid by WAPCo to undertake such financing and last but not least the amount of the shareholder loans refinanced.

-91 - Annex 9

Financial Analysis of the New Pipeline 26. Project Financial Costs (Nominal US$s): For the purposes ofthe financial analysis ofthe Project, the principal costs that are taken into account are for: (a) the pipeline in Kigeria, Benin, Togo, and Ghana, including the conversion costs undertaken by the foundation customers, (b) operating and maintenance costs associated with the pipeline, (c) costs ofadditional compression required during the life ofthe Project, and (d) environmental and social impact management costs related to the Project's construction and operation.80 The Project's capital costs are expected to be about US$ 5 18 million (Nominal). An additional US$72 million are considered as development costs associated with the Project resulting in an overall Project cost of about US$ 590 million. About US$ 110 million are expected to be spent towards additional capital expenditures over the life ofthe Project (financed from operating revenues). Operating and maintenance costs over the life ofthe Project (20 years) are estimated to be about US$379 million (an average of about US$ 19 million per mum and about 2.36% ofthe initial pipeline and compression costs). Subsumed in these Project costs are the environment and social management costs being borne by the private Sponsors. 27. Financial Benefits cUS$ Nominal): The gross transportation revenues from the sale of gas (gross revenues from sale ofgas minus cost ofupstream gas; or gross revenues to WAPCo) in the Low Demand Scenario are expected to be about US$5,722 million (nominal). The undiscounted cash flow, net ofoperating and maintenance costs and taxes, are estimated to be about US$3,285 million and NPV ofcash flow (at a discount rate of 13%81)is expected to be about US$31 1 million. The financial IRR for the new pipeline in expected to be about 19.0%. The gross revenues from the sale ofgas in the High Demand Scenario are expected to be about US$ 5,529 million (nominal). The undiscounted cash flow, net of operating and maintenance costs and taxes, are estimated to be about US$ 3,207 million and NPV ofcash flow (at a discount rate of 13%) is expected to be about US$358 million. The financial WR ofthe new pipeline is expected to be about 20.3%.

For the purposes ofthe Financial Analysis, the Project is defined not to include upstream costs and benefits associated with the production of WAGP gas but only those associated with the operations of the new pipeline. '*A real discount rate of 10% is assumed (also used for economic analysis). US$ inflation equivalent of 3% is added to the real discount rate to determine the nominal discount rate of 13%.

- 92 - Annex 9

Chart 9.2: WAPCo Cash Flow and IRR Analysis

I

I__I_--I" I __I .- ._ -_-__ - 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

Table 9.4: Financial Returns - New Pipeline Undiscounted Net Pipeline Financial Pipeline Financial Gross Revenues Cash Flow NPV Q 13% IRR (US$ Millions) (US$ Million) (US$ Millions) (A8 a 'A) Low Demand Scenario 5,722 3,285 311 19.0 High Demand Scenario 5,52982 3,207 358 20.3

28. It is important to note that implementing agencies have some degree ofcontrol over construction and operating costs, however no control over the international price ofoil; low crude oil prices in the market do not materially impact the price ofWAGP gas. This price risk is being partially passed on to the Foundation Customers (see following analysis on VR4 and CEB for more details) under the take-or-pay GSAs. On the whole, the new pipeline is exposed to construction and operation risk and the credit risk ofits Foundation Customers, CEB and VU,

82 The magnitude and timing of cash flows to WAF'Co in the High Demand Scenario is different than those in the Low Demand Scenario for the following reasons: (a) the WAGP Reservation Charge is higher in the Low Demand Scenario (see paragraph 18); and (b) Cash flows to WAGP are higher in the HighDemand Scenario than the Low Demand Scenario).

- 93 - Annex 9 which is reasonably mitigated by termination guarantees from IDA, MIGA, and ZuricWOPIC (see B. 1 for more details on guarantees from the Bank Group).

Sensitivity Analysis 29. A detailed sensitivity analysis has been conducted on key variables for the new pipeline. As seen fi-om Table 9.5 returns are not materially sensitive to variations in operating costs, but are reasonably sensitive to change in capital costs. Based on the review ofthe process and procedures for advertising, pre-qualification, and evaluation oftechnical and commercial bids for the new pipeline it has been concluded83that WAPCo has adopted good private-sector procurement practices resulting in a competitive, economical, and efficient procurement ofthe pipeline (see Annex 8) Furthermore, the contracts have contingencies built in to fund unanticipated increases in costs. As in the case ofother private sector procurement and installation ofoil and gas pipelines, a cost increase over the base case ofUS$5 18 million is considered highly unlikely.

Table 9.5: New Pipeline Sensitivity Analysis

19.0 358 20.3 Base Case 311 i_ - - Operating Costs +50% 27 1 18.2 318 19.5 Operating Costs +loo% 23 1 17.4 278 18.7 Total CapexMincluding expansion +25% 214 16.6 260 17.7

Rates of Return and Risk to the Sponsors of the Pipeline 30. The tariff methodology prescribed in the International Project Agreement agreed between the four States and the Sponsors largely determines the new pipeline revenues. This tariff methodology is designed to achieve the following target rates ofreturn:

0 an after-tax Real Rate ofReturn of 12% calculated on foundation volumes only, which, as a consequence ofthe ‘take-or-pay’ provisions ofthe Foundation Customer GSAs, can be regarded as a floor rate for the Project; 0 an after-tax Real Rate ofReturn of 15% when calculated on the basis that the actual growth in Reserved Capacity equals the expected demand forecast, with an actual rate higher or lower than 15% according to whether the actual growth is greater or less than the expected demand. The RoR of 15% can therefore be regarded as the base case target rate for the Project; and

83 WAPCo has been thorough, rigorous, and fair in pre-qualifying and carrying out technical and commercial evaluation. The conditions of contract for construction are generally fair and consistent with the private sector procurement and the construction risks are shared equitably between the contractor and the Company.

84 Assumes costs have increased beyond the contingencies already accounted for in construction contracts.

- 94 - Annex 9

0 an after-tax Real Rate ofReturn of 15% in respect of additional capital employed in the come of a Pipeline System Enlargement or on other anticipated capital expenditure. 3 1. It is therefore expected that the Sponsors will achieve a retum on total invested capital from net cash flows (net ofcapital costs, including cost of future gas compression to reach the agreed forecast ofgas demand85(most likely demand for gas under scenarios A-G; probability of occurring equaling 50%) plus all allowable operating and other expenses) derived from all GTAs (i)of exactly 15%, assuming that actual growth in Reserved Capacity exactly equals the agreed demand forecast; (ii)of less than 15% if the actual growth in Reserved Capacity is less than the agreed demand forecast; and (iii)of more than 15% if the actual growth in Reserved Capacity is greater than the agreed demand forecast. This also means that if demand for WAGP gas does not materialize beyond the foundation demand (an unlikely scenario), the Sponsors will make a RoR on their invested capital ofabout 12%. 32. The above results would be dependent on the financial performance of Shippers under GTAs and WAPCo performance under the GTA as well as the future growth in the market for natural gas. It should be noted that the States have not guaranteed these returns to shareholders. 33. The private Sponsors are providing almost 60 percent offunding needs for the Project. Their returns from the Project (through WAPCo, N-Gas, and upstream operations) are made up ofthe following components: (i)proportionate share ofthe upstream revenues from the sale of gas; (ii)proportionate share ofthe WAPCo dividends and repayment ofshareholder loans; (iii) proportionate share ofthe WAGP commodity charge; and (iv) proportionate share ofthe N-Gas Delivery Fee. Returns to Private Sponsors 34. Returns to the private Sponsors, for comparative purposes, have also been analyzed on a real basis, although an analysis using nominal figures is arguably more pertinent from their perspective. The analysis indicates that the private Sponsors would, as a group,86 generate a positive NPV ofUS$197 million and IRR of 16.6% in the Low Demand Scenario and a positive NPV ofUS$234 million and IRR of 18.2% in the High Demand Scenario, including the benefits that are generated from upstream activities related to the Project.87 The analysis also indicates that the private Sponsors would, as a group, generate a positive NPV ofUS$ 158 million and IRR of 15.5% in the Low Demand Scenario and a positive NPV ofUS$184 million and IRR of

85 The Sponsors have completed an independent analysis ofgas demand (undertaken by bin& Gertz), which has been agreed with the four States. The power sector inputs ofthis probabilistic demand forecast are consistent with the gas demand forecast ofthe Bank.

86 This analysis excludes returns to SoBeGaz and SoToGaz, which are private are commercial entities in Togo and Benin. To date, SoBeGaz and SoToGaz are not shareholders in WAF’Co, and it is unclear as to how Benin and Togo will arrange for domestic ownership (2% each). Therefore, for the purposes ofthis analysis, it is assumed that SoBeGaz and SoToGaz are public entities and the benefits accruing to them would accrue to Benin and Togo, respectively. *’For the purposes ofthis financial analysis, sunk costs have been included as costs incurred by the four Sponsors. The Bank’s Low Demand Scenario is marginally more optimistic than that ofthe Sponsors resulting in a RoR of 15.5% fiom the new pipeline, excluding the upstream benefits generated to the Sponsors fiom the pipeline.

- 95 - Annex 9

16.8% in the High Demand Scenario, from the new pipeline, i.e., excluding the benefits that are generated from upstream activities related to the Project. 35. This Project entails many commercial and political risks, which e Sponsors have taken into account before agreeing with the four States on the above-mentioned tariff methodology. These risks8* include: (a) upstream production and delivery risks, namely that the gas is produced in Nigeria; (b) ELPS operational risks, namely that the ELPS pipeline delivers the gas to WAPCo; (c) completion and operational risks relating to WAPCo itself, including political risks involved in each country and in operating across the three borders, and (d) downstream or offtake risks, namely the risk that VRA and CEB are able to pay for delivered gas and the related “co-completion risk”, namely that they have adapted their generating facilities to use the gas. The first three sets ofrisks are borne by the Sponsors, and the fourth is technically borne by VFWGhana and CEB under the Foundation Customer GSAs and GCSAs. 36. One significant risk is that the Sponsors rely initially and primarily on a single customer, the Takoradi Power Stations. There are no other customers ofthis size in the region upon which the pipeline could rely if sales to Takoradi had to be terminated for any reason. It is true that the Project will mitigate this risk through IDA, MIGA, and Zurich/OPIC guarantees, however, the coverage ofthese guarantees is limited to about US$200 million,89 which is much lower than the cash flow &om Foundation Customers over a period of 20 years. The insurance/guarantee package represents approximately 33% oftheir investment on a PV basis, 28% oftheir cash flows on a discounted basis, and 12% ofthe pipeline cash flow from Foundation Customers in nominal terms. 37. Furthermore, these guarantees cover only termination events and therefore WAPCo is taking the day-to-day credit risk with the Foundation Customers, which is significant. The Sponsors are likely to achieve their target rates ofreturn when the gas buyers pay WAPCo for its services for 20 years (the duration ofthe primary term) without termination of the Project. In addition, there is a significant risk associated with the operation ofthe pipeline across the four countries. For example, any political event affecting the operation ofthe pipeline in a single State will affect the capacity ofthe pipeline to deliver gas. The Sponsors are also taking significant construction and commercial risks in a difficult environment for major developments. Ifthere is a major increase in construction costs, or a significant delay in start-up, or a lower growth in the market than anticipated, that will impact the returns earned by the Sponsors because the tariffs are set before start ofconstruction, using estimates ofthe costs and market growth, not actual values. 38. Given the risk associated with a large single asset in West Africa, a real after tax retum of 16.6% (including the benefits generated from upstream activities) and 15.5% (excluding the benefits generated fkom upstream activities) in the Low Demand Scenario appears reasonable. Price of Gas under the Low Demand and High Demand Scenarios 39. The price ofgas is dependent upon the load factor ofthe power stations when compared to the take-or-pay clauses ofthe Foundation Customer GSAs. It is expected that in the Low

Most ofthese risks are not generally present in mature environments like Europe or North America. The Sponsors have requested Zurich/OPIC to consider an increase in their portion of insurance from US$75 million to US$ 125 million in the Low Demand Scenario with Ramp.

- 96 - Annex 9

Demand Scenario, the average price of gas delivered to Foundation Customers would be about US$3.44/MMBtu based on World Bank projections for natural gas demand for VRA and of crude oil prices - it is expected the average price ofgas will be about US$4.15IMMBtu for the first 5 years, about US$3.48/MMBtu in the second 5 years, and about US$3.05/MMBtu for the remaining 10 years ofthe Foundation Customer GSAs. In the High Demand Scenario, the average price ofgas delivered to Foundation Customers in 2007 is expected to be about US$ 2.69/MMBtu - it is expected the average price ofgas will be about US$3.13/MMBtu for the first 5 years, about US$2.71/MMBtu in the second 5 years, and about US$2.46/MMBtu for the remaining 10 years ofthe Foundation Customer GSAs. The following charts shows the decline in the overall cost ofWAGP gas, including commodity and other charges, to key customers in the Low and the High Demand Scenarios. Chart 9.3: Gas Tariffs in Low Demand Scenario to Key Customersw

4.75

4.25 A

2007 20082009 20102011 2012 20132014 20152016 20172018 20192020 2021 20222023 20242025 2026 Time (years)

4- Foundation (Ghana) dl- Standard Customers (Ghana) -.9- Industrial Customers (Togo) -Average Gas Price to Foundation Customers -Foundation (Togo & Benin)

90 The unit cost of delivered gas to CEB is lower than that of VRA because the “ramp” is being made available to both W and CEB, even though CEB has adequate plant load factors to sustain benefits from the use of gas; i.e. CEB will pay less Reservation Charges during the “ramp” years of operation but will be able to utilize the N1 capacity that it has reserved resulthg in a lower reservation charge (per unit of gas shipped) when compared to VRA until the ramp is still in place (201 1, in the Low Demand Scenario).

- 97 - Annex 9

Chart 9.4: Gas Tariffs in High Demand Scenario to Key Customers"

2 3.45 s 3.25 8 3.05 'Q) V 'E n. u) 2.85 __- 8 U 2.65 -.-g 8 2.45 ---- I 2.25 I I

Time (years) -e Foundation (Ghana) Standard Customers (Ghana) Industrial Customers (Togo) -Average- Gas Price to Foundation Customers -Foundation (Togo & Benin) Financial Impact on the Foundation Customers Volta River Authority 40. VRA is bearing no construction or operation costs ofthe pipeline Project; it is purely a consumer ofWAGP gas. VRA is only bearing costs associated with the conversion to gas of Takoradi Power Stations, which is expected to be about US$ 8 million in real terms. When compared to the use ofcrude oil (Nigerian Bonny Light) to generate power, WAGP gas is expected to be cheaper resulting in cash flow savings to VRA. A premium ofUS$2.90/bbl (in 2004 US$s) of oil shipped has been added to crude oil prices to adjust for quality and transportation. Further, considering the proposed power sector development plan ofGhana, this analysis assumes that benefits accruing to the Takoradi Power Stations (the Foundation Customer demand) will accrue to VRA (and to the final consumer via the power sector tariff setting mechanism). For the purposes ofthis analysis it is assumed that any benefits accruing from any future development (the Standard demand in the power sector) will not accrue to VRA but to the power sector in general (see Annex 10, Economic Analysis for this analysis). 41. Returns to VRA, for comparative purposes, have also been analyzed on a real basis although a financial analysis, using nominal figures is arguably more pertinent from their perspective. This analysis, using 2004 World Bank projections for crude oil prices indicates that VRA would generate savings of US$230 million in PV terms in the Low Demand Scenario and a PV ofUS$443 million in the High Demand Scenario. These savings would results from an investment ofabout US$ 8 million for conversion ofTakoradi plants. Overall the use ofWAGP

The unit cost of delivered gas to CEB is exactly same as that of VRA as both entities foundation customers have similar plant load factors.

- 98 - Annex 9 gas would result in an NPV ofUS$221 million and US$435, and IRR of 79% and 430%, in low and high demand scenario’s respectively for VRA. Furthermore, the analysis indicates that VRA would have a zero PV of benefits from WAGP at constant Brent crude oil prices ofUS$ 17.68hbl in the Low Demand Scenario and at constant Brent crude oil prices ofUS$12.34/bbl in the High Demand Scenario and therefore will be neutral between the choices ofthe fuel (WAGP gas over imported crude).92 Table 9.6 and Charts 9.5,9.6, and 9.7 detail the savings over crude oil to VRA as a Foundation Customer over the 20-year term of the Takoradi GSA. Overall, it is expected that, on average, the fuel costs are expected to fall by 27% to VRA in the Low Demand Scenario and fall by 43% in the High Demand Scenario.

Table 9.6: Savings to VRA over Crude Oil (US$ Millions, Real, 2004)”

Cost of Gas 100.52 123.52 122.47 127.81 127.21 121.19 110.53 107.94 Net Savings 7.32 -4.20 5.57 9.62 36.64 48.33 66.70 78.61 Savings as a % 7.3% ( 34%) 4.5% 7.5% 28.8% 39.9% 60.3% 72.8% high Demand Scenario 2607 2008 20s 2610 m3 20015 2610 2028 Cost of Altemate Fuel (Gill.. 157.24 is.05 156.88 157.72 ia.85 169.52 177.23 186.55 Cost of Gas 123.80 119.88 109.87 105.70 99.22 95.58 87.84 88.53 Net savings 33.45 36.17 47.02 52.01 64.63 73.94 89.40 98.02 Savings as a % 27.0% 30.2% 42.8% 49.2% 65.1% 77.4% 101.~~ 110.7%

Chart 9.5: Savings to VRA over Crude Oil (US$ Millions, Real, 2004)

100.00

80.00 3 4 60.00 t 2. >d s IH 4 I (20.00) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 18 17 18 19 20 Time (Years) Low Demand Scenario High Demand Scenario

92 This analysis is conducted from VRA’s perspective as a commercial entity and excludes the investment made by Ghana in the pipeline.

93 This analysis is based on the World Bank’s forecast ofcrude oilprices. When compared to the Sponsors’ forecast prepared by Purvin & Gertz, the Bank’s forecast for crude oil prices is marginally lower. The “ramp” in the Sponsor Case A has been designed on the basis ofthe Sponsors’ forecast of oil prices and expected load factor ofthe Takoradi Power Stations. WB forecast ofoil prices is applied to the gas tariffs to generate the savings to W over the life ofthe Project. As seen in Table 9.6, gas supply to VRA (based on current assumptions) will be marginally expensive when compared to crude oil in 2008, but will be substantially cheaper in the following years.

- 99 - Annex 9

Chart 9.6: Comparison of Unit cost of Oil vs Gas for VRA in Low Demand Scenario I 6.00 1

8+&9 0@,!@6%%*[email protected]?q?+.=p 9 9 9 9 9'% 9 9 9 9k9k9'9 9 9 9 9 9 9 9 Time (Years) J- Bonny Ught (BumTip, GM/) -C Net Charges to Deliver Gas (GM/)

Chart 9.7: Comparison of Unit cost of Oil vs Gas for VRA in High Demand Scenario

600 1 1 5.00 - 4.00 1 3.00 2 8 2.00 -c

VRA 's Ability to Pay for WAGP Gas 42. A review of VRA accounts shows that VRA's net cash flow from operating activities improved from 10,741 million cedis in 2002 to 847,882 million in 2003 and is projected to increase each year thereafter until 2008; VRA's financial covenants including the debt service coverage ratio (1 -7); return on average net fixed assets in operation (4%); and operating ratio have improved significantly from negative figures to positive and satisfactory ones. For this positive trend towards the financial recovery and strengthening ofthe sector to continue, VRA would need to closely monitor the efficiency gains that could result from an optimization oftheir generation mix between hydroelectric generation, thermal generation, and imports from CBte d'Ivoire; as well as to implement specific measures related to sector reform. 43. A review of2002 and 2003 financials suggests that Bulk Supply Tariff (BST) levels are reasonable (see Table 9.7 below), enabling VRA to recover operating expenses and debt service, and generate sufficient returns to cover part of investment requirements. The thermal generation expenses and imports accounted for approximately 90% ofthe BST in 2002 and approximately

- 100- Annex 9

70% ofthe BST in 2003.94 Salaries and related expenses accounted for approximately 8% ofthe total BST. The Public Utilities Regulatory Commission tariff methodologyg5currently in effect automatically adjusts electricity tariffs quarterly for, inter alia, changes in fuel costs. A lowering of fuel-related charges is therefore expected to have little impact on the cash flow ofVRA. Though BST levels from an accrual accounting standpoint are sufficient to cover operating expenses and some capital charges, VRA suffers from low cash realization. It consistently averages nearly six months ofreceivables as against 45 days for a well-run utility ofthis nature. The low cash realization, from both public sector and private bulk consumers, largely explains VRA’s weak financial condition.

