Assessment of Profitability and Impact of Risked Variables on the Viability of Ajaokuta-Kaduna-Kano Gas Pipeline

Abstract:

The Nigeria Gas Master Plan (NGMP) was developed in 2008 as a result of the Country’s resolve to become a major player in the international gas market as well as to lay a solid framework for gas infrastructure development within the domestic market. The full liberalization of the gas industry translates to clear definition of roles of the different stakeholders, viz. government, institutional financiers, investors and others, in the industry. In line with the core mandate