Table 9.7: Review of the Bulk Tariff and Weighted Average Tariffs. 2002 2003 Total Electricity Supplied (GWh) 7,933 9,000 Bulk Supply Tariff (vS#kWh) 4.50 4.80 Weighted Average Tariff (US$/kWh) 3.12 4.55 Operating Expenses Hydro Generation (USq!fiwh) 0.03 .04 Thermal Generation (USq!fiwh) 0.64 1.09 T2 PPA (USq!fiWh) 1.51 1.14 Imports (USq!kwh) 0.66 0.76 Transmission Expenses (USq!fiW%) 0.04 0.05 Other (US#/kwh) 0.21 0.45 Total Operating Expenses without Debt Service & Capex (vS#kWh) 3.09 3.53 Capex with Debt Service (as a YOof Total Revenues) 99% 78% Margin for Debt Service (as a % of Total Revenues) 1% 22%

44. The fuel saving benefits from WAGP to VRA comes with the risk oftake-or-pay liabilities incurred by VRA to offtake a minimum quantity ofgas from WAPCo. This adds to the existing fixed charge burden ofVRA and the rest ofthe sector, placing greater urgency on achieving efficiency improvements in the next 2 years. VRA being both part-owner ofthe WAPCo and the main gas buyer could potentially face a conflicted role. This arises from trade- offs between optimizing hydroelectric generation or thermal generation to increase gas volumes. The latter benefits VRA since increased gas volumes result in reduction ofthe per unit gas price. Therefore, VRA would need to optimize its hydro/thennal mix to maximize its profit margin. As mentioned earlier, VRA’s tariffs are broadly cost-reflective and VRA should be able to pay for the gas as needed. 45. There are several sources ofdirect subsidy and cross-subsidies in the tariff structure. One ofthe key ones is relating to Valco. VRA’s bulk tariff to Valco was approximately 1.65 US#/kWhin 2002, when the approved BST was 4.5 US#/kWh. VRA’s other high voltage, bulk

94 There was a lower level of thermal generation needed due to the Valco shut-down in 2003.

95 As published in the Ghana Gazette, 26’ July 2002, page 196s

- 101 - Annex 9

supply consumers also paid tariffs reasonably close to this BST. Since the Valco demand was approximately one-third ofthe total demand, and thermal generation expenses incurred by VRA were significantly higher than 1.65 US#/kWh, other consumers effectively cross-subsidize Valco’s tariff. For 2002, this subsidy was approximately US$30 million. As the Government moves toward renegotiating the Valco contract, it should consider the extent ofthis cross-subsidy with a view to minimizing it in order to manage the impacts on IRA’Sfinances. CEB 46. CEB is bearing no construction or operation costs ofthe Project. They are purely a consumer ofWAGP gas. CEB is only bearing costs associated with the conversion to gas of existing gas turbines in Cotonou and Lomk, and the move ofthe Cotonou power station to a new location, which is estimated to be about US$5 million in real terms (US$4 million in Benin and US$ 1 million in Togo). Currently, CEB is using Jet Fuel to generate some ofits power. When compared to the use ofJet Fuel to generate power, WAGP gas is expected to be far cheaper resulting in cash flow savings to CEB. For the purposes ofthis analysis, it is assumed that savings to CEB are compared against the use ofJet Fuel. Further, considering the proposed power sector development plan of CEB for both Togo and Benin, this analysis assumes that benefits accruing to the power sector ofboth Togo and Benin and only the foundation demand from the power sector) will accrue to CEB. 47. Returns to CEB, for comparative purposes, have also been analyzed on a real basis although a financial analysis, using nominal figures is arguably more pertinent from their perspective. This analysis, using 2004 World Bank projections for crude oil prices indicates that CEB would generate savings ofUS$96 million in PV terms in the Low Demand Scenario and a PV ofUS$ 108 million in the High Demand Scenario. These savings would results &om an investment ofabout US$5 million (real) for conversion and move ofexisting plants in Lome and Cotonou. Overall the use ofWAGP gas would result in an NPV ofUS$92 million and US$ 104 million, and IRR of268% and 252%, in low and high demand scenario’s respectively for CEB. Furthermore, the analysis indicates that CEB would be have a zero PV ofbenefits from WAGP at constant crude oil prices ofUS$7.24/bbl in the Low Demand Scenario and at constant crude oil prices ofUS$5.91/bbl in the High Demand Scenario and therefore will be neutral between the choices ofthe he1(WAGP gas over imported crude).96 Table 9.6 and Chart 9.5,9.6, and 9.7 detail the savings over crude oil to CEB as a Foundation Customer over the 20-year term ofthe Takoradi GSA. Overall, it is expected that, on average, the fuel costs are expected to fall by 58% to CEB in the Low Demand Scenario and fall by 65% in the High Demand Scenario.

96 This analysis is conducted from CEB’s perspective as a commercial entities. CEB’s switching values are lower than those of VRA for the following reasons: (a) benefits to CEB are compared against the use of Jet Fuel (used currently to generate power) whereas benefits to VRA are calculated against crude oil; the price ofJet FueVMMBtu is higher than that of crude oil; and (b) the “ramp” is being made available to both VRA and CEB (see Annex 9 for details) even though CEB has adequate plant load factors to sustain benefits from the use ofgas; this results in CEB generating proportionately larger benefits (on a per unit basis) when compared to VR4, until 2009 when the ramp is in place.

- 102- Annex 9

Table 9.8: Savings to CEB over Crude Oil (US$ Millions, Real, 2004)

Low Demand Scenario 2007 ' "' ' ' m aooo 2010 2013 2015 2420 2026 Cost dMemate Fuel (Mddle Distillates) 23.54 23.33 23.41 23.51 24.33 25.09 26.10 27.33 Costof Gas 9.59 11.35 11.25 11.67 11.37 10.83 9.88 9.65 Net Savings 13.95 11.97 12.16 11.83 12.96 14.26 16.22 17.68 Savingsasa% 59.3% 51.3% 52.0% 50.3% 53.3% 56.8% 62.2% 64.7%

Cost of Gas 11.07 10.71 9.82 9.45 8.87 8.54 7.85 7.91 Net Savings 12.47 12.61 13.59 14.06 15.46 16.5 ia:25 19.42 Savingsasa% 53.0% 54.1% 58.1% 59.8% 63.6% 66.0% 69.9% 71.1%'

Chart 9.8: Savings to CEB over Jet FuellAIternative Fuels (US$ Millions, Real, 2004)

20.004

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Time (Years)

Low Demand Scenario High Demand Scenario

- 103 - Annex 9

Chart 9.9: Comparison of Unit cost of Oil vs Gas for CEB as a Foundation Customer in the Low Demand Scenario

10.00 , 9.00 8.00 7.00

6'005.00 I---- 4.00 3.00 2.00 1.00

Time (Years)

I +At Kero (Burner Tip, W) +kt Gas CosffMMBtu

Chart 9.10: Comparison of Unit cost of Oil vs Gas for CEB as a Foundation Customer in the High Demand Scenario

10.00 ,

3 6.00 3 5.00 P 4.00

Time (Yean)

-&-Jet Kero (Burner Tip, NHV) +Net Gas CosVMMBtu

- 104 - Annex 10: Economic Analysis AFRICA: West African Gas Pipeline Project

Summary of Economic Analysis 1. This economic analysis assesses the economic benefits ofthe West Afr-ican Gas Pipeline Project as a whole as well as from the erspectives ofthe countries of Ghana, Nigeria, Benin, and Togo. An independent consultantE for the Bank has also carried out a detailed Economic & Financial Assessment ofthe Project to verify these benefits. The assessment has concluded that the economic benefits are significant and fairly distributed. This assessment is based on several detailed studies carried out amongst others by PA, Nexant, and Purvin & Gertz as independent consultants to the Bank, the Sponsors, or the four governments. The analysis presented here is consistent with the assessment conducted by the Bank’s consultants. 2. The main aspects addressed in this Project economic analysis are: (a) an analysis ofthe alternatives to the proposed Project; (b) Project economic costs and benefits; (c) economic costs and benefits to Ghana, Nigeria, Benin, and Togo; (d) environmental benefits from the Project; (e) other economic benefits expected from the Project; and (0 an assessment ofthe overall reasonableness ofthe sharing ofProject benefits. 3. The analysis of various alternatives to the Project has concluded that the transportation of Nigerian gas to Ghana, Benin, and Togo via the proposed pipeline is the most cost-effective means ofmeeting the anticipated growth in regional energy demand. Substitution ofoil by gas will also yield environmental benefits. 4. The Project as a whole is economically and commercially viable in both of the Bank’s scenarios ofgas demand - Low Demand and High Demand (see Annex 1 for more details on gas demand scenarios), and using July 2004 World Bank Oil price projections (Nominal forecast starting with US$24.00/barrel in 2007 to US$25.25 in 2015, US$25.75 in 2020 and US$27.25 in 2026). As a whole, the Projectg8shows a positive economic NPV (at a real discount rate of 10%) ofUS$1,421 million and an ERR of 24.9% in the Low Remand Scenario, and a positive NPV (at 10%) of US$2,021 million and an ERR of 31.4% in the High Demand Scenario. The sensitivity analysis indicates that the economic return ofthe Project is fairly insensitive to changes in operating and capital expenditures but is sensitive to significant drops in international price ofcrude oil. 5. The Project will result in significant net economic benefits to each ofthe four participating countries, and such benefits are significant even in a Low Demand Scenario (see Table 10.1 below) and with relatively low prices ofcrude oil. Overall, the economic analysis has concluded that the Project is economically, financially, and technically sound and environmentally and socially sustainable over the long run.

97 PAEnergy Consulting, U.K. ’* For the purposes of the Economic Analysis, the Project is defined to include upstream costs and benefits associated with the production of WAGP gas to all participants as well operations of the new pipeline. - 105 - Annex 10

Table 10.1: Summary Economic Returns to Project Participants (Low Demand Scenario)

Prlvate Project 88 a (US$ Millions) Ghana Nigeria Togo Benin Participants" Whole Net Undiscounted Benefits accruing in 2,568 827 675 1,229 6,545 Low Demand Scenario (US$ Millions) NPV at 10% (US$ Millions) 549 292 192 149 23 8 1,42 1 ERR (Yo) 35.8% 29.6% 66.6% 51.5% 19.5% 24.9%

6. WAPCo has indicated to the Bank Group that if completion ofthe FID process is after November 30,2004, WAPCo would incur significant cost increases ofup to about US$25 million that are expected on that date under the price escalation clauses of some EPC bids. The Sponsors have acknowledged that such an increase in costs may impact the WAGP Reservation Charge by up to about 7 US@MMBtu ofcapacity reserved by the Foundation Customers. The Sponsors have stated that FID completion is dependent on a number ofconditionalities, including enactment ofthe enabling legislation in each ofthe four States, final approvals ofthe IDA, MIGA, and ZuricWOPIC guarantees, due authorizations for execution ofcontracts, and funding of (or posting ofletters of credit to) the escrow account by shareholders. Board approval would be an important milestone in WAPCo's ability to mitigate price escalation.

Analysis of Project Alternatives 7. Various options for energy supply to Ghana, Benin, and Togo have been considered as Project alternatives to the WAGP. These include electricity generation in the region, power imports, as well as various natural gas delivery options. The Project alternatives that were considered are:

0 Traditional sources ofenergy, both hydro generation and thermal generation; 0 Increased indigenous sources, including indigenous gas and indigenous renewables; 0 Gas imports fkom C8te d'Ivoire; 0 Power imports &om C8te d'Ivoire; 0 Power imports fkom Nigeria; 0 Nigerian Gas Alternatives such as LNG, CNG, and other pipeline routes; and 0 Overseas fuel imports, for both coal and nuclear. 8. These options to deliver energy to Ghana, Benin, and Togo have been assessed against the Project on the basis oftechnical feasibility, resource availability, cost-effectiveness, ease of implementation, and their sociaVenvironmenta1impact. Technical Feasibility 9. All the alternatives, except the importation of solar or wind power from Burkina Faso, are regarded as being technically feasible. In the domestic power sectors, the various power generation technologies are technically feasible. Most non-hydro renewable energies have been considered as demand (for thermal energy) reducers, rather than Project alternatives, per se. All the gas resource and transportation alternatives are recognized as being technically feasible.

99 Includingthe Producers. - 106- Annex 10

Resource Availability 10. On the basis ofresource availability, the following conclusions were reached: 0 Although indigenous sources of natural gas could enhance supply security and diversity, reserves are estimated to be small and as a consequence are doubtful as credible alternatives to WAGP; 0 Similarly, increased use ofrenewable resources could enhance efforts to reduce GHGE, but non-hydro renewable resources face various site-specific resource constraints; 0 Known reserves of gas in Cbte d’Ivoire are largely committed to domestic generation; 0 The importation of electricity from Nigeria is unlikely until Nigeria’s considerable suppressed demand for electricity is satisfied; 0 In the short to medium term, power imports from Cote d’Ivoire is likely to be available, but a longer term tightening ofthe electricity supply/demand balance is expected; and 0 Although Nigerian gas is available, most LNG from existing and currently planned regional LNG projects is committed to buyers in the USA and Westem Europe. Implementation Constraints 11. The following implementation constraints were regarded as being material: 0 Long lead times and limited private sector appetite would restrict large-scale hydro development; 0 Any proposed nuclear program is likely to face significant stakeholder opposition; 0 Prior satisfaction ofNigerian electricity demand is likely to significantly delay/constrain the availability of electricity for export fi-om Nigeria; 0 Nigerian LNG export volumes are already committed to Europe and North America; 0 There are presently no sponsors for a CNG export project and the technology remains largely untested; and 0 Securing right ofways, etc., for various other onshore pipeline routes would impose significant delays to gas delivery. Cost Effectiveness 12. The cost-effectiveness ofthose alternatives considered technically feasible and adequately resourced was considered. The table below summarizes the likely costs ofdelivered power to Ghana for key alternatives.

- 107- Annex 10

Table 10.2: Indicative Costs of Electricity Generation

CCGT CCGT Imports WAGP LigM Pulverized from COte Hydro Gas" CrudeOiI Coal d'tvoire (W Nuclear Capacity Factor % 80% 80% 80% NIA 54% 80% Installed Capacity (Mw) 330 330 400 NIA 200 600 Capital Cost per MW ($US, 0.7 0.85 1.4 NIA 2.04 2.2 Installed Capacity 2004) Average Cost of us 4.2 4.7 4.6 6.6 7.2 9.3 generated electricity centskWh

Sources: Energy Commission of Ghana, PAEnergy Consulting 13. On the basis of an average delivered gas price ofless than US$4.00/MMBtu, and at an assumed load factor of 80%, electricity generated by CCGT is more cost-effective than CCGT Light Crude Oil or any other energy delivery option. Therefore, it has been concluded that transportation ofgas to Ghana, Benin, and Togo via the proposed pipeline is the most cost- effective means ofmeeting the growth in regional energy demand as anticipated. A summary of the alternatives as considered is presented in Table 10.3.

looAn economic assessment of gas delivery options demonstrated that WAGP, as designed, yielded the lowest economic cost of gas. - 108- iz

iz

I Annex 10

Base Case Assumptions, Project Costs and Benefits 14. Expected WAGP Throughput and Capacity Utilization (Total Demand for Gas): As noted in Annex 1, because ofthe uncertainty and importance ofthe aluminum smelter in Ghana (Valco) on the gas demand, two gas demand scenarios have been designed by the Bank to analyze the economic benefits arising out ofthe WAGP Project.”’ The demand for gas is represented by the projected throughput in the pipeline over the next 20 years. The pipeline is limited to a capacity of 474,000 MMBtu per day. The projected throughput is expected to be less than the maximum capacity ofthe pipeline to take account for the load factors ofeach individual customer (generally expected to be about 80%). The key difference in the two scenarios, as noted in Annex 1, is the demand originating from the smelter operations in Ghana. Over the medium term, the smelter demand is overtaken by domestic and industriaVcommercia1 sector demand, which reduces the difference in demand for gas between the two scenarios in the latter years. The two gas demand scenarios are: (a) Low Demand Scenario, which assumes that Valco operations will never restart, and therefore no demand for power will arise from Valco operations. Because of the power available from the existing hydroelectric facilities in Ghana, demand for WAGP gas will be lower. This case is considered to be a less likely scenario given the Government ofGhana’s stated interest and current efforts to restart Valco operations. At the same time, such a scenario tests the economic robustness ofthe Project and therefore is being considered as one ofthe key demand scenarios for the economic analysis. (b) High Demand Scenario, which assumes that Valco operations will restart before first gas (expected in early 2007), all four potlines will be operational, and a demand ofabout 2,540 GWh (Valco demand for 4 potlines) will have to be met by incremental VRA thermal generation. 15. It is important to note that the Sponsors have completed an independent analysis of gas demand (undertaken by Purvin & Gertz), which has been agreed with the four States. Another independent consultant hired by the four States (Nexant Limited) has reviewed this market analysis and generally concurred with the probabilistic demand forecasts as produced by Purvin & Gertz. The Bank’s consultant (PA Energy Consulting) has also reviewed the Sponsors’ demand forecasts. The power sector inputs ofthis probabilistic demand forecast are fairly consistent with the gas demand forecast ofthe Bank (see Annex 1). When compared with the Bank’s forecast for the demand for gas for WAGP, the Sponsors forecast for gas in the Low Demand Scenario is conservative. In the high case scenario, the Bank’s demand forecast is similar to that ofthe Sponsors. 16. The gas demand analysis provides the basis for throughput volume in the WAGP pipeline and the demand for reserved capacity. A summary of aggregate gas demand in Ghana, Benin, Togo, and expected WAGP pipeline throughput for the Low Demand Scenario is provided in

101 These demand scenarios have been developed by the Bank based on the Bank’s and IFC’s view ofthe power sector in Ghana and Benin. This analysis is also based on the work carried out under the Ghana ESW (dated July 2004) and incorporates CEB’s plans regarding expected power imports from Ghana and CBte d’Ivoire in the medium-term.

- 110- Annex 10

Table 10.4, that for the High Demand Scenario is provided in Table 10.5, and summarized in Chart 10.1 below.lo2 Table 10.4: Aggregate Gas Demand in Low Demand Scenario (by Sectors, in MMBtulday)

Ghana: Industrial Sector 5,739 6,009 6,882 7,594 9,273 11,447 Benin & Togo: Power Sector 8,800 8,800 17,680 26,845 35,855 47,969 88,297 118,385

Table 10.5: Aggregate Gas Demand in High Demand Scenario (by Sectors, in MMBtulday)

Benin &Togo: Industrial Sector - 19,976 21,272 22,614 23,203 23,691 35,487 Grand Total (MMBtulday) 127,212 134,976 178,047 193;914 229 ,976 262,065 36U,750 385,507

Chart 10.1: Aggregate Gas Demand in Low and High Demand Scenarios

450,000 1 400,000 350,000 9 300,000 3 250,000 g 200,000 150,000 100,000 50,000

17. Other Assumptions. The Bank’s economic analysis ofthe Project has been carried out based on two scenarios, the Low Demand Scenario and the High Demand Scenario (see paragraph 14). It is expected that WAPCo will ship “first gas” starting in January 2007 for a period of20 years thereafter. These cases oflow and high demand for gas are being evaluated with fuel savings over crude oil based on the World Bank’s long-term projections ofcrude oil prices’03 in constant 2004 dollars, adjusted upwards by about US$2.90 per barrel to take account for quality (an average ofUS$ 0.40hbl) and transportation and delivery costs to Ghana, Benin, and Togo (an average ofUS$2.50/bbl).

lo*The analysis is based on average throughputs that can be sustained by the new pipeline based of the maximum reservation capacity of 474,000 MMBtu/day. lo3July 2004, Nominal Forecast of Crude Prices (basket of Brent, Dubai, and WTi) - starting with US$24.00/bbl in 2007 to USS25.25 in 2015; US$25.75 in 2020; and US$27.25 in 2026.

- 111 - Annex 10

18. The review ofgas tariffs is provided in Annex 9. The economic analysis is based on the tariffs in the PDP as agreed between WAGPA, the Sponsors, and the four States. 19. Proiect Costs (Real 2004 US$). For the purposes of the economic analysis ofthe Project, the principal costs that are taken into account are for: (a) the capital costs ofthe proposed WAGP pipeline in Nigeria, Togo, Benin, and Ghana and any associated conversion costs in consuming countries; (b) operating and maintenance costs associated with the new pipeline; (c) investment costs ofadditional compression required during the life ofthe Project; (d) environmental and social impact management costs related to the Project’s construction and operation. The Project’s initial capital costs are expected to be about US$ 502 million’04 (2004 US$s). An additional US$75 million are projected to have been spent on by the Sponsors ofthe Project before FID and are being considered as development costs associated with the new pipeline; for the purposes ofthe economic analysis, development costs are being considered as sunk costs and are therefore excluded in this analysis. About US$ 115 million (2004 US$s) are expected to be spent towards additional capital expenditures over the life ofthe Project (financed from operating revenues). Operating and maintenance costs over the life ofthe Project (20 years from “first gas”) are estimated to be about US$260 million (2004 US$s, an average ofabout US$ 13 million per annum (about 2.75% ofthe initial pipeline and compression costs in nominal terms). Subsumed in these Project costs are the environment and social management costs being bome by the private Sponsors. In addition, other economic costs borne by the consuming countries in converting existing facilities or setting up new facilities to use WAGP gas have also been taken into account (see following paragraphs on economic benefits to consuming countries for details). 20. Proiect Benefits (Real 2004 US$). The Project would result in the following benefits to the four participating countries: (a) Net Benefits from Gas Commodity Sales in Nigeria and Agency Fees: Gas commodity sales and N-Gas Agency fees provide a revenue stream to the NNPC/CNL and NNPC/SPDC/Elf/Agip joint ventures. This revenue stream is allocated to both private and public entities in accordance with the shareholdings in N-Gas on a net basis and the benefits to public entities have been included in the economic benefits to the countries.’05 (b) Net Benefitsfiom Fuel Cost Savings in the Power Sector: Fuel cost savings in the power sector are measured by deducting the full financial cost of gas from the delivered WAGP gas from the economic costs ofthe fuels being substituted by the WAGP gas, on a net heating value basis. (c) Net Benefits fiom Fuel Cost Savings in the IndustrialKommercial Sectors: industrial and commercial fuel cost savings (from both the public economic and private financial perspective) are derived in a similar manner taking account of the economic cost ofdistribution using secondary networks and ofconversion of facilities to gas. Even though the industrial gas tariffs are lower than the other tariffs, for the purposes ofthis analysis, on the conservative side, it is assumed

lo4Including the benefits arising to Ghana from construction related taxes and levies. For the purposes of this analysis, it is estimated that upstream Producers would incur expenditures in the range of 50% of the revenues from the sales of gas in the gathering/production of gas, i.e., upstream companies will realize a net profit margin of 50% on incremental gas sales through WAGP.

- 112- Annex 10

that the benefits realized by the industrial and commercial sectors would be similar to those achieved by the power sectors. BeneJitsPom WAPCo Income Taxes: All four States will benefit from Income Tax from WAGP. WAPCo income taxes are apportioned by countries, in proportion to the pipeline distances and reserved capacities, as agreed. Following a 60-month tax holiday, WAPCo is liable to pay Income Tax at the rate of 35% of its Taxable Income attributable to that State in the Tax Year. Benefitsfiom WAPCo Dividends: WAPCo dividends have been discussed in the financial analysis (Annex 9). Dividends accrue in accordance with WAPCo ownership (see Annex 6 for details). These dividends paid on the basis ofthe shareholding in the pipeline company are being included as economic benefits to the relevant countries (Ghana and Nigeria). BeneJtsJLom taxes on construction contracts: The majority ofthe construction contracts have been outsourced and have no significant tax implications on participating countries. Ghana will receive about US$2.5 million in taxes and levies from the construction contracts. Such costs have been excluded as Project costs for the purposes ofthe economic analysis.'06 Environmental BeneJits: In addition to the benefits outlined above, the Project would promote a reduction in GHGE, creating net environmental benefits. A discussion on environmental benefits arising out ofthe Project is undertaken in paragraph 39-40. These benefits have been considered in this analysis as global benefits and have not been incorporated in the assessment ofthe net economic benefits to each ofthe participating countries. Other BeneJits: In addition to the net economic benefits indicated above, there are other benefits to the countries in the region from this Project that are difficult to quantify. These include:

0 Establishing a new level ofregional cooperation and economic integration to enhance regional stability and cultivates ECOWAS as a regional economic cooperative agency,

0 Increasing the security of energy supply through diversification of supply,

0 Providing additional economic benefits from the construction phase spending in the four counties, including creation ofnew jobs, and

0 Technology transfer, both in terms of facilities and in terms ofthe management and regulation ofgas projects.

lo6It is assumed that these taxes and levies would accrue to Ghana in CY 2006.

- 113 - Annex 10

Project Economic Cost Benefit Analy~is"~ 21. Low Demand Scenario: The undiscounted gross economic benefits from the Project are estimated to be about US$7,453 million. These benefits are represented by economic costs of altemate fuels required by the electricity, industriaVcommercia1sectors ofGhana, Togo, and Benin over the life of the Project. The undiscounted net economic benefits from the Project, after paying for operating and maintenance costs of the WAGP, are estimated to be about US$ 6,545 million.'** These overall benefits arise from three sources, about US$3,708 million will be the net economic benefits generated from the new pipeline related activities (transportation of gas in the new pipeline), about US$ 814 million will be generated from upstream activities including the economic cost ofgas as a commodity, and about US$2,93 1 million will be generated from savings through fuel substitution (cost ofoil minus cost ofgas). The NPV of Project benefits (at a discount rate of 10%) is expected to be about US$ 1,421 million. The Project ERR is expected to be 24.9%. 22. Hi& Remand Scenario: The undiscounted gross economic benefits from the Project are estimated to be about US$9,100 million. These benefits are represented by economic costs of altemate fuels required by the electricity, industrial/commercial sectors ofGhana, Togo, and Benin over the life of the Project. The undiscounted net economic benefits from the Project, after paying for operating and maintenance costs ofthe WAGP, are estimated to be about US$ 8,192 milli~n."~These overall benefits arise from three sources, about US$3,638 million will be the net economic benefits generated from the new pipeline related activities (transportation of gas in the new pipeline), about US$916 million will be generated from upstream activities including the economic cost ofgas as a commodity, and about US$4,545 million will be generated from savings through fuel substitution (cost ofoil minus cost ofgas). The NPV of Project benefits (at a discount rate of 10%) is expected to be about US$2,021 million. The Project ERR is expected to be 3 1.4%. Table 10.6: Results - Project as a whole

Low Demand Scenario 7,453 6,545 1,42 1 24.9 High Demand Scenario 9,100 8,192 2,021 31.4

23. Switching Values' lohave been calculated for the key variable, namely price of crude oil."' In the Low Demand Scenario, Brent Crude Oil prices ofless than US$ 8.92 per barrel

lo7This analysis includes the benefits that arise to consuming countries from the fuel substitution. While conducting the economic analysis from the participating countries, costs and benefits bome by upstream or pipeline entities in the production and transportation of gas have been taken into consideration. logFor the purposes of this analysis, the benefits being generated to the Sponsors from their shareholder loans are considered similar to those generated from their equity participation in the Project. lo9 For the purposes ofthis analysis, the benefits being generated to the Sponsors from their shareholder loans are considered along with those generated from their 'true' equity participation in the Project.

'loSwitchmg Value of a variable is that value at which the Project's NFV becomes zero, l1 Assumes that the price ofoil remains constant throughout the life ofthe Project.

- 114 - Annex 10

(constant over the life of the project) would result in negative NPVs ofthe Project. In the High Demand Scenario, Brent Crude Oil prices ofless than US$6.12 per barrel (constant over the life ofthe project) would result in negative NPVs ofthe Project. It is important to note that implementing agencies have some degree of control over construction and operating costs, however no control over the international price ofoil; this represents the main commercial risk. As seen from Table 10.7, Project returns are not materially sensitive to variations in operating costs but are sensitive to significant drops in international price ofcrude oil. Table 10.7: Project Sensitivity Analysis

Low Oemand Scenarlo High Demand Scenario -x . " XI_^ ---- .. ~ . - Project NPV @ Project NPV @ I096 Project ERR i0% Project ERR (US$ Millions) a 46) (US$ Millions) (As a %) Base Case 1,421 -24.9 2,021 -31.4 Crude Prices @. US$ 20/bbl"' 953 21.3 1,467 27.5 Crude Prices @. US$15/bbl 523 16.6 939 22.1 Crude Prices @. to US$30/bbl 1,813 28.8 2,524 36.3 Operating Costs +50%"' 1,374 24.4 1,973 30.9 Operating Costs +loo% 1,326 23.8 1,926 30.3 Total Capex including expansion +25% 1,309 22.4 1,907 28.3

24. The Project's economic analysis shows that overall the Project has high returns (both in NPV and ERR terms) in both the Low and High Demand Scenarios. As noted before, the economic analysis is being carried out at World Bank oil price projections (US$24/bbl in 2007); at present crude oil is trading at US$42-52/bbl. Given that under a Low Demand Scenario, the Project is generating an ERR of24.9% on the basis ofan expected US$24/bbl price of crude oil in 2007, the Project economics can be considered strong and robust.

Economic Benefits to Ghana 25. Costs and Benefits to Ghana. Ghana will acquire an equity participation of 16.3% in the pipeline company, WAPCo. The analysis and underlying calculations presented in this economic analysis are based on an equityhhareholder loan investment by Ghana ofUS$84 million, excluding development expenditures ofabout US$ 12 million. Additional costs ofabout US$8 million will be incurred including those associated with the conversion ofthe Takoradi Power Stations to burn natural gas instead of crude oil. The implementation ofthe Project would generate important benefits to Ghana. These include: (a) cost savings arising out oftwo sources: (i)buming of gas instead ofcrude oil for power generation, and (ii)the use of gas for industrial uses instead ofother alternatives; (b) direct benefits from the Project in the form of additional taxes; and (c) direct benefits from the Project as return on invested capital in WAPCo (in the

Assumes that the price ofoil remains constant throughout the life of the Project.

'13 This analysis ofsensitivity to capex and opex assumes that the price of oil would be consistent with the WBG forecast.

- 115 - Annex 10 form ofinterest, principal repayments, and dividends). Environmental benefits accruing globally from the project are discussed in paragraphs 38-43. 26. In the Low Demand Scenario, undiscounted net economic benefits to Ghana would be about US$2,568 million (net ofits equity investment), with average annual benefit of about US$ 128 million. The NPV ofGhana's investment in the pipeline company is expected to be about US$549 million providing a rate ofreturn of 35.8%. It is expected that savings from switching to gas would represent about 70%, taxes would represent 17% and return on capital benefits would represent about 13% ofGhana's total benefits (net of equity investment) in the Low Demand Scenario. In this scenario, the PV (at 10%) ofsavings from switching to gas is expected to be US$403 million, ofwhich US$384 million would be realized in the power sector. It is estimated that a PV ofUS$230 million could be realized by converting the existing Takoradi power plants only. 27. In the High Demand Scenario, undiscounted net economic benefits to Ghana would be about US$3,887 million (net ofits equity investment), with average annual benefit ofabout US$ 194 million. The NPV of Ghana's investment in the pipeline company is expected to be about US$998 million providing a rate ofreturn ofabout 64.5%. It is expected that savings from switching to gas would represent about 8 1%, taxes would represent 11% and return on capital benefits would represent about 8% ofGhana's total benefits (net of equity investment) in the High Demand Scenario. In this scenario, the PV (at 10%) ofsavings from switching to gas is expected to be US$850 million, ofwhich US$ 808 million would be realized in the power sector. It is estimated that a PV ofUS$443 million could be realized by converting the existing Takoradi power plants only. 28. Table 10.8 below summarizes the results ofthis analysis. Table 10.8: Economic Returns to Ghana

Undiscountard Net Benefits NW@ 10% ERR (US$ Million) (US$ Millions) (ba %I Low Demand Scenario 2,568 549 35.8 High Demand Scenario 3,887 998 64.5

29. Switching Values1l4 have been calculated for the key variable, namely price ofcrude 0i1.l'~ In the Low Demand Scenario, Brent Crude Oil prices ofless than US$13.40 per barrel would result in negative NPVs to Ghana. In the High Demand Scenario, Brent Crude Oil prices ofless than US$10.04 per barrel would result in negative NPVs to Ghana.

Economic Benefits to Nigeria 30. Costs and Benefits to Nigeria. Nigeria will also acquire a 25% equity participation in WAPCo through NNPC. The analysis and underlying calculations presented in this document are based on an equityhhareholder loan investment ofMgeria ofUS$ 129 million excluding

'14 Switching Value of a variable is that value at which the Project's NPV beconies zero.

'15 This analysis assumes that the price ofoil remains constant throughout the life ofthe Project.

- 116- Annex 10 development expenditures of about US$18 million.'16 Nigeria will also incur economic costs in producing/gathering the gas117that will be shipped via WAGP. The implementation ofthe Project would generate important benefits to Nigeria. These include: (a) monetization ofgas resources; (b) direct benefits from the Project in the form oftaxes; (c) direct benefits from the Project in the form of interest, principal repayments and dividends (return on capital benefits) for its investment in the Project; and (d) direct benefits from gas transportation in ELPS and other charges (ELPS and NGC related charges). Environmental benefits accruing globally from the project are discussed in paragraphs 3 8-43. 3 1. In the Low Demand Scenario, undiscounted benefits to Nigeria (net ofits investment) would be about US$ 1,247 million, with average annual benefits of about US$62 million. The NPV ofNigeria's investments related to the undertaking ofthe Project is expected to be about US$292 million providing a rate ofreturn of29.6%. It is expected that economic benefits associated with Nigerian gas sales to the Project would represent about 54%, taxes would represent 6% and return on capital benefits would represent about 40% ofNigeria's total benefits in the Low Demand Scenario. 32. In the Hi& Demand Scenario, undiscounted benefits to Nigeria (net ofits investment) would be about US$ 1,314 million, with average annual benefits ofabout US$66 million. The NPV ofNigeria's investments related to the undertaking ofthe Project is expected to be about US$331 million providing a rate ofreturn of 33.4%. It is expected that economic benefits associated with Nigerian gas sales to the Project would represent about 57%, taxes would represent 5% and return on capital benefits would represent about 38% ofNigeria's total benefits in the High Demand Scenario. 33. Table 10.9 below summarizes the results of this analysis. Table 10.9: Economic Returns to Nigeria Undiecounted Net Benefits NPV 8 10% ERR (US$ Million) (US$ Yillionr) (Aa a Ya) Low Demand Scenario 1,247 292 29.6 High Demand Scenario 1,314 33 1 33.4

Economic Benefits to Benin and Togo 34. Costs and Benefits to Benin and Toao. Benin and Togo are not shareholders in WAPCo and therefore have no investments to make in the new pipeline. However, as noted before, SoBeGaz (from Benin) and SoToGaz (from Togo), are expected to be commercial entities; to date, SoBeGaz and SoToGaz are not shareholders in WAPCo, and it is unclear as to how Benin and Togo will arrange for domestic ownership (2% each). For the purposes ofthis analysis, it is assumed that SoBeGaz and SoToGaz are public entities and the benefits accruing to them would fully accrue to Benin and Togo, respectively. Other costs to Benin and Togo include those

Any investmentsthat NGC will undertake to upgrade ELPS have been excluded from this analysis as these investments were in any case intended to be expended in a No-WAGP scenario at a later date.

'I7Given that Nigerian gas resources are vast, the economic cost of Nigerian gas to be provided to the Project is consideredto be the economic costs ofproducing and gathering such gas. Production and gathering costs are estimated at 50% of the gas sales contract price (escalated US$ O.SO/MMBtu).

- 117- associated with the move ofthe current gas turbine of Cotonou to a new location at Maria Gleta, the costs ofsetting up the new generation site and conversion of the two gas turbines (at Cotonou, Benin, and at LomC, Togo) to burn natural gas instead ofc e oiVjet fuel. These costs to Benin are estimated to be in the range ofUS$4 million and to Togo about US$ 1 million. The implementation of the Project would generate important benefits to both Benin and Togo. These include: (a) fuel cost savings arising out oftwo sources: (i)burning of gas instead of crude oil for power generation, (ii)the use of gas for industrial uses instead of other alternatives; and (b) direct benefits from the Project in the form oftaxes. Environmental benefits accruing globally from the project are discussed in paragraphs 38-43. Net Economic Benefits to Benin 35. Economic benefits to Benin (in the Low Remand Scenario) are expected to be about US$ 675 million, with average annual benefits ofabout US$34 million. The NPV of Benin’s participation in the Project is expected to be about US$ 149 million providing a rate ofreturn of 51.5%.”’s It is expected that savings from switching to gas would represent about 71%’ taxes would represent 23% and return on capital benefits would represent about 6% ofBenin’s total benefits (net of equity investment) in the Low Demand Scenario. 36. Economic benefits to Benin (in the High Demand Scenario) are expected to be about US$ 776 million, with average annual benefits of about US$39 million. The NPV ofBenin’s participation in the Project is expected to be about US$ 178 million providing a rate ofreturn of 57.6%. It is expected that savings from switching to gas would represent about 76%, taxes would represent 19% and return on capital benefits would represent about 5% ofBenin’s total benefits (net ofequity investment) in the High Demand Scenario. Net Economic Benefits to Togo 37. Economic benefits to Togo (in the Low Demand Scenario) are expected to be about US$ 827 million, with average annual benefits ofabout US$41 million. The NPV ofTogo’s participation in the Project is expected to be about US$ 192 million providing a rate ofreturn of 66.6%.l19 It is expected that savings from switching to gas would represent about 77%, taxes would represent 18% and return on capital benefits would represent about 5% of Togo’s total benefits (net ofequity investment) in the Low Demand Scenario. 38. Economic benefits to Togo (in the High Demand Scenario) are expected to be about US$ 964 million, with average annual benefits of about US$48 million. The NPV of Togo’s participation in the Project is expected to be about US$238 million providing a rate ofreturn of 76.2%. It is expected that savings from switching to gas would represent about 81%, taxes would represent 14% and return on capital benefits would represent about 4% ofTogo’s total benefits (net of equity investment) in the High Demand Scenario.

11* Benin’s investment associated with the setting-up of a new site at Maria Gleta and the conversion of the unit to burn gas is only US$4 million. In addition, investments made by SoBeGaz in the new pipeline are considered to be those made by Benin.

‘19 Togo’s investment associated with the conversion of the Lomk power plant in the project is only US$ 1 million. In addition, investments made by SoToGaz in the new pipeline are considered to be those made by Togo.

- 118- Annex 10

Table 10.10: Economic Returns to Benin and Togo

Undlacounted Net Benefits NPV @ 10% ERR Law Demand Scenario (US$ Mlliion) (US$ Mlliions) (As a %) Benin 675 149 51.5

Togo- -- 827 192 66.6 Undiscounted Net Benefits NPV 8 104~ ERR High Demand Soenatlo (US$ Million) (US$ Milllons) (As a X) Benin 776 178 57.6 Togo 964 23 8 76.2

~~ ~ Environmental Benefits from WAGP 39. Environmental benefits from the implementation ofthe proposed Project will be generated due to: (a) a decrease in emissions linked to fuel substitution in Ghana, Benin, and Togo, and (b) the Project contribution to gas flaring reduction in Nigeria. These benefits are estimated in the following paragraphs. 40. The following emission contents have been used to estimate the carbon dioxide and sulphur dioxide emissions from natural gas and from the petroleum based fuels displaced by the use ofnatural gas in Ghana, Benin and Togo. Table 10.1 1: Emission Content by Fuel

Fuel Carbon Content (V,) Sulphur Content (%) LPG 83% 0.00% Kerosene 86% 0.00% 0.2% Gas Oil 86% 0.20% 1.0% Fuel Oil 84% 1.OO% 3.5% Fuel Oil 84% 3.50% Light Crude Oil 77% 0.14% Natural Gas 60% 0.00%

41. Applying these emission contents by fuel to the Low Demand Scenario projections provides an estimate ofyearly reduction in carbon dioxide and sulphur dioxide emissions. Assuming a value ofUS$ 5/tonne'** for reduction in carbon dioxide emission, the NPV (at a discount rate of 10%) ofthe reduced emissions benefits has been estimated to be US$4.2 million for Benin, US$ 13.1 million for Togo, and US$29.7 million for Ghana. 42. The NPV (at a discount rate of 10%) ofGHGE avoided in Nigeria is estimated to be about US$7 million.

120 Expert estimates of the economic value of avoided carbon dioxide emissions over the medium term and the long term vary wildly from US$4 per tonne to US$ 100 per tonne. For the purposes of this economic analysis, a conservative value ofUS$5 per tonne has been used.

- 119- Annex 10

Reasonableness of the Sharing of Project Economic Benefits 43. Table 10.12 summarizes the estimated net direct benefits to each party in the WAGP Project in the Low Demand Scenario. Table 10.13 provides the same information in the High Demand Scenario. Chart 10.2 summarizes the sharing ofthe net economic benefits for each party in the two gas demand scenarios. The following tables and charts do not include the environmental benefits accruing to the four States as discussed in paragraphs 41 and 42 above.

Table 10.12: Low Demand Scenario - Economic Benefits to Project Participants

Private Project as Ghana Nigeria Togo Benin In comstant 2004 US& Participants a Whole FGN Taxation Benefit from 437 437 Commodity Sales Net Gas Commodity Sales & 236 141 377 Shipper Agency Fee Fuel Cost Savings in Power 1,732 476 476 2,684 Sector Fuel Cost Savings in Non- Power, Industrial / 78 162 5 245 Commercial Sector WAPCo Income Taxes 439 77 150 158 825 WAPCo Dividends (net of 324 497 40 40 1,087 1,988 investments)

Total Net Economic Benefits 2,568 1,247 827 675 1,229 6,545 NPV @ 10% 549 292 192 149 238 1,421 Economic IRR 35.8% 29.6% 66.6% 51.5% 19.5% 24.9%

Table 10.13: High Demand Scenario - Economic Benefits to Project Participants

Private Project as Ghana Nigeria Togo Benin In constant 2004 US& Participants a Whole FGN Taxation Benefit from 470 470 Commodity Sales Net Gas Commodity Sales & 278 168 446 Shipper Agency Fee Fuel Cost Savings in Power 3,009 55 1 552 4,112 Sector Fuel Cost Savings in Non- Power, Industrial / 154 234 42 430 Commercial Sector WAPCo Income Taxes 406 71 139 147 764 WAPCo Dividends (net of 323 495 40 40 1,083 1,980 investments)

Total Net Economic Benefits 3,887 1,314 964 776 1,25 1 8,192 NPV @ 10% 998 33 1 238 178 275 2,021 Economic IRR 64.5% 33.4% 76.2% 57.6% 21.8% 3 1.4%

- 120- Annex 10

Chart 10.2: Sharing of the Project Net Economic Benefits (on a NPV Basis)

Primte Primte Participants Participants 14%

/-----

Nigeria Nigeria 21% 16% Low Demand Scenario High Demand Scenario 44. As the above tables and charts show, on the whole, even in the case of low demand for gas, the Project net economic and environmental benefits are significant. A detailed, in depth, quantitative comparison ofthe alternatives has been undertaken that shows that the new pipeline is the best alternative to achieve the objectives ofthe Project. The costs and design ofthe Project have been optimized and risks associated with the Project have been properly assessed and mitigated. In addition, the economic benefits to the three consuming countries are significant, proportionate and commensurate with their investment. More importantly, the Project is resulting in robust returns to all four countries even in the Bank’s Low Demand Scenario for gas. As noted before, this Low Demand Scenario is considered an unlikely scenario given the Government ofGhana’s stated interest in restarting Valco operations. Overall, it can be concluded that the Project is economically beneficial to each ofthe four participating countries, that the sharing ofbenefits amongst participants is reasonable and that the proposed Project is a fair commercial transaction for the participating countries and for the other private shareholders.

- 121 - Annex 11

Annex 11: IDA Guarantee GHANA: West African Gas Pipeline Project

Introduction 1. The proposed West African Gas Pipeline system (WAGP or the Project) will transport Nigerian natural gas to Ghana, Togo, and Benin. Two new entities and one existing entity will implement the WAGP: * N-Gas Limited, a newly formed entity expected to be owned (directly or indirectly by affiliates) by Nigerian National Petroleum Corporation (NNPC), Chevron Nigeria Limited (CNL), and Shell Petroleum Development Company of Nigeria Limited (SPDC),121 will contract for the purchase (from NNPCKNL and NNPC/SPDC/EWAgip), transportation (by NGC and WAPCo), and sales (to VRA and CEB) ofnatural gas. Nigerian Gas Company (NGC), a wholly owned subsidiary ofNNPC, under contract from N-Gas, will transport natural gas from its sources in Nigeria to a terminal near Lagos over the existing ELPS. West African Gas Pipeline Company Limited (WAPCo), a newly formed entity expected to be owned (directly or indirectly by affiliates) by CNL (36.7%), NNPC (25%), SPDC (18%), and the Government ofGhana (represented by VRA) (16.3%), and, subject to exercise of options, Societe Beninoise de Gaz S.A. (2%), and Societe Togolaise de Gaz S.A (2%),’22 will build, own, operate, and transport (under contract with N-Gas) natural gas over a new pipeline from the terminal near Lagos to Takoradi in Ghana, with spurs to Cotonou, Lome, and Tema. 2. VRA and N-Gas have entered into the Takoradi Gas Sales Agreement (Takoradi GSA) which provides for, among other things, payment by VRA ofcertain amounts upon termination of the Takoradi GM following a VRA payment default. Among these amounts, listed in Schedule 5 ofthe Takoradi GSA, clause l(a) of such Schedule 5 is in respect ofN-Gas’s liability to WAPCo under the Takoradi Gas Transportation Agreement (Takoradi GTA) resulting from a termination ofthe Takoradi GSA for VRA payment default (such amount being referred to herein as the “WAPCo Termination Payment”). Furthermore, under the VRA Direct Agreement among VRA, WAPCo, and N-Gas, VRA agrees to pay any WAPCo Termination Payment directly to WAPCo. Additionally, under the Government Consent & Support Agreement (GCSA) among WAPCo, %Gas, and the Republic ofGhana, Ghana has agreed to provide an irrevocable and unconditional guarantee ofall VRA payment obligations under both the Takoradi GSA and the VR4 Direct Agreement, including the WAPCo Termination Payment. The Government proposes to enhance its guarantee ofVRA’s commitment to make the WAPCo Termination Payment in phrt by arranging for the proposed IDA Guarantee.

lZ1These three companies plus Agip and Elf, organized in two joint ventures (NNPC/CNL, and “F’C/SPDC/ElE/Agip, respectively), are collectively referred to as the “Producers.” lZ2These six entities are collectively referred to as the “Sponsors.”

- 122 - Annex 11

3. The proposed IDA Guarantee scheme for the West Afiican Gas Pipeline system is summarized in the following simplified chart:

Proposed IDA Guarantee Scheme

Risk Coverage 4. The Takoradi GSA allows N-Gas to demand, inter alia, the WAPCo Termination Payment if the Takorudi GSA is terminated by N-Gas following a payment default by VRA, and pursuant to the VRA Direct Agreement the WAPCo Termination Payment is to be paid directly to WAPCo. (In order to establish the amount ofand to make a claim ofthe WAPCo Termination Payment, N-Gas andor WAPCo will be required to present either (i)an affidavit ofthe Minister ofFinance ofGhana, duly certified, that VRA owes N-Gas and WAPCo the WAPCo Termination Payment, or (ii)a duly authenticated arbitral award in favor ofN-Gas and WAPCo for the WAPCo Termination Payment.) IfVRA fails to make the WAPCo Termination Payment, Ghana is obligated to do so under the GCSA upon written demand by WAPCo andor N-Gas; but if Ghana then fails to make the WAPCo Termination Payment, WAPCo will be deemed to have made a Loan to the Government in the amount ofIDA's share ofthe WAPCo Termination Payment, such Loan (and interest thereon) being due in approximately one year. Subject to the terms and conditions contained in the IDA Guarantee Agreement, IDA will guarantee to WAPCo repayment ofthis Loan at its maturity upon proper demand by WAPCo. Again, any draw on the IDA Guarantee may not exceed the amount certified in the affidavit or established by the arbitral award, as the case may be; and may not exceed the Maximum IDA- guaranteed Loan Amount (as described in the indicative term sheet below).

Approval Process and Required Documentation 5. The World Bank procedures require approval ofthe IDA Guarantee by management and IDA's Board of Executive Directors. Before Board approval can be sought, the Project must be determined to meet World Bank technical, environmental, social, economic, financial, and

- 123 - Annex 11 information disclosure policies and requirements, in some cases through assessments prepared by independent experts. The World Bank will also review the ownership and management structure ofWAPCo. In addition, Project documentation and agreements relating to the IDA Guarantee, including the Takoradi GSA, the YR4 Direct Agreement, the GCSA, the IDA Guarantee Agreement, the IDA Project Agreements, and the Indemnity Agreement, must be finalized in forms acceptable to the World Bank. At that point, the proposed transaction will be presented to IDA’SBoard ofExecutive Directors for approval ofthe IDA Guarantee; this approval will be given in the sole discretion ofthe Executive Directors. 6. Required documentation includes the following: (a) IDA Guarantee Apreement: The terms and conditions ofthe IDA Guarantee will be embodied in an IDA Guarantee Agreement between WAPCo and IDA. (b) IDA Project Agreements: WAPCo and N-Gas will execute separate IDA Project Agreements with IDA in order to create direct contractual relationships with IDA. They will contain undertakings to the World Bank with respect to matters of particular concem, such as consent requirements for changes to Project agreements and documentation, compliance with World Bank safeguards policies, assignment ofrights, and good governance. (c) Indewtv Agreement: The Government will indemnify IDA in the event it makes payments under the IDA Guarantee, and against other expenses or liabilities incurred by the World Bank. 7. An indicative term sheet for the proposed IDA Guarantee is attached and should be read in conjunction with the statements contained herein. The term sheet is prepared on the basis of the draft Project agreements and documentation previously delivered to the World Bank. The World Bank reserves the right to modify or withdraw its consideration ofthe proposed IDA Guarantee at any time, without prior notice, for any reason, including based on changes to these drafts. The World Bank reserves the right in any event to determine the final terms and conditions ofthe IDA Guarantee. The World Bank is not under any obligation to issue an IDA Guarantee and shall have no liability to any party in the event that it does not do so for whatever reason.

- 124 - Annex 11

SUMMARY OF INDICATIVE TERMS AND CONDITIONS OF THE IDA GUARANTEE

Government Consent & Suggorteement Government: Republic ofGhana acting through the Government ofGhana (Ministry of Finance). Loan: As provided in the GCSA, Ghana shall be deemed to incur indebtedness in respect ofthe Loan upon the occunence ofall ofthe following: (a) VRA shall have defaulted in its payment obligations under the Takoradi GSA and N-Gas shall have delivered a notice ofdefault and termination in accordance with the terms ofthe Takoradi GSA; as a result ofsuch termination VRA shall be obligated under the Takoradi GSA to pay, inter alia, the WAPCo Termination Payment, and VRA shall have failed to pay the WAPCo Termination Payment when due; (b) an arbitral award shall have been rendered or an affidavit ofthe Minister ofFinance delivered by the Beneficiary or N-Gas to the Government and to IDA, in either case confvming the amount ofthe WAPCo Termination Payment to be paid by VRA; (c) the Beneficiary and N-Gas shall have delivered a written demand under the GCSA to the Government for the payment of, inter alia, the WAPCo Termination Payment, which demand shall certify the dollar amount of the WAPCo Termination Payment to be paid directly to the Beneficiary; and (d) the Government shall have failed to pay the WAPCo Termination Payment to the Beneficiary within 5 days following delivery ofthe award or affidavit to the Government and to IDA and delivery by the Beneficiary and N-Gas ofthe written demand for payment to the Government. Repayment of Loan: Under the GCSA, Ghana must repay WAPCo for any Loan, with interest at the agreed Loan Interest Rate, within 365 days ofthe date ofany such Loan being deemed made.

Loan Interest Rate: LIBOR f 0.25% p.a.- (plus.- a pass-through- ofIDA’S Guarantee Fee). IDA Guarantee Aareeme nt

Guarantor: International Development Association (IDA). Beneficiary: West African Gas Pipeline Company Limited, a Bermuda corporation. Guarantee: IDA will guarantee to the Beneficiary repayment ofthe Loan, plus accrued interest (up to the Maximum IDA Liability), upon default by Ghana ofits Loan repayment obligation under the GCSA and receipt by IDA from WAPCo of, inter alia, a written demand notice confirming such default. Maximum IDA Liability: The Maximum IDA-Guaranteed Loan Amount plus 365 + 40 (extendable by IDA) days ofinterest at the Loan Interest Rate.

- 125 - Annex 11

Maximum IDA-Guaran teed Loan Amount: For a Loan deemed made on a date (and The Maximum IDA- for purposes of calculation of the Guaranteed Loan Guarantee Fee) during the following Amount is the period: lesser of: mar 15,20051 through [Mar 14,20151 USD 50,000,000 war 15,20151 through [Sep 14,20151 USD 49,500,000 [Sep 15,20151 through [Mar 14,20161 YSD 49,000,000 war 15,20161 through [Sep 14,20161 USD 48,500,000 [Sep 15,20161 through [Mar 14,20171 USD 48,000,000 [Mar 15,20171 through [Sep 14,20171 USD 47,500,000 [Sep 15,20171 through mar 14,20181 USD 47,000,000 [Mar 15,20181 through [Sep 14,20181 USD 46,500,000 [Sep 15,2018] through [Mar 14,20191 USD 46,000,000 [Mar 15,20191 through [Sep 14,20191 USD 45,500,000 [Sep 15,20191 through [Mar 14,20201 USD 45,000,000 [Mar 15,20201 through [Sep 14,20201 USD 44,500,000 [Sep 15,20201 through [Mar 14,20211 USD 44,000,000 [Mar 15,20211 through [Sep 14,20211 USD 43,500,000 [Sep 15,20211 through [Mar 14,20221 USD 43,000,000 war 15,20221 through [Sep 14,20221 USD 42,500,000 [Sep 15,20221 through [Mar 14,20231 USD 42,000,000 [Mar 15,20231 through [Sep 14,20231 USD 41,500,000 [Sep 15,20231 through [Mar 14,20241 USD 4 1,000,000 [Mar 15,20241 through [Sep 14,20241 USD 40,500,000 [Sep 15,20241 through [Mar 14,20251 USD 40,000,000 [Mar 15,20251 through [Sep 14,20251 USD 39,000,000 [Sep 15,20251 through [Mar 14,20261 USD 38,000,000 [Mar 15,20261 through [Sep 14,20261 USD 37,000,000 [Sep 15,2026]’2 USD 36,000,000 or 25% of the WAPCo Termination Amount, once it is finally determined. Upon notice from the Beneficiary, such percentage is subject to revision at ‘‘fust gas” and if and when thereafter the Reference Tariff is changed as described in Annex 9, paragraph 19, and Zurich/OPIC increases its cover, to a pre-determined percentage between 20% and 25%, inclusive. Guarantee Fee: 75 basis points per on the Maximum IDA-Guaranteed Loan Amount Guarantee Fees must be paid in advance on regular semiannual payment dates as specified in the IDA Guarantee Agreement. Standby Fee: If applicable, in lieu of the Guarantee Fee, 25 basis points per annum of any Maximum IDA-Guaranteed Loan Amount subject to a Limitation Notice, calculated semiannually in arrears and overpayments of Guarantee Fee rebated (or applied to reduce future payments of the Guarantee Fee) by IDA to the Beneficiary. Up-front Fees: See IDA Project Agreements below.

lZ3end of Initial Contract Duration of Takoradi GSA based on estimated Start Date of Sep 15,2006

- 126 - Annex 11

Conditions precedent to the IDA Guarantee: Usual and customary conditions for infrastructure financings, including the following: funding or firm and creditworthy commitments from the Sponsors for sufficient funding to complete construction and startup ofthe Project; execution and delivery ofall Project agreements, satisfactory to IDA, including execution and delivery ofthe GCSA, the Indemnity Agreement, the IDA Project Agreements, and the MIGA and ZuricWOPIC policies ofinsurance; delivery ofan Environmental and Social Assessment ofthe Project that is satisfactory to IDA; IDA’s determination that the Tarst Accounts & Security Deed or other security document prevents any type ofdistributions to any shares held beneficially by the Government ofGhana in the Beneficiary, following a termination ofthe Takoradi GSA due to payment default by VRA and payment by IDA under the IDA Guarantee, until such time as IDA recovers the Government’s attributable share ofsuch payment; effectiveness ofall required Project insurance (to include IDA as an additional named insured on third-party liability insurance); delivery ofsatisfactory legal opinions; and receipt in full by IDA ofthe Initiation Fee and the Processing Fee, and the first installment ofthe Guarantee Fee. Currency: United States Dollars (USD).

Final Claim Date: [Sep 15,20261 124 + 365 days + [tbd] days. Suspension of coverage: IDA may by written Limitation Notice to the Beneficiary suspend its Guarantee if: (a) there is a material default by the Beneficiary or N-Gas under the IDA Project Agreements; (b) any Producer is not a participant in EITI; or (c) prior to the FID date, IDA has suspended loans or credits to, or guaranteed by, Ghana, or there is a breach by Ghana ofits obligations under the Indemnity Agreement. Cessation of coverage: Including in respect ofa Loan (and interest thereon) already deemed made by the Beneficiary under the GCSA, default in payment ofGuarantee Fees will automatically terminate the IDA Guarantee. The IDA Guarantee will also terminate in the event that any changes are made without IDA’s consent in those provisions ofthe Project agreements in respect ofwhich IDA’s consent is required, or if it is determined that any ofthe Project agreements is invalid, illegal, or unenforceable. In addition, if the Beneficiary or N-Gas has engaged or engages in corrupt or fraudulent practices, it will cause

lZ4end ofInitial Contract Duration ofTakoradi GSA based on estimated Start Date ofSep 15,2006

- 127 - Annex 11

termination ofthe IDA Guarantee. Claims and disputes: Claimby the Beneficiary must be made within 90 days ofnonpayment by Ghana ofthe Loan under the GCSA, with IDA paying within 5 business days thereafter. Choice of law: England. mnitv4rermenf Parties: IDA and the Republic ofGhana. Indemnity: Ghana will reimburse and indemnify IDA on demand, or as IDA may otherwise direct, for all payments under the IDA Guarantee and all losses, damages, costs, and expenses incurred by IDA relating to or arising from the IDA Guarantee. Covenants: [Section to include summary ofany specific covenants that may be given by Ghana to IDA] Remedies: IfGhana breaches any ofits obligations under the Indemnity Agreement, IDA may suspend or cancel, in whole or in part, the rights ofGhana to make withdrawals under any other loan or credit agreement with IDA or IBRD, or any IDA credit or IBRD loan to a third party guaranteed by Ghana or the Government, and may declare the outstanding principal and interest ofany such loan or credit to be due and payable immediately. A breach by Ghana under the Indemnity Agreement will not, however, forgive any existing guarantee obligations ofthe World Bank under the IDA Guarantee. Choice of law: The Indemnity Agreement will follow the usual legal regime and include dispute settlement provisions customary for agreements between member countries and IRA. IDA Proiect Anre ementg Parties: (i)IDA and the Beneficiary, and (ii)IDA and N-Gas. Representations and warranties: Each of the Beneficiary and N-Gas will represent, among other standard provisions, as ofthe effective date, that it (i)is in compliance with applicable environmental laws and other applicable World Bank guidelines, safeguard policies, and other applicable requirements and (ii)has not been a party to any corrupt or fraudulent practice in relation to the Project. Covenants: Each ofthe Beneficiary and N-Gas will covenant, among other things, that it will (i)comply with applicable laws, including environmental laws and the EMPs and RAPSto the extent applicable, (ii)provide annual audited financial statements and other reports, (iii)provide access to the Project, and (iv) not be a party to any corrupt or fraudulent practice in relation to the Project. Up-f ront Fees: IDA will charge the Beneficiary a one-time Initiation Fee ofUSD 100,000 for internal Project preparation and development costs, payable upon Board of Executive Directors approval ofthe IDA Guarantee. IDA will also charge the Beneficiary a Processing Fee ofup to 0.50 percent ofthe face amount of the IDA Guarantee to cover the cost ofout-of-pocket expenses, payable as incurred, for which other payment arrangements have not been made with the Beneficiary. Costs and expenses: The Beneficiary will indemnify and reimburse the World Bank for reasonable out-of-pocket expenses incurred in connection with the consideration of any

- 128 - requests for IDA’Sconsent, any amendments to documentation, or the preparation for and actual enforcement or protection ofrights under the IDA Guarantee and other documentation. Assignment of rights: Each ofthe Beneficiary and N-Gas will assign to IDA, MEA, and ZuricWOPIC (and possibly other claimants) appropriate allocations ofits right, title, and interest in and to any affidavit or arbitral award, as described above, and any claims or causes of action available to the Beneficiary or N- Gas against Ghana, the Government, or VRA, as a precondition to making any draw under the IDA Guarantee. Choice of law: England.

- 129 - Annex 12

Annex 12: MIGA Guarantee AFRICA: West African Gas Pipeline Project

MIGA’s Standard Rescription of Risks

1. TRANSFER RESTRICTION Transfer Restriction Coverage protects against (i)the inability to convert, from local currency into guarantee currency, loan payments, dividends, profits, and proceeds from the disposal of the guaranteed investment, and (ii)host government actions that prevent the transfer of the guarantee currency outside the host country, including the failure of the government to grant an authorization for the conversion or the transfer of such currency. Compensation is based on the guaranteed percentage of any payments that cannot be converted or transferred. 2. EXPROPRIATION Expropriation Coverage protects against losses attributable to measures taken or approved by the host government that deprive the guarantee holder of its ownership or control over its investment, or in the case of debt, results in the project enterprise being unable to meet its obligations to the lender. Both direct and indirect (creeping) expropriation are covered. Compensation for equity is based on the guaranteed percentage of the net book value of the guaranteed investment in the project enterprise. For debt, compensation is based on the guaranteed percentage ofthe principal and interest that is in default as a result ofexpropriation. 3. WAR AND CML DISTURBANCE War and Civil Disturbance Coverage protects against losses arising as a result of military action or civil disturbance in the host country, including sabotage and terrorism, that destroys or damages tangible assets of the project enterprise or interferes with its operations (business interruption), or, in the case of debt, results in the project enterprise being unable to meet its obligations to the lender. Compensation is based on the guaranteed percentage of the value of the assets destroyed or damaged or, in the case of business interruption, the net book value of the guaranteed equity investment. For debt, compensation is based on the guaranteed percentage of the principal and interest that is in default as a result ofwar and civil disturbance.

4. BREACHOF CONTRACT Breach of Contract Coverage protects against losses arising from a repudiation or breach by the host government of a contract entered with the guarantee holder, provided that a final and binding arbitration award or judicial decision has been rendered in favor of the guarantee holder and cannot be enforced against the host government. Compensation is based on the amount that the guarantee holder is entitled to recover from the host government in accordance with the terms of the arbitration award or judicial de~isi0n.l~~

lZ5MIGA’s Convention provides for coverage under Breach of Contract in three different scenarios: (i)when the Guarantee Holder does not have recourse to a judicial or arbitral forum to determine the claim; (ii)a decision by such forum is not rendered within a reasonable period of time; or (iii)such a decision cannot be enforced.

- 130 - Annex 12

MIGA Breach of Contract Risk Assessment Breach ofContract cover is requested for certain contractual obligations ofthe Government of Ghana and VRA contained within the following Project agreements (see Annex 6): a. Government Consent and Supriort Anreement (GCSA) in respect to Government of Ghana guaranteeing the performance (including payment performance) ofVRA under the Takoradi GSA and VRA Direct Agreement; b. Takoradi Gas Sales Ameement (Takoradi GSA) between VRA and N-Gas, in respect to W’spayment obligations regarding a termination payment to N-Gas in the event ofN-Gas’s termination ofthe Takoradi GSA for VRA’s default; and c. VRA Direct Agreement among VRA, WAPCo, and N-Gas in respect to direct VRA payments to WAPCo in the event of default under the Takoradi GSA. MIGA’s liability to pay a claim will be triggered if: a. an Arbitration Award (the “Award”) is rendered for a breach by the Government of Ghana ofits contractual obligations due under the GCSA, and must be a direct result ofthe termination ofthe Takoradi GSA and the VRA Direct Agreement due to a payment default by the VU; b. the Award is final and binding; c. the Award clearly stipulates in favor ofWAPCo and recognizes the Government of Ghana’s liability; and d. WAPCo is unable to enforce the Award against the Government ofGhana. Disputes under the Takoradi GSA and GCSA are to be resolved by international arbitration in accordance with rules ofthe UNCITRAL and administered by the London Court of International Arbitration (LCIA). The VRA Direct Agreement will refer to the courts of England for the settlement ofdisputes.

Main Risks:

0 Viability ofthe energy sector in Ghana, and the ability ofVRA to meet its payment obligations under the Takoradi GSA.

0 Ability and willingness ofGovernment of Ghana to honor the payment obligations of VRA as specified under the GCSA.

0 Government of Ghana does not readily recognize a final decision rendered by an arbitral tribunal and pay the award. Risk Mitigants:

0 The reform ofthe energy sector in Ghana has begun, including reforming utilities, restructuring the market and setting up public-private partnerships. In particular, VRA has already benefited from substantial debt relief which has resulted in a cleaner balance sheet and improved financial results for 2003. VRA is to be restructured to increase operational efficiency. The World Bank is active in this sector and this

- 131 - Annex 12

Project, together with other regional and country specific projects, will support energy sector reforms in the region.

0 Ghaha being a member ofICSID is a clear indication that the country is willing to submit itself to intemational arbitration. The Project is actively supported by NEPAD and ECOWAS and is fully supported by the Government of Ghana, represented by its investment in the pipeline. Ghana has an indirect 16.3% shareholding in the pipeline company.

0 Under the terms ofthe Treaty and the International Project Agreement, the governments in Ghana, Nigeria, Benin, and Togo have agreed, amongst other things, to implement and maintain a legislative framework to govem the West African Gas Pipeline. Within the agreements, the governments have specifically undertaken to issue any necessary permit, authorization or consent required for all aspects ofthe Project.

0 Ghana benefits directly from the project through taxes and dividend payments throughout the life ofthe Project. It benefits indirectly through generation of employment and ancillary economic and infrastructure benefits.

0 Financial and economic benefits are significant for customers and the governments in Ghana, Nigeria, Benin, and Togo, and for the private Sponsors; the distribution of these benefits has been determined to be broadly equitable.

0 MIGA is further protected by the standard waiting period of 180 continuous days from the date the arbitral tribunal decision becomes final.

- 132 - Annex 13

Annex 13: Safeguard Policy Issues AFRICA: West African Gas Pipeline Project

1. This annex summarizes the key issues associated with each safeguards policy triggered by the Project and the studies undertaken concerning them, and it explains how the issues are being addressed in Project design and implementation. It also summarizes consultation and disclosure and how they influenced Project design. OP 4.01 Environmental Assessment 2. WAGP is classified in Category A for environmental assessment and S1 for safeguards. Because the Project would have potential impacts on the natural and human environments of four countries and the marine environments in the waters along 580 km of their coastlines, the Bank advised that a regional EA would be appropriate. The laws and regulations ofthe four countries also required EAs. Consequently, the Project Sponsors engaged a consultant, ICF Consulting, to prepare country EAs for Benin, Ghana, Nigeria, and Togo, and a regional EA. 3. Environmental Impacts. A methodical and rigorous impact assessment was conducted to establish severity levels of specific Project activities on each ofthe potentially affected environmental media and socioeconomic aspects. The impact assessment process took into account mitigation measures already incorporated in the Project design specifications.'26 When potential impacts were initially judged to be high or moderate even with the planned mitigation measures, additional measures were recommended to reduce the anticipated impacts to lower levels. In assessing socioeconomic impacts, it was assumed that the RAPSwould be properly implemented. The RAPSintend to mitigate displacement, disruption ofcurrent land use, and reduction in means oflivelihood for people affected by the Project. The result of the assessment ofWAGP was that no potentially high severity impacts (as defined by the methodology) would remain after the planned mitigation measures are applied in accordance with current commitments and plans. All ofthe residual impacts become either moderate or low severity. Those that were initially ranked high and moderate are presented in Table 13.1 with the residual severity after application ofthe planned mitigation.

12' A set of general mitigation principles were applied to address the linear nature ofthe design and construction ofthe onshore pipeline installation Examples include: avoiding sensitive receptors in site and route design, avoid vegetation losses and/or reinstate vegetation, minimize the footprint size in site and route design, conserve and reuse topsoil, and develop and maintain alignment sheets that reduce impacts by making all relevant operational control information available by operation and geographic location.

- 133 - 2

I d 2 a 8

& .CI cd 3 0

% b

I W 2 I I Annex 13

4. Analysis of Alternatives. The Project alternatives considered in the EA reflect the business capabilities and objectives ofWAPCo and a limited number of competing power options and/or alternative energy resources. Besides the No-Project and Proposed Project Alternatives, the EA evaluated a select number ofalternate scenarios. Two alternatives considered - developing gas-fueled power generation and export stations in Nigeria, and exporting natural gas as LNG - meet some ofthe energy supply objectives but do not provide comparable benefits. These alternatives either would produce more substantial environmental and socioeconomic impacts than WAGP, would not provide as timely a solution, and/or would incur higher costs for the same benefits as WAGP. A renewable fuels alternative would not contribute to flare reduction in Nigeria and presents challenges in terms ofreliability, security, and feasibility for Benin, Ghana, and Togo. In addition, it is doubtful that the renewable fuels alternative could provide sufficient power for industrial uses. 5. Alternatives for the pipeline routing were considered: combined onshore/offshore, onshore only, and offshore only. The selected option, a combination ofonshore and offshore routes, provides the greatest benefits at the lowest level ofenvironmental and socioeconomic impacts and least cost. 6. The EA considered design alternatives for nearly every aspect ofthe Project. Selection ofpreferred alternatives when devising, considering, and choosing between design options were based on a number offactors including: overall safety ofthe public and workers; environmental impact; potential impacts to communities; acceptance by stakeholders; best available practicable technologies; feasibility of construction, operation, and maintenance; and cost ofconstruction, operation, and maintenance. Final design ofthe pipeline route was given considerable attention due to the linear nature ofthe Project and the extensive overall length. Within the preferred Onshore/Offshore Option, more specific routing options were considered and chosen in order to minimize environmental and socioeconomic impacts. Alternate construction techniques for installing the pipeline across the shorelines were also considered. In Nigeria, horizontal directional drilling (HDD) was selected as it created the least disturbance in the Badagry wetland-lagoon-barrier island crossing from the Lagos Beach Compressor Station. In Ghana, blasting and trenching across the rocky seafloor was selected over HDD (which was not feasible) and a rock saw (which created spoils management problems). 7. Upstream impacts. To support the initial demand for gas from WAGP, as well as some ofthe projected increase in demand over the first five to ten years ofWAGP operation, production capability of200 MMScf/day has been identified from existing oil and gas operations in the Niger Delta. The ELPS pipeline has been assessed for capacity and integrity and requires no upgrading to accommodate up to 200 MMScElday for WAGP. Consequently, construction and operation ofWAGP do not entail any new environmental or social impacts upstream for at least five to ten years. Thereafter, the combined effects ofdeclining volume ofAG available for WAGP and possible increases in demand up to WAGP’s maximum capacity would necessitate new wells and gas gathering systems, with attendant impacts. The timing ofthe need for additional gas and the specific well locations, gathering system capacities, etc. cannot be identified and therefore were not addressed in the regional EA or the EA for Nigeria. Instead, the Access Code includes a provision that no entity will be accepted as a shipper ofgas through WAGP that is in gross violation ofthe environmental laws and regulations ofNigeria. Nigerian regulations require completion ofan approved EA prior to issuance ofpermits for new wells and

- 138 - Annex 13 related facilities, and the permits require implementation ofenvironmental management and monitoring measures identified in the EA. ank has made a comparison between applicable Nigerian regulations an procedures and Bank safeguards policies. Nigeria’s EA Decree No. 86 of 1992 sets out a process that is for the most part similar to that OP 4.01, including screening, public participation, and disclosure. The decree specifies the outline ofan environmental assessment, and this is similar to the outline in OP 4.01, Annex B. There appear to be differences between the decree and OP 4.01, namely in the amount of attention given to the regulatory framework alternatives analysis and the provision of a specific EMP. However, the “Environmental Assessment Sectoral Guidelines for Oil and Gas” issued by the Nigerian Federal Environmental Protection Agency in 1995 make it abundantly clear that the regulatory framework is to be described, the report must include a justification for the selection ofthe proposed project over alternatives, and an EMP should be integrated into the EA. The “Guidelines” also require consideration ofresettlement and displacement of squatters if land has to be acquired for the project. Cultural property and environmentally sensitive areas are specific topics to be covered. The gaps that may exist between Bank requirements and what is likely to occur under application ofNigerian procedures to upstream developments are therefore likely to be in only two areas -- differences between compensation rates determined under OP 4.12 and Nigerian law and the more general problem of shortfalls in implementation. 9. Downstream impacts. Downstream impacts that are known with reasonable certainty are: conversion ofthe oil-fired generating stations at Takoradi, Ghana, for operation with natural gas as the primary fuel; relocation of CEB’s gas turbine generator at Cotonou, Benin, to a new site at Maria Gleta and conversion from jet-A fuel to natural gas; and conversion ofCEB’s gas turbine generating station at Lome, Togo, from kerosene to natural gas operation. The impacts ofthese activities are not analyzed in the WAGP EA but are being addressed in other EA work carried out to Bank standards and described below.

0 VRA has commissioned and completed an environmental audit ofthe existing operations at Takoradi 1 and 2 and an EA covering the impacts and environmental management requirements ofthe conversion ofTakoradi 1 to use natural gas. It has been reviewed by the Bank and is referred to in a covenant in the legal agreements that conditions delivery ofgas to VR4 at Takoradi on satisfactory completion of actions recommended in the audit, so certified by Ghana Environmental Protection Agency.

0 VRA is obtaining financing from IFC for the completion ofTakoradi 2 as a combined- cycle plant. An EA for that project was prepared and disclosed in 2001, but it is based on continued use oflight crude oil. IFC is requiring an updated EA to cover conversion to gas and expects to receive it in 2005.

0 CEB has made a written commitment to the Bank that it will carry out an EA and prepare a RAP satisfactory to the Bank for the establishment of a new generating station with an associated industrial development zone at Maria Gleta. The Cotonou site will be examined in an audit to determine whether there are any “legacy” environmental concerns that should be addressed in conjunction with the relocation ofthe turbine presently operating there. The Bank will also review the terms ofreference as well as the reports ofthe studies.

- 139 - Annex 13

a CEB will at the same time conduct an analysis ofthe impacts ofconversion to gas fuel and an environmental audit at the Lom6 plant, also with Bank review and approval ofthe terms ofreference and reports.

Secondary and Cumulative Impacts 10. It is likely that other secondary benefits will be realized downstream through new industrial development and the associated creation of employment opportunities and income facilitated by the availability ofreliable, lower-cost electric power as well as gas transported through WAGP. Industrial development may also spur economic and land development, particularly in areas around major towns and cities. Local businesses such as food markets and household goods stores may see secondary benefits resulting from spending ofwages earned in jobs directly and indirectly created by the Project. However, adverse impacts can result from induced development that is not planned and managed in accordance with environmental regulations. 11. Beyond the issues ofupstream and downstream development, few indirect or secondary impacts were found to be significant. In Nigeria, installation of the pipeline and maintenance of the ROW may increase ease of access for local residents who may use the new pathway for hunting activities. Temporary indirect air quality impacts may also occur in Nigeria. Lastly, groundwater quality may be indirectly affected due to increased extraction from the reservoirs, particularly during construction. Few existing industrial development projects are currently additive to any direct WAGP Project impacts, so few cumulative impacts ofthis type will occur. 12. EMPs. Each EA includes an environmental management and monitoring plan (EMP) that WAPCo is committed to implement. The EMPs have also been issued as free-standing documents so that there will be no ambiguity in references in the Project legal documents and elsewhere to the commitments made by WAPCo. The EMPs include monitoring to check whether the WAPCo operational controls and mitigation measures conform to planned arrangements, including regulatory requirements, whether they are being properly implemented, and whether they are effective. 13, WAGP has identified those operations and activities that are associated with potential moderate and severe impacts. WAGP has planned these activities, including maintenance, in order to ensure that they are carried out under specified conditions by establishing and maintaining documented procedures, referred to in the EMPs as “operational controls”. Alignment sheets that geospatially reference relevant operational controls, mitigation and monitoring plans, regulatory requirements, training needs, and other specifications will be prepared by WAPCo prior to start ofconstruction to enhance effectiveness ofthe EMP. The operational controls, using the following hierarchy, are detailed in Appendix 8-B to the EAs and in the fkee-standing EMP. 14. Monitoring. The objective ofthe monitoring approach prescribed by the EMP is to check whether the WAPCo operational controls and mitigation measures conform to planned arrangements, including regulatory requirements, and whether they are being properly implemented. This monitoring will be provided by the WAPCo internal HSE audit program. The internal audit program will schedule audits based on the environmental importance of the activity concerned and results ofprevious audits. Audit checklists will be prepared based on requirements stipulated in the operational controls. Audits will be performed by qualified staff

- 140- Annex 13 and results will be provided to WAPCo, WAGP Project Team, and contractor management. Empirical Monitoring. In addition to performance/implementationmonitoring, certain quantitative, empirical monitoring will occur to ensure that operational controls and mitigation measures are effective and/or to make appropriate corrections to controls and measures. Details ofthe monitoring program are described in the EMP. OP 4.04 Natural Habitat 15. No critical natural habitat, either terrestrial or marine, will be converted. There are no coral reefs along or near the pipeline route. Much ofthe terrestrial habitat traversed by the ROW is already degraded. There are known sea turtle nesting areas near pipeline beach crossings, and the EMPs contain an elaborate sea turtle protection protocol that depends on (a) avoiding work during egg-laying seasons and (b) detailed response procedures in the event turtles or their eggs are encountered during construction. The potential impacts on turtles are short-term only; the mere presence ofthe pipeline after construction is complete will not affect sea turtle nesting. OP 4.09 Pest Management 16. ROW clearance and maintenance will be carried out without use ofherbicides. Pesticide use will be limited to mosquito control at construction camps and pipeline facilities. The Ems provide for pest management procedures that are consistent with OP 4.09. OPN 1I, 03 Cultural Property 17. Important cultural resources exist in the vicinity ofthe Project, such as medicinal plants in Benin; the Gao Lagoon and nearby sacred grove and shrine near Tema, in Ghana; a sanctuary, sacred trees, and a cemetery near Gbetsogbe, in Togo; and, in Nigeria, churches, gravesites, praying grounds, shrines, and the homes and palaces oftraditional rulers. In the planning ofthe pipeline ROW and the related facilities, care was taken to avoid community and population centers and cultural areas. In the case ofthe sacred grove near Tema, extensive consultation with community leaders led to agreement on a new location for the regulating and metering (R&M) station that would not disturb the spirits ofthe grove. Archaeological surveys have been conducted to verify what existing sources show - that there are no significant archeological features along the ROW. The surveys were still in progress when the final draft EAs were disclosed, but their findings have been included in the final EAs prepared in October 2004. The EMPs include a chance-finds procedure. OP 4. I2Involuntary Resettlement 18. In compliance with OP 4.12 and in order to minimize land acquisition and thus avoid physical and economic dislocation ofthe affected population, several measures were adopted: (a) the ROW and the sites ofthe compressor station and R&M stations have been chosen among altematives to impact only a few residential structures; (b) the ROW width has been kept to the minimum of25 meters; (c) the construction ofaccess roads to the pipeline has been avoided; (d) replacement land within the affected communities has been identified; (e) arrangements have been made to ensure that lands leased for temporary camps and storage facilities will be chosen from plots unsuitable for cultivation or returned to their original owners after proper restatement for cultivation; (f) construction plans limited the extent ofclearing so as to retain as much productive land as possible; and (g) provision has been made for allowing cultivation ofcrops up to the ROW border to limit permanent crop loss.

- 141 - Annex 13

19. For each country, a RAP was prepared to ensure that land acquisition and losses ofassets are well identified and affected entities are properly compensated. The following paragraphs provide a summary ofthe scope ofthe resettlement and compensation issues, the modality of compensation, the institutions in charge ofthe RAPS'implementation, monitoring and evaluation, and the grievance procedures. The disclosed RAPs provide more detailed and specific information on (i)policy and legislative frameworks; (ii)Project-affected communities; (iii)land acquisition procedures and implementation responsibilities; (iv) Project impact and mitigation measures; (v) public consultation and disclosure; (vi) monitoring and evaluation; (vii) resettlement budget and cost; and (viii) implementation schedule. All four RAPs were issued in draft form for public consultation in July 2004. 20. WAGP held broad consultations with local communities and other key stakeholders such as community leaders and public officials to ensure that the entitlements and the compensation levels established are accurate and appropriate. The land plots identified by Estate Surveyors for acquisition were publicly announced and displayed to verify entitlements. Negotiations for compensation were held with several estate agents that people chose to represent them. Choices for in-kind versus cash compensation were also presented through these agents to all affected parties. 2 1. Responsibilities for the commitments proposed in the RAP reside within WAPCo and are delegated internally and to qualified contractors such as Estate Surveyors. Various departments ofWAPCo are involved in the implementation ofresettlement activities, under the overall direction ofthe Project Director, who reports directly to the WAPCo Managing Director. A special unit referred as the R4p Management Team will work with the Project Director to ensure RAP implementation and to carry out independent internal monitoring. Within WAPCo, the core responsibilities for RAP implementation rest with the Community Relations staff. 22. In addition, a number ofthe central and regional government agencies have some legal responsibilities in the implementation ofthe RAP in each country. 23. In Nigeria, the Project requires the acquisition of less than 144 hectares. Because ofthe linear nature ofthe Project, this relatively small amount ofland is spread among 23 communities oftwo western states ofthe country. A total of 1,557 private landowners and 928 tenants will lose a small portion ofthe total holdings they own andor cultivate. They all have been contacted both by the Estate Surveyors contracted by WAGP and responsible for the land and asset inventory as well as by independent surveyors that the affected populations have hired to represent them. The estimated nurnber ofpeople who live in the affected families of owners and tenants is 8,647. Owners lose less than 6 percent oftheir total land holdings. The income loses attributable to loss ofland are less than 2 percent oftotal household income. About 143 residential plots are affected; on 37 ofthese there are fully constructed homes. 24. For the loss ofland, crops, and structures WAGP will provide cash compensation based on a willing-buyer/willing-seller model. All land acquired and assets impacted as a result ofthe WAGP Project will be compensated through a negotiated agreement. The negotiations for compensation for land were based on the 1998 OPTS'27 rates established by the Government for the oil sector. These rates are multiplied by 10 and then further increased by 50-75 percent to reflect inflation adjustment and restoration oflost incomes. Affected crops and trees, as well as

lZ7OPTS - Oil Producers Trade Section

- 142 - Annex 13 structures will receive 50-75 percent over the1998 OPTS rates. The entitlements for tenants are limited to affected crops and trees. Tenants will also receive 50-75 percent over the 1998 OPTS rates for standing crops. 25. In Ghana, a total of 13 hectares ofland must be acquired in two places. At Tema, the WAPCo ROW will extend from the Atlantic Ocean 520m west to an R&M station. A new weight-coating plant will also be constructed nearby to coat pipe lengths in concrete. The plant will be constructed on industrial land close to the port ofTema owned by the Free Zone Board. At Takoradi, the ROW will extend fiom the Atlantic Ocean 110m north to the R&M station. The affected population includes tenants, squatter farmers, and landowners. The title-holders include the Tema Development Corporation (TDC), the Tema Traditional Council (TTC), and VRA. The rest of the claimants are leaseholders and tenants. The Project in Ghana affects only 23 lease-holding households and 19 tenants. 26. Most land acquired consists ofland held by the TDC and public land held by the VRA. However, a number oftenants and squatters also use this land. WAPCo will negotiate with stakeholders and owners at both locations to ensure that tenants and encroachers will be compensated. VR4 and TDC, as legal landowners, will be compensated for all land to be acquired for the Project, fixed assets, and improvements made on the land, based on negotiations. The Tema Traditional Council (TTC) will also be compensated for the stool lands over which they have ownership claims. Formal and informal tenants will be compensated for standing crops and any other improvements they may have made. To establish the best level of compensation to be offered to the affected households, valuation and assessment ofproperty to be acquired were based on different methodologies, including market rate and replacement value. Replacement land has been identified for leaseholders ofresidential plots. The leaseholders expressed their satisfaction with the arrangements. 27. In Benin, WAGP land acquisition and resettlement impacts for the pipeline itself are modest. The total pipeline length in Benin is 14.6 kilometers. Building the pipeline will require clearing a 25-meter ROW along the pipeline as well as land for an R&M station. However, CEB proposes to acquire approximately 29 ha for a new power plant and industrial development site at Maria Gleta. The total amount of land involved in Benin thus exceeds 30 ha. WAGP will affect 573 individual land plots owned by 337 individuals. Among the affected population, 337 landowners cultivate the land on their own or as part ofa “collectivite.I ,3128 Some owners will lose part or all of a single plot, while others will lose several plots to the Project. No tenants appear to be on the affected plots. Most plots to be acquired include privately owned agricultural land and constitute a minor proportion ofthe land holdings ofthe affected households. Only 24 plots have buildings on them, including those made ofbamboo as well as ofmodern building materials. Twenty-one ofthese residential homes, and three are small storage facilities. One private school will need to be relocated at Maria Gleta. 28. A compensation framework has been designed for the loss ofland, home, and other assets, where the assets are affected. WAPCo staff held individual consultations with the affected households to identify people’s opinions with regard to compensation. Project-affected people have expressed preference for cash compensation over other types, including land-for-

128 The Estate Survey and Valuation Assessment (2003) identified six “collectivitks” (in French). “Collectivitks” are privately owned, but often used by a group offamilies, often related or from the same neighborhood.

- 143 - Annex 13 land arrangements. Cash compensation for land, building, crops, trees and other affected assets have been calculated based on market values as negotiated between willing buyer and willing seller. The Project meets conditions specified in OP 4.12 for cash compensation based on willing-buyer/willing-seller arrangements. However, the land-for-land option (in-kind compensation) option has not been ruled out and altemative land plots are readily available in the areas adjacent to the affected territories. People have been informed that they are free to choose either option until the final commitment is made through their signing a letter ofintent prior to the FID date. 29. In Togo, WAGP land acquisition and resettlement impacts in Togo are also modest. Building the pipeline will require clearing a 25-meter ROW along the link line as well as land for an R&M and future compressor station at Lome, altogether involving permanent acquisition of only 10.43 hectares of land. The amount ofland taken in the area includes 30 plots used by 29 tenant farmers or about 145 people. Land to be acquired for WAGP in Togo is currently vested in a private company, SAZOF (Societe d’Administration des Zones Franches), and approved by the State ofTogo for industrial development. However, traditionally, this land has been used by the local communities, which still hold title, and issues remain to be resolved between SAZOF and the local communities regarding compensation for the land. 30. As directed by the Government ofTogo, WAPCo will compensate SAZOF for the land, fixed assets, and improvements made on the land, based on willing-buyedwilling-seller negotiations. In order to ensure that the land required for WAGP is free of claims and that all owners are satisfactorily compensated before WAPCo mobilizes for construction (as required under WE3 OPBP 4.12), WAPCo will work with SAZOF, the Ministry ofFinance and the Communities to establish an agreement involving two payments; where: (a) WAPCo will pay the Ministry ofFinance the amount ofcompensation due to the communities (as negotiated between the communities, SAZOF and as needed the relevant governmental authorities in Togo); and (b) the Ministry ofFinance will direct the hdsto the communities and facilitate the transfer of title to SAZOF. Upon demonstrated receipt of Title Transfer to SAZOF, WAPCo will pay the remaining compensation as negotiated between SAZOF and WAPCo and both parties will complete the remaining performance requirements ofthe lease agreement. Regardless ofthe final agreement details, WAPCo will not mobilize for construction until it is clear that the village has been compensated and title has transferred to SAZOF. WAPCo will also compensate all tenants currently farming the land directly for standing crops, and any other improvements they may have made on the land. 3 1. A number ofgovernment agencies are also responsible for the implementation ofthe RAP and the WAGP Project. They include the Ministry ofthe Interior, Security and Decentralization; Ministry ofEconomy, Finance, and Privatization; Ministry of Commerce, Industry, Transport, and Free Zones Development; and Department ofEnergy. OP 7.50 International Waterways 32. The offshore section ofthe pipeline transits international marine waters. Notification of riparians has been effected through the WAGP treaty. Consultation and Disclosure 33. The Sponsors’ consultations with stakeholders started at the conceptual design stage of Project preparation, in 2000, and WAPCo intends that they will continue throughout its

- 144- Annex 13 implementation. Stakeholders included members ofboth directly and indirectly affected communities, administrative and traditional community leaders, regional and national government agencies, national and international NGOs, academicians and other experts, representatives ofthe private sector, and special interest groups such as fisherfolk and gravel miners (see Table 13.2). Among the subject matter discussed with stakeholders were issues related to safety, environment, land acquisition, compensation and displacement, in conformity with Bank’s safeguard policies (OP 4.01, Environmental Assessment, and QP 4.12, Involuntary Resettlement). Consultations in these areas were initiated by WAPCo as early as September 2002 and have continued up to the public hearings held by the environmental agencies ofBenin, Ghana, Nigeria, and Togo in March and April 2004 as part ofthe national review and clearance procedures.

Table 13.2: Target Audiences of Consultations Conducted by the Sponsors (%)

Benin Ghana Nigeria Togo

Business 1 8 3 18 Community 83 6 72 43 Government Agencies 10 62 25 21 Internationalorganizations and NGOs 5 21 ___ 11 Media 1 1.5 --- _-- National experts and education institutes --- 1.5 --- 7

34. Table 13.3 is a tabulation ofthe issues and questions raised in the Sponsor’s consultations, with an indication oftheir relative importance to the participants. Environment, land acquisition, community benefits, safety, and the permitting and regulatory process were apparently the topics ofmost interest, but within that group the issues most frequently mentioned varied from country to country. The Sponsors’ summaries ofthe consultations indicate that there is broad general support for WAGP in all four States. Where voices have been raised in opposition, as is the case with at least one international and one Nigerian NGO, the main reasons appear to be not the characteristics ofthe Project itself (though the NGOs have raised questions and made suggestions for improvement in the EA and the design), but the fact that WAGP does not extend to resolving environmental, social, and governance issues in the Niger Delta.

Table 13.3: Relative Importance of Issues Covered at Sponsors’ Consultations (by % of events at which the topic was raised) IasuelQuestionltopic-- Benin Ghana Nigeria Togo Community Benefits and Employment 19 4 11 2 costs 2 3 --- 2 Design of Project 0.8 5 9 7 Environmental Issues and EA process 5 26 12 33 Fish Ecology 1 6 2 11

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lsruelauestionnopic Benin Ghana Nigeria Togo Gas Market 1 5 3 --- Information Exchange 2 6 8 13 Land Acquisition and Compensation 36 6 18 17 Liaison 0.4 1 5 Niger Delta _-_ 3 6 Permitting and Regulations 11 19 5 Safety 4 11 17 Support and Participation sought 17 5 5 Training 1

35. Drafts ofthe EAs were publicly disclosed at a total of41 locations across the four countries prior to the hearings (see Table 13.4). The country EAs and RAPS,and the Regional EA were reviewed by the World Bank, revised by WAPCo’s consultants, and cleared in final draft form for disclosure in accordance with Bank policies. The documents were posted on the WAGP website and disclosed at the same 41 locations, plus the Public Information Centers in the Bank’s country offices and the InfoShop in Washington. Disclosure was completed on July 7,2004.

Table 13.4: Venues at which the EAs and RAPS have been disclosed to the public:

Country Venue Location

United States World Bank Offices Washington, DC MIGA Washington, DC Nigeria WAGP EA Rep Office Lagos Lagos State Ministry ofEnvironment Lagos Ogun State Ministry ofEnvironment Abeokuta Liaison Office Federal Ministry ofEnvironment Lagos Liaison Office Federal Ministry ofEnvironment Abeokuta Badagry Local Government Office Badagry Ado Odo Ota Local Government Office Ado Odo Ota If0 Local Government Office If0 Ogun State Ministry ofLands and Housing Abeokuta Lagos State Lands Bureau Lagos Federal Ministry ofEnvironment Abuja Togo WAGP EA Rep Office Lomk Ministtre de 1’Environnement et des Ressources Forestitres Lomk Gbetsogbe Palace Gbetsogbe Domocile du chef traditionnel Gbetsogbe Baguida Baguida Ministhe de l’finergie et des Ressources Hydrauliques Lom6 Ministry of Land Affairs Lomk Benin WAGP EA Rep Office Cotonou Documentation Center ofthe Ministry ofEnvironment, ofHabitat and Cotonou Urbanism (MEW) Beninese Agency for Environment (BE) Cotonou Documentation Center ofMinistry of Mines, Energy and Hydraulic Cotonou

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Country Venue Location (MMEH) Mayoral& of Abomey-Calavi Abomey-Calavi Mayoralty of Ouidah Ouidah Institute ofEndogenous Development and Exchanges (IDEE) Ouidah Documentation Center of the University of Abomey-Calavi Abomey-Calavi Ghana WAGP EA Rep Office Tema EPA Library Accra Greater Accra Regional Coordinating Council Accra EPA Greater Accra Regional Office Amasaman Accra Metropolitan Assembly Accra Shama Ahanta East Metropolitan Assembly Sekondi EPA Central Regional Office Cape-Coast Central Regional Coordinating Council Cape-Coast Western Regional Coordinating Council Sekondi EPA Zonal Office Tema Tema Municipal Assembly Tema EPA Western Regional Office Sekondi Volta Regional Coordinating Council HO EPA Volta Regional Office HO Ghana EPA Accra

36. Revised final draft EAs and RAPSincorporating most ofthe Bank and MIGA comments were received in June 2004 and cleared by the Bank and MIGA for disclosure. In-country disclosure ofthese documents was completed at the same locations shown in Table 13.4 as well as in the Bank’s InfoShop on July 7,2004. Copies were also placed in the PICs at the Bank’s offices in all four countries. Final EAs and EMPs incorporating comments from the national environmental agencies as well as additional comments fi-om the Bank were prepared and submitted to the Bank in October 2004. They are being re-disclosed at the same locations as the final draft documents. The RAPSrequired no further modification. 37. The Bank’s appraisal ofWAPCo’s consultation process began in September 2004 with an examination ofthe public hearing records and relevant sections ofthe final draft EAs and RAPS. Stakeholder meetings followed in October 2004 in the four countries. They were open to any interested parties and announced as such in the affected communities, but invitations were also sent to lists developed from discussions with NGOs and other resource persons in the respective countries, advance visits to the affected communities, and the lists of participants from the consultations conducted by WAPCo and the public hearings on the EAs. The Bank’s staff actively sought inclusive participation in the meetings and ensured that women, fisherfolk, youth groups, traditional leaders, traditional council members, religious leaders, village chiefs and notables, community based organizations, local NGOs, land owners, local associations and business persons were present. The meetings were conducted in local languages. The meetings with the NGOs were held with those that have been most concerned about and actively involved with the Project. Meeting attendance is summarized in Table 13.5.

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Table 13.5: Total number of meetings and stakeholders met Number of Number of individuals Location meetings Female Male Total - -^_ _^.__ -- . .--- GHANA NGOs 3'4 0 3 3 Takoradi area communities 1 26 80 106 Tema area communities 1 5 28 33 TOTAL 5 31 111 142

NGOs 1@) 1 4 5 Chief, notables, women's groups, 1 22 28 50 youth groups, local development assoc. Land owners 1 1 10 11 Gravel traders 8z fishing 1 22 15 37 Market gardeners 1 2 21 23 TOTAL 5 48 78 126 BENIN Maria Gleta community 1 60 120 180 Akadjamey area communities 1 13 32 45 TOTAL 2 73 152 225

NGOs 1 1 3 4 Badagry area community 1 1 135 136 Otta area community 1. 40 290 330 TOTAL 3 42 428 470

TO'IAI, 15 I94 769 963

(a) individual meetings with three NGOs @) combined meeting with four NGOs

38. The general conclusion ofthe appraisal is that the consultations with the affected stakeholders conducted by WAPCo on issues related to environment, land acquisition, displacement and compensation, are up to the general standard required by the Bank. This conclusion is based on the specific findings summarized below. 39. There is broad generaZ support for the Project. In fact, no individual or organization spoke in opposition to the Project. All speakers considered it beneficial. Many community members expressed impatience with the length oftime it is taking to get started. Most NGOs agreed that the Project is ofprime importance to their respective countries and to the region and showed strong support. Many NGOs emphasized the need for governments, investors and the Bank to work together to ensure that local communities do indeed share in the benefits to be brought about by WAGP.

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40. Stakeholders received sufficient prior information. NGOs were not unanimous on this point, but most agreed. Two ofthe three NGOs that the mission consulted in Ghana acknowledged that a great deal of information had been disseminated but considered it skewed toward the beneficial aspects ofWAGP, while downplaying negative aspects and risks. One of them, alluding to the volume ofinformation produced, advised that a better job could have been done at isolating the key points on which feedback was desired, summarizing the information clearly and disseminating it, and allowing sufficient time for review and comment. A local NGO in the Takoradi area stated that it was not sure the communities understood what to do in the event ofan accident to the pipeline. Two NGOs in Nigeria had evidently not seen the public announcements ofEA and RAP disclosure; they had not been aware ofthe Project prior to their meeting with the appraisal team and would have liked to have been directly invited to consultations earlier in Project preparation. In contrast, NGOs consulted in Togo spoke in very complimentary terms about all aspects ofconsultations including information sharing. Two had served as members ofa national steering committee for the EA - FOE Togo commented that such close involvement was a first-ever experience - and one had been a consultant on marine ecology. Affected communities, on the other hand, all felt (and indeed seemed to be) well informed about the project. Most communities even think that consultation has continued for too long and want to see the whole process come to closure so that the Project can begin. 41. Stakeholders are generally satisfied with the responses to consultation. The exception is the NGO in Nigeria that has initiated litigation against the Project; it criticizes the process as not being truly participatory or consultative. To the Togo NGOs, the biggest concern now is for WAPCo and the Government to implement the measures contained in the EMPs and RAPS. Ghana NGOs have the same view, adding that oil companies have a credibility problem as a result ofpast history in the Niger Delta. Addressing the Delta’s environmental and social problems is the major area on which the international NGOs feel that WAGP is not sufficiently responsive; however, they do not advocate holding up the Project until the Delta problems are resolved. Affected communities generally felt that their questions and issues had been adequately dealt with; they are “satisfied with the explanations” according to the Chief Fisherman ofAbuesi. Some could point to ways in which they have influenced the EA and Project design, The Chief ofGbetsogbe Village, site ofthe pipeline landfall in Togo, explained that the community had been consulted on the optimum alignment ofthe pipeline, and WAPCo had taken their advice. An elder from the village that is the site of a sacred grove near Tema confirmed that arrangements to safeguard the grove, including a change in the proposed location ofthe metering station, had been worked out with the village and were acceptable. Representatives ofAjido, the planned location ofthe compressor station in Nigeria, expressed satisfaction with the design changes in pollutiQncontrol features WAPCo made in response to their concerns. Communities stressed that what is important now is for WAPCo to honor the commitments it has made during consultation on the EAs and especially during negotiations on compensation rates for land and other assets. 42. Disclosure generally conformed to Bank guidelines, but more needs to be done during implementation to get practical information into the hands of interested communities. NGOs have generally seen the documents and some have obtained their own copies by requesting them from WAPCo. In Togo, NGOs had confirmed that their recommendations and concerns have been taken into account in the EA, with the exception ofthose related to the Niger Delta. As mentioned above, one international NGO in Ghana believes the information is too voluminous to be digested and responded to in the time given, especially by those who are not experts, and

- 149 - Annex 13 argues for simpler and clearer presentations in the future. The Nigerian NGO most involved with the Project claims not to have seen the disclosed EA, abut WAPCo in response asserted that it had delivered copies directly to that organization. 43. Community members were aware ofthe existence ofan EA and RAP for the elements of WAGP to be constructed in their countries, but few had seen them. Community leaders at Tema had copies ofa short, local-language summary ofthe Ghana EA. Landowners at Gbetsogbe brought copies ofthe Togo RAP to their meeting with the mission. However, these were exceptions. This situation affects the level of communities’ comfort with Project implementation and impact mitigation measures. Fro example, the Emscontain a wealth ofinformation on safety and emergency response that would alleviate much ofthe communities’ worry if they were aware ofit. 44. At Maria Gleta, several speakers stressed the need for a single document on which the community, government, and investors can all base their discussions. WAPCo has agreed to prepare and disseminate short, local-language summaries ofEMP and RAP provisions after the FID is taken and before land acquisition begins. 45. There are some outstanding questions and concerns.

0 NGOs expressed the desire to participate in Project monitoring and evaluation on a continuous basis.

0 All NGOs showed concerns about whether their respective governments and WAPCo will stand by and honor their engagements as specified in the EAs and RAPS.

0 The NGOs with international affiliation in Ghana and Togo as well as the Nigerian NGOs were very concerned about the environmental and social conditions and growing insecurity in the Niger Delta and its negative effect on their countries. They urged that the Project and the international community “attempt” to alleviate some ofthe problems.

0 Nigerian NGOs requested that WAGP maximize its intake ofcurrently flared gas and, more broadly, that oil producers develop a credible plan to eliminate flaring by 2008.

0 Nigerian and Ghanaian NGOs and some communities continue to be concerned about pipeline safety, security, and arrangements for emergency response.

0 Communities have established a long list ofrequirements they hope will be fulfilled by WAPCo. Ifunrealistic expectations are not addressed through consultation and information on what WAPCo will do in its community development program, then the relatively high level ofconfidence in WAPCo that presently prevails will likely erode. 12’ and negatively reflect on the Project.

0 The communities fear that if their respective governments get involved in the compensation process, the promises and commitments expressed by WAPCo will not be

12’ WAPCo observers at the meetings explained that as soon as the decision is made to proceed with WAGP, discussions will begin that will lead to memoranda of understanding with the communities on the details ofthe community development program.

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honored, especially with regard to the agreed on price of land and the support for community services.

0 There have been long time lapses since compensation agreements were drawn up, during which land prices have escalated.

MIGA 46. MIGA has carried out its review ofthis Project in collaboration with Bank environmental and social specialists assigned to work on the WAGP Project. Site visits by MIGA environmental and social specialists were carried out as part ofMIGA’s environmental and social due diligence during Project underwriting to verify that the Project will comply with MIGA’s Safeguard Policies and environmental guidelines. MIGA’s issue-specific Safeguard Policies that apply to this Project include: Projects on International Waterways; Natural Habitats, and Involuntary Resettlement. MIGA’s Physical Cultural Resources Policy does not apply because site surveys have indicated no physical cultural resources as defined by the policy are expected to be significantly impacted by the Project, nor is there reasonable likelihood of chance finds ofresources during construction. MIGA’s Pest Management Policy does not apply because the only significant use ofpesticides is a one-time hydrostatic testing ofthe pipeline, which is subject to compliance with water quality criteria for discharge ofeffluent from the test. None of the other MIGA issue-specific Safeguard Policies are relevant to this Project. WAPCo has shown intent and commitment to apply international best practices to the Project planning and permitting phases. WAGP is overall a project with major environmental benefits. It has a positive effect in terms ofpromoting the economic integration ofWest Africa as well, and delivers West Afirican gas to West Aficans. The WAGP Project is in conformity with MIGA Safeguard Policies and associated procedures for public involvement and disclosure.

Safeguards Implementation Arrangements 47. WAPCo is committed to provide resources essential to the implementation and control of the EMP. Resources include human resources and specialized skills. WAPCo’s Construction Management Team will have dedicated HSE staff, who are competent on the basis of appropriate education, training and/or experience, performing management and oversight during Project site preparation, construction, commissioning, and start-up phases. Similarly, WAPCo will have a dedicated HSE staff for the WAGP operations phase. The organizational structure for HSE management and oversight during construction is shown below.

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WAGP Construction Management Agreement Organization

Project Dlrector Construction Manager" Agreement I

Englneering and Health Safety Construction Manager Environment Manager co~onls Plannlng Manager

Communlty Relations I- Rep -Ghana LEnvlmnmantal Community Relations Spaclalbt Rap -Tow Communlly Relatlonr Rep - Benln - ICommunlty Relation8

Commleslonlng and Startup c'laam (to beflllsd by WAPCo OBM personnel) 48. Also included on the organizational chart above are a Construction Community Relations organization. These professionals are crucial to the success ofthe socioeconomic monitoring process and the continuation ofthe stakeholder consultation process. Additional Project professionals will also be present in each country to manage land use/acquisition and compensation issues reporting to the Engineering and Construction Manager, but working closely with the WAPCo Corporate Affairs and Construction Community Relations organizations. The Construction HSE staff will be responsible for communicating with WAPCo headquarters, Project engineers, EPC contractors, and government regulatory agencies to ensure that regulatory and impact mitigation commitments are met. The Construction HSE staff will also support WAPCo and Construction line management in terms ofcompliance with regulatory reporting requirements. 49. WAPCo, more specifically the Construction Project Management Team, will engage several EPC contractors during the site preparation and construction phase ofthe Project. EPC contractors will be responsible for performing all work in a manner that is: (i)in compliance with relevant HSE legislation and regulations, including World Bank Safeguard Policies and Guidelines (the most stringent policies and guidelines provide precedence), and with other requirements to which WAPCo subscribes; (ii)in conformance with WAPCo's HSE Management System; (iii)in accordance with the technical and quality specifications of WAPCo; and (iv) in compliance with contractual obligations set forth in the EMP, notably Exhibits F (Appendix 8B5.1, Independent Contractors Health Safety & Environmental Guidelines), K (Appendix 8B5.2, Drug & Alcohol Policy), and N (Appendix 8B5.3, Security Plans). These contractual obligations require that each EPC contractor develop and provide to WAPCo: HSE Policy Statements, Programs, and Management Systems, Organization and Description ofResponsibilities;

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. Indexes of HSE procedures for design ofice(s), fabrication yard(s), construction sites and marine operations; * Outlines for Employee HSE Training Programs; . Waste Management Plans; . Emergency Response/Evacuation Plans; . . Land Transportation Safety Management System; . Potable Water Standards; . Hazardous Materials Management Program, including MSDS tracking; . Industrial Hygiene and Medical Protection Plans; and . Site specific HES Plans covering topics such as sources and transportation ofraw materials, anticipated local content of labor and materials, water supplies, labor camp management, security, etc. 50. Each EPC contractor will be required to provide resources to manage HSE and socioeconomic-related aspects ofthe work to be performed. Depending on the nature and size of the contractor’s effodtasks, the number of WSE personnel will vary, but will not be less than one HSE professional per 50 contracthubcontract employees. The Construction HSE staff will act as the point ofcontact for communication ofHSE issues from government regulatory agencies, and WAPCo through the Construction Project Management Team will be responsible for communicating any pertinent information arising from such discussions to the appropriate contractors.

Monitoring 5 1. PerformanceflmplementationMonitoring. The objective ofthe monitoring approach prescribed by the HSE Management Plan is to check whether the WAPCo operational controls and mitigation measures conform to planned arrangements, including regulatory requirements, and whether they are being properly implemented. This monitoring will be provided by the WAPCo internal HSE audit program. The internal audit program will schedule audits based on the environmental importance ofthe activity concerned and results ofprevious audits. Audit checklists will be prepared based on requirements stipulated in the operational controls. Audits will be performed by qualified staff and results will be provided to WAPCo, WAGP Project Team, and contractor management. Correction ofdeficiencies uncovered by the audits and impacts caused by deficiencies will be mitigated as described in the WAPCo Investigation Procedure. 52. Empirical Monitoring. In addition to performance/implementationmonitoring, certain quantitative, empirical monitoring will occur to ensure that operational controls and mitigation measures are effective andor to make appropriate corrections to controls and measures. Details of the proposed empirical monitoring program are described in the EMP. Examples ofthe parameters to be monitored include: sanitary and other waste effluents for vessels and onshore facilities, noise levels, employment and procurement from surrounding communities, surface water quality, salt water intrusion, encroachment on ROW, vegetation in ROW. Final specifications for both performance and empirical monitoring, including reporting requirements, will be arranged by agreement with the appropriate government regulatory agencies and extemal

- 153 - Annex 13 lenders and will be incorporated into a final WAPCo HSE Compliance Assurance Monitoring Plan. 53. Monitoring Oversight Responsibilities. Generally, it is ass ed that the overall “action party” and responsibilities for day-to-day monitoring will be WAPCo; however, a “layering” or hierarchy ofoversight responsibilities includes the following:

Chapter 8 EMP Responsible Party Frequency of Monitoring Reference Section

Daily EPC contractors and subcontractors 8.4 (Tables 8.1 to 8.9) On-site WAPCo Project team inspectors, Daily 8.3 field representatives, and monitors (Tables 8.1 to 8.9) Weekly-Monthly 8.3 WAPCo Project team HSE staff (Tables 8.1 to 8.9) WMCo will contract out 2 to 3 audits HSE independent 3‘d party auditors 8.6 during the construction period and once every three years thereafter Regulatory agencies 8.5 To be determined ESAP 8.7 Twice a year Bank and MIGA staff 8.2.1 To be determined

Roles, Responsibilities, and Capacity of Government Agencies 54. While WAPCo and its contractors bear the responsibility for implementing the EMP and monitoring its effectiveness, regulatory agencies must oversee compliance with national regulations and permit requirements. The WAGP Treaty, signed and ratified between the four States, and the PAbetween the four States and WAPCo, include the creation ofa regulatory body known as WAGP Authority, reporting to the Committee ofMinisters, composed ofthe relevant Energy Ministers in each State. The WAGP Authority will have a primary regulatory jurisdiction over WAGP, particularly in terms ofhealth and safety issues; however, environmental authorities will have direct oversight ofenvironmental matters as dictated by the environmental laws and regulations in each country. A summary ofall jurisdictions having some potential oversight responsibilities over WAGP is presented in the Ems. 55. Communications between the Construction HSE staff and government regulatory agencies during the site preparation and construction phases ofthe Project will occur through a variety ofmechanisms, including written reports and memos, as well as informal and formal meetings. Meetings will include regularly scheduled sessions as well as additional meetings called on an as-needed basis. At the field level, formal meetings with government regulatory agency representatives will be held as needed to discuss schedulinglplanning issues, current areas ofconcern, and emerging HSE and socioeconomic issues. Field personnel in the cognizant agencies will routinely be invited to join HSE and contractor staff in monitoring activities, especially empirical monitoring, both to foster cooperation and to build capacity through on-the- job training.

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56. At the management level, formal meetings are expected to occur, but on a less frequent basis. Informal meetings and communications will also occur as necessary. With respect to formal meetings, the Construction HSE Manager will meet with government regulatory agency and World Bank Group representatives to review HSE and socioeconomic performance based on the analysis ofinternal HSE audits and field report reports. These meetings can be expected to include discussion ofupcoming work plans and coordination issues and resolution ofproblems that could not be adequately addressed at the field level, 57. During the operations, maintenance, decommissioning, and abandonment phases, communications and interactions between WAPCo and the government regulatory agencies and the World Bank Group will occur at all levels, from the field level to the WAPCo Managing Director level, although the General Manager Operations will be responsible for day-to-day compliance and HSE performance. In general, communications during the operations, maintenance, decommissioning, and abandonment phases will involve WAPCo HSE staff interfacing with appropriate government regulatory agency representatives depending on the issue involved. At the field level, government regulatory agency field representatives will inform appropriate WAPCo representatives if compliance concerns arise. At the management level, regularly scheduled meetings will occur between HSE Managers and the appropriate government regulatory agency representative to review HSE performance, areas ofconcern, and emerging issues. 58. The capacity ofthe various agencies to carry out their responsibilities, and measures to strengthen it, are topics not addressed in specific detail in the EAs and EMPs, primarily because of WAPCo’s concem that conducting critical evaluations ofits host governments’ agencies was not an appropriate role for it to play. Lack ofcapacity is a concern the Project team and indeed some ofthe agencies themselves have noted, not so much for EMP implementation as that is mainly WAPCo’s task, but for compliance monitoring and emergency response. WAPCo has professed to be open to assisting key agencies in building capacity, and the topic has been addressed during the consultation and official review processes in each country Ghana EPA, for example, has set as a condition ofpermit issuance for the pipeline the execution ofa Memorandum ofUnderstanding between WAPCo and the Ghana National Fire Service covering cooperation, technical assistance, and capacity-building. WAPCo has stated in the EMPs that regulatory agencies will be welcome to participate in various monitoring activities, thus providing an opportunity for knowledge transfer as well as improving liaison.

Independent Monitoring and Advisory Support 59. WAPCo will contract with environmental consulting firms to conduct independent audits ofthe implementation ofthe EMPs, at least twice and possibly three times during the 12- to 15- month construction period and once every three years thereafter. The arrangements for these audits will be agreed between WAPCo, the Bank, and the national regulatory agencies. The reports ofthe independent audits will be submitted to the Bank. 60. In addition, in accordance with OP 4.01, WAPCo will provide fixed financial support for a three-person ESAP operating under terms ofreference agreed with the World Bank. Its purpose is to provide advice and consultation to government regulatory agencies on HSE and socioeconomic issues and provide written reports on these efforts and their observations. The expert panel is intended to be an independent panel, essentially a third-party independent review board. Although WAPCo provides certain fimding for the panel, it has virtually no control over

- 155 - Annex 13 how it operates or what it does. For ease ofadministration considering the differing interests of the four States, the World Bank will recruit and appoint the panel, but the expert panel is intended to be relatively independent from the World Bank as well. This way it can provide an independent assessment ofthe success ofsafeguard measures and policies. This panel will function in this capacity for up to seven years. It is expected that most ofthe consultations will occur during the site preparation and construction phase ofthe Project. The panel’s role and frequency ofoversight will be reassessed following construction and the first year of operations. It is suggested that the panel comprise science and policy professionals who are highly regarded by their peers in disciplines that include large marine ecosystems (including fisheries, coastal erosion, and estuarine wetlands), pipeline safety and security, human resettlement planning, and HSE regulatory program design and implementation. The ESAP’s reports will be made public.

Reporting 61. WAPCo will notify the appropriate regulatory authorities as indicated in the EMF and/or provide written reports as follows:

0 Significant Modifications to the EMP;

0 Significant Design, Routing, or Implementation Changes;

0 WAPCo Hydro test Effluent Discharge Work Instruction (Ecotoxicity Testing Plan) and subsequent Waste Water Discharge Controls Plan and Results;

0 Chance Finds;

0 Defined Community or HES Incidents including: o Visible Community Protests and/or Work Stoppages; o Security Incidents for potential or actual personnel-at-risk, sabotage attempts, asset losses and fraudextortion; o Occupational Lost Work Day cases; o Occupational Restricted Duty cases; o Occupational Medical cases; o Emergency Medical Situations (evacuations, hospitalization, etc.); o Fires; o Hazardous Material and Hazardous Waste releases or spills; o Motor Vehicle Incidents; and o Deployment ofExternal Emergency Response Resources.

0 As applicable, Sanitary Waste discharge monitoring results;

0 Complete Nigeria Onshore Blowdown through the Midline Valve Station;

0 Full system blowdown through the Nigeria Compressor Station flare or Takoradi Vent System;

0 Results from Third Party Inspections; and

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Results fiom Third Party Independent Audits. WAPCo will make accessible, or provide upon request the following: Land Acquisition status and other RAP reporting/monitoring requirements; On-site (daily) Inspection and Monitoring Reports (WAPCo and EPC contractors); Internal Audits; Occupational First Aid and Minor Medical cases; Investigations and Root Cause Analysis reports; Reinstatement Assessment Reports; General Modifications to this HSEMP or the WAPCo HSE Management System; Waste Management Plan documentation including: o On-site collection, storage, and inspections; and o Third party transport, recycling and disposal; Training Records; and Completed alignment sheets geospatially referencing operational controls, mitigation and monitoring plans, regulatory requirements, training needs, etc. for the entire pipeline ROW, compressor and R&M facilities, and ancillary operations.

Financial Resources 63. WAPCo is committed to provide resources essential to the implementation of the EMP. The estimated budget to support this commitment during the construction phase is shown in the table immediately following. The major costs associated with HSE management and oversight are for wages, salaries, and benefits. Other significant cost items to be borne by WAPCo via a Construction Management Agreement approved by the WAGP Authority are also shown in the table. In addition, WAGP Construction Contractors have responsibilities for certain HSE costs that are explicitly required per the terms ofthe contract (ie., Waste Management, Medical Resources, Emergency Response).

Human Resources WAPCo Construction Management HSE Staff US$2,900,000 Third Party HSE Inspectors/Monitors 2 5 0,000 Technical Expertise including Safety, Greenhouse Gas, GIS-Remote 5 75,000 Sensing, and Environmental Consultants Personnel and Asset Security Planning and Implementation 150,000 Drug and Alcohol and Contraband Inspection Resources 50,000 Third Party Auditing (2 to 3 Audits during Construction) 50,000 Hydro test Effluent-Ecotoxicity Testing and Operational Controls 100,000

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Component Financial Commitment Development

HSE Program Implementation (Communications, Training, and Personal 115,000 Protective Equipment)

TOTAL US$4,340,000

64. Because activity levels are expected to substantially decrease during the operations, maintenance, decommissioning, and abandonment phases relative to the construction phase, a smaller HSE management and oversight team will be needed. It is anticipated that many ofthe day-to-day, routine HSE field monitoring activities will be incorporated into the job duties ofon- site operations personnel, with two to four WAPCo HSE Professionals coordinating and overseeing this work and any compliance reporting, plus any HSE business planning (budget, staffing), consulting, or analysis activities. As required, operations, maintenance, decommissioning, and abandonment phase HSE professionals will draw on outside expertise to provide assistance in special situations. 65. As was the case during the site preparation and construction phases ofthe Project, the major operations, maintenance, decommissioning, and abandonment phase costs associated with the HSE management and oversight are for wages, salaries and benefits, and other related costs.

HSE Cost Component Annual Financial Commitment

Human Resources WAPCo HSE Staff US$ 512,000 Personnel and Asset Security 295,000 Planning and Implementation (personnel and hardware) Drug and Alcohol Testing Resources 15,000 Third Party Auditing (1 Audit every other year) 25,000

HSE Program Implementation (Communications, Training, and Personal 170,000 Protective Equipment) HSE monitoring and reporting software 50,000 (Initial Purchase $200,000) Annual Management Cost Emergency Response Resources 115,000 Medical Resources 100,000 Waste Management Services 40,000

TOTAL US$ 1,322,000

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Annex 14: Project Preparation and Supervision AFRICA: West African Gas Pipeline Project

Planned ActualiExpected - PCD review 8/7/03 8/7/03 Initial PID to PIC 81 15/03 11/21/03 Initial ISDS to PIC 8/15/03 12/23/03 Appraisal 8/2/04 91 16/04 Negotiations 101 1104 911 8/04 Board approval 11/16/04 11/30/04 Planned date of effectiveness 12/1/04 12/23/04 Planned date of mid-term review 613 0106 6/30/06 Planned closing date 6130109 6/30/09

Key institutions responsible for preparation of the project: Ministries responsible for Energy in Benin, Ghana, Nigeria, and Togo West Afi.ican Gas Pipeline Company (WAPCo) and N-Gas Limited 0 Volta River Authority (VRA) 0 Communaute Electrique du Benin (CEB) Bank staff and consultants who worked on the project included:

scott Sinciair Lead Financial Officer IEF Pankaj Gupta Sr Financial Analyst IEF Thomas Walton Regional Safeguards Coordinator AFTSD Michael Silverman Sr Counsel LEGCF Dan Aronson Consultant AFTEG Erica Hyde Program Assistant AFTEG Ignatius Menezes Consultant AFTEG Lily Wong Program Assistant AFTEG Philippe Benoit Lead Specialist AFTEG V. S. Krishnakumar Lead Procurement Specialist AFTPC Kofi-Boateng Agyen Sr Operations Officer AFTPS Arbi Ben-Achour Sr Social Scientist AFTS 1 Robert Robelus Sr Environmental Assessment Specialist AFTS 1 Mourad Belguedj Lead Energy Specialist COCPO Sascha Djumena Sr Energy Specialist COCPO Marea Eleni Hatziolos Sr Environmental Specialist ENV Charlotte Bingham Lead Environmental Specialist ESDQC Emanuele Santi Communications Associate EXTCD Paul Mitchell Manager EXTCD Karen Hudes Sr Counsel LEGAF Susan Maslen Consultant LEGCF Mohammed Bekhechi Lead Counsel LEGEN

- 159 - Annex 14

MIGA staff and consultants who worked on the project included:

Chemicals Monique Koning Team Leader, New Initiatives & Products MIGOP Nkem Onwuamaegbu Underwriter MIGOP Thomas Vis Sr Risk Management Officer MIGEP Aradhana Kumar-Capoor Sr Counsel MIGLC Harvey Van Veldhuizen Lead Environmental Specialist MIGEP Robert McDonough Sr Environmental Assessment Specialist MIGEP Deniz Baharoglu Sr Social Sector Specialist MIGEP Lorie Henson Program Assistant MIGOP

Peer Reviewers for the project were:

Peer Reviewers: Title Unit Bent Svensson Program Manager COCPO Cecile Ramsay Operations Adviser AFTOS William Porter Consultant ECSIE

Bank funds expended to date on project preparation: 1. Bank resources: US$935,000 2. Trust fhds: 0 3. Total: US$935,000 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$ 50,000 2. Estimated annual supervision cost: US$300,000

- 160- Annex 15

Annex 15: Documents in the Project File AFRICA: West African Gas Pipeline Project

Subject to the Confidentiality Agreement with WApCo: Access Code (draft) CEB Direct Ameement among CEB, WAPCo, and N-Gas (to follow) CEB Gas Purchase Agreement between N-Gas and NNPC/CNL (to follow) CEB Gas Purchase Ameement between N-Gas and NNPC/SPDC/Elf/Agip (to follow) CEB Gas Sales Aereement (Benin) between CEB and N-Gas (to follow) CEB Gas Sales Aaeement (Togo) between CEB and N-Gas (to follow) CEB, Gas Transportation Agreement (Benin) between N-Gas and WAPCo (to follow) CEB Gas Tranmortation Ameement (Togo) between N-Gas and WAPCo (to follow) Construction Contracts between WAPCo and various engineering, procurement, and construction companies (to follow) Credit Suisse First Boston (CSFB) report on financing ELPS Pipeline Integritv Study prepared by Penspen Group (Part 1 only, Part 2 to follow) Environmental ImDact Assessment (EA) prepared by ICF Consulting Group, Inc. Escrow Aprreement among, directly or indirectly, CNL, NNPC, SPDC, VRA, WAPCo, and Standard Chartered Bank Etude de march6 pour l'amrovisionnement en gaz nature1nigkrian au Togo prepared by Tractebel; and similar studies for Benin and Ghana Feasibilitv Study for WAGP prepared by Pipeline Engineering GmbH (PLE) Financial model developed by WAPCo Gas Transportation Agreement between N-Gas and NGC (draft) Government Consent & Support Ameement among Benin, N-Gas, and WAPCo (to follow) Government Consent & Support Ameement among Ghana, N-Gas, and WAPCo (draft) Government Consent & Support Aqeement among Togo, N-Gas, and WAPCo (to follow) Insurance Policies between WAPCo and various insurance providers, and between N-Gas and various insurance providers (to follow) Interconnection Aneement between NGC and WAPCo (draft) Market Report by Purvin & Gertz (March 200 1) and Update (April 2004) Offshore FEED studv being prepared by Project Consulting Services, Inc. Onshore Front End En~neeringrpd Design (FEED) study prepared by Paragon Engineering Services Incorporated Pipeline Development Plan (PDP) prepared by WAPCo Proiect Management Agreement between CNL and WAPCo

- 161 - Annex 15

Subject to the Confidentiality Agreement with WAPCo: Shareholder Ameement among CNL, NNPC, and SPDC (to follow) Shareholder,Ameementamong, directly or indirectly, CNL, NNPC, SPDC, VRA, and WAPCo Takoradi Gas Purchase Ameement between N-Gas and NNPC/CNL (to follow) Takoradi Gas Purchase Ameement between N-Gas and "PC/SPDC/Elf/Agip (draft) Takoradi Gas Sales Ameement between VRA and N-Gas (draft) Takoradi Gas Transportation Agreement between N-Gas and WAPCo (draft) Technical Services Ameement between WAPCo and [CNL] (to follow) Trust Accounts & Security Deed among N-Gas, NGC, NNPC, CNL, SPDC, Elf, Agip, WAPCo, and CEB (to follow) Trust Accounts & Security Deed among N-Gas, NGC, NNPC, CNL, SPDC, Elf, Agip, WAPCo, and VRA (draft) VRA Direct Ameement among VRA, WAPCo, and N-Gas (draft)

Not subject to the Confidentiality Agreement with WAPCo: [political Risk Guarantee] between ZuricldOPIC and WAPCo (to follow) Contract of Guarantee for Equity Investments between WAPCo and MIGA (to follow) Economic and Financial Assessment prepared by IPA Energy Consulting (in process) Environmental ImDact Assessments (5) prepared by ICF Consulting Group Gas Market Promotions Strategies Study prepared by Nexant Gas Master Plan for Nigeria by IHS EnergyPetroconsultants, and Gas Stratem for Nigeria by IPA Energy Consulting Guarantee Agreement between WAPCo and IDA (draft) Proiect Agreement between N-Gas and IDA (draft) Proiect Ameement between WAPCo and IDA (draft) Indemnity Ameement between Ghana and IDA (draft) Integrated Safermards Data Sheet International Proiect Ameement among Benin, Ghana, Nigeria, Togo, and WAPCo Proiect Concept Document Proiect Information Document Resettlement Action Plans (4) prepared by ICF Consulting Group Treaty among Benin, Ghana, Nigeria, and Togo

- 162 - Annex 16

Annex 16: Statement of Loans and Credits GHANA: West African Gas Pipeline Project STATEMENT OF IDA'S Held and Disbursed Portfolio In Millions ofUS Dollars

~i~i~~~ountin US$ Millions c-l-"ll _II. -. II. P~~~~!o____Fv_Purperso__.__"x - ^_II_I_._"" 1- " ~ IBRD--llll-llll"__l_". IDR SF GEL _ca?E!.- I?" POT1 l5T 2004 GH brd rlminisbmtiin 0.m 20.51 0.m 0.00 0.m PO60620 2004 Educ. %a&. RDjad 0.m 78.00 0.80 0.03 0.a 73.62 -2.96 0 .oo PO82373 2004 OH 2nd Urb.En~Aronracentdhrikatbn 0. 82.00 0.80 0.W 0.130 60.38 0.m 0 .oo POP3643 2003 2nd HeelA Sed. Pmg. Suppxt 0.m m90 0.80 0.m 0.m 68.91 -1 A? 0.00 POT13 2003 Partnsrstdps wbTrsditincd Ikrthccitias 0. 0.00 0.80 0. 0.W 4.40 1.18 0 .oo PO675 2002 GhanaGEF- NDrlham Gilwnna 0. 0.00 0.m 7. Om 6.62 3.01 0.00 PO60623 2002 CH ROAD SECTBR DWELOPklENT PRaOMU 0. 220.00 0.W 0. 0.m 102.38 66.10 0 .oo POTI 6 t 7 2001 AIDS Respmar hi.(GBRNND] oar, zmo 0.00 0. 0.03 11.00 -16.E 0.00 PO00968 2001 Ghana.AeRIC SEWICES 0.0 m.oa 0.m 0.m Om 48.05 63.27 0 .DO P069dES 2008 Chana:RWZPJ- FlNbMlclAL SERVICES PRWEC 0. 6.13 0.02 0.m 0.W 3.47 19.74 O.QO PO5Oti18 2000 WATER II 0.m 25.00 0.m 0.03 0.m 5.2s 6.87 -2.33 PO40550 l88D Carnmunily-basd Pm. Rad. 0.a 5.00 0.m 1.w 1.m 0.25 POom70 om 68.50 0.02 23.38 21.03 0 .oo PO00074 0.m 32.00 0.03 21.11 16.18 10.16 ~046188 1888 GhsnwFBREm ElODWERSllY 0.m o.ao 0.m 6.06 0.m 0.00 Pooao28 1985 GH "rd pwerVII) 0.m 175.60 0.00 lB.48 21.05 20.34

Total: 0.00 a.04 0.W -16.80 0.08 568.31 '1Eld.M 28A

STATEMENT OF IFC's Held and Disbursed Portfolio In Millions ofUS Dollars Held Disbursed

FYApproval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1990/91/96 AAIL 0 0 3.26 0 0 0 3.26 0 1993 AEF Afariwaa 0.16 0 0 0 0.16 0 0 0 1995 AEF Antelope Co. 0.4 0 0 0 0.4 0 0 0 2001 AEF GPPI 1.17 0 0 0 1.17 0 0 0 1998 AEF NCS 0 0 0.53 0 0 0 OS3 0 1997 AEF PTS 0 0 0.3 1 0 0 0 0.3 1 0 1999 AEF PharmaCare 0.0s 0 0 0 0.05 0 0 0 1994 AEF Shangri-la 0.93 0 0 0 0.93 0 0 0 1996 AEF Tacks Farms 0.43 0 0 0 0.43 0 0 0 1989 Cont Acceptances 0 0.88 0 0 0 0.88 0 0 2001 Diamondcement 4.25 1 0 0 4.25 1 0 0 2000 ELAC 0 0.1 0 0 0 0.1 0 0 1991 GHANAL 0 0.44 0 0 0 0.44 0 0 2001 MFISSLC 0 0.49 0 0 0 0.49 0 0

Total Portfolio: 1.39 2.9 1 4.1 0 7.39 2.91 4.1 0

Approvals Pending Commitment Loan Equity Quasi Partic 2004 BP Ghana 0 2 0 0 2004 Japan Motors 3.8 0 0 0 2004 Takoradi II 60 0 0 0

Total Pending Commitment: 63.8 2 0 0 - 163 - Annex 16

Statement of MIGA'S Exposure including this and other projects approved by the Board in Ghana as of September 30,2004

1. MIGA'S EXPOSURE (CONTINGENT LIABILITY) Transfer War & Civil Breach of US$ million Restriction Expropriation Disturbance Contract Maximum Gross Exposure 0.0 0.0 0.0 75.0 75.0 % oftotal portfolio 0.0 0.0 0.0 7.4 1.4 Net Exposure 0.0 0.0 0.0 67.5 67.5 % oftotal portfolio 0.0 0.0 0.0 11.2 2.0 CUP 0.0 0.0 0.0 0.0 0.0 Current Amount* 0.0 0.0 0.0 0.0 0.0 * On a gross basis

2. NET EXPOSURE BY SECTOR Ghana MIGA Worldwide US$ million YO US$ million YO Agribusiness 0.0 0.0 68.4 2.1 Construction 0.0 0.0 0.0 0.0 Financial 0.0 0.0 1,144.9 34.3 General Banking 0.0 0.0 1,064.1 31.9 Investment Fund 0.0 0.0 0.0 0.0 Leasing 0.0 0.0 68.4 2.1 Mortgage 0.0 0.0 12.3 0.4 Infrastructure 0.0 0.0 1,185.7 35.6 Electric, Gas & Sanitary Services 0.0 0.0 37.0 1.1 Power 0.0 0.0 610.7 18.3 Telecommunication 0.0 0.0 254.3 7.6 Transportation 0.0 0.0 163.2 4.9 Water Supply 0.0 0.0 112.4 3.4 Water Transportation 0.0 0.0 8.3 0.2 Manufacturing 0.0 0.0 343.3 10.3 Mining 0.0 0.0 108.6 3.3 Oil and Gas 67.5 00.0 201.4 6.0 Services 0.0 0.0 118.5 3.6 Tourism 0.0 0.0 162.2 4.9

Total 67.5 00.0 3,333.1 00.0

- 164- Annex 17

Annex 17: Country at a Glance AFRICA: West African Gas Pipeline Project Ghana at a glance

-2 "1 f3 28 2.3

57.3 b1,8 359 62 17.1 252 3s 9.3 92 36.1 37.8 389 898 a6.6 78.7 7 9.1 1 I 6.S 12.1 15 b 11.1 W*'ODI rq*ILODC 3s 28.8 70 5 67.1 I 1982-32 199242 200 1 2002

2.1 3B 3 1 1.1 7.1 3.7 6.3 7.3 12 fb" an 7.3 1s 1.3 1.1 L7 12 1 .b 10.3 1.5 IS ien -10.7 7.1 19 -1 .l 10.1 7.1 9.1 2n 66 Annex 17

1982 1992 a01 20cE

22 3 10 .D 330 159 27.9 11.2 348 20 2

80 18.5 20 ,? 22 3 -32 4.2 29 30 6.1 -5.4 .45

1982 t992 2001 20@

988 2 380 2.881 302 503 53 114 215 265 t- T I 1586 3781 4.041 38 182 257 2% 277 85 78 81 103 99 # 83 79 8s

1982 1992 ZOO1 20a? 71 1 1,105 2,433 2,80? 813 1846 3.429 3.862 -fa3 -740 895 -1 055 -89 - 108 -1 78 -1% *1 255 787 750 -192 -592 -388 -4hx) 191 487 465 598 1 124 -79 -fa 1

431 678 21 .L 437.1 r,i7ns 7 932.7

1982 1992 PO1 ma2 1.434 4508 8 758 131 87 6 125 1,831 3.172 111 319 316 18 21 4 1 14 59

30 218 305 58 309 289 14 46 154 18 23 89 0 0 0 DES46 c:a*

0 375 433 24 170 193 8 15 37 16 158 158 9 20 25 7 136 130

- 166 - Annex 17

Dedopmant dimond'

7

- 167 - Annex 17

21901 am2

4.0 3.3 3.1 a .a

17.3 ll.B 4.0 9.9 -2.8 4.9 I

2011 2CQZ

484 &16 191 a201

ssr Tlb aQ2 21J 120 12D $71 sale, 101 w 118 114 817 79

2na 1 2m2

s2 Z38 b SiIB a389 90 -2 1 -24 1$E 131 -74 '54 "1D -28

733.i2 LI"Jlr.0

2cro 1 26332

1,m1 1,WE D 0 S30 s54 F"4 60 a9 0 D 8 J

132 91 41 D D 13 1 D a: 4k34

18 41 4B n 4 9 44 20 4 4 a0 18

- 168 - Annex 17

I .-

- 169- Annex 17

19 19132 zoo 1

lkl.8 -?.a

.1 ME4 TI 1B.7 7.1 -35

2691) 1 Erpnrtmd impart lsrrrlrr {US$ millg lT.W8 1W.5?4 98% XI@ 88 13.631 I 4.W0 2.11 J

148 (I& 178

P69lDl

18,@&3 17,041 1 ,E102 -2,982 1.m3 1.185 -170 -1.MJ

10,423 111.1

EXTERNU DEW and RESOURCE FLciWS 19 1sa2 200 1

91,418 1.337 G.?l 3.&M as 13

1m 4M -1.m4 -184 l.T@$O B 0 0

336 2T 21 Ei "(BED a3 -2? 1

- 170- Annex 17

1saz 1692 rrstr a00z

27Q 36.3 a4 m.1 PSA 238 21.3 218 'PA 118 g.7 B3 a.9 41D B.4 as3 88.1 a1.1 w.1 1B.3 1B.l 13.4 gl.S 10.0 68.7 962 4Q.P 6Q.l 1982292 189242 aOnl 21102 I I 65 98 4.e 9.a 28 43 0.2 5.1 48 E3 5.s 0.7 -0.1 1.9 2.0 6.1 6.4 8.2 -QB -0.1 -1.3 -9,s Q.1 23 E.? 2.5 7 .? 1s 62 6.5 ?is

- 171 - Annex 17

19a a80 1 nm2

9.9 3.5 P.1 3-4 1 .&

ZBBB 1332 14.G B.1 0.0 -0.4 -2.7 -2% -2.9

19 2001 2wz

3 =!a mar $7 a2 52 a0 llEg 'p.3 7D 4m 542 ED7 ISa 192 It34 64 g3 79 a9 102 194 ao i.6 a1 QSl 'la0

19 $001 PmP

4w. 41 1 $91 U i8.M @? e%z -1 si 21Bi a -m -24 -2E 43 31 44

-&p -1Q 12% -381 2D 1 .la .

3ma 799.0 .O

1 si32 200 1 0m2

SB1 1'48Ei 3 D D Bl E F;32 a5 91 11 1 D a 0 1E 0

11 3.3 0 54 21 12 43 0 (9 46 BT 0 0 0 (9

5 a 0 11 12 T Q 1D !3 11 1 jt 1 E 0 1Q -4 7

- 172- I r-tl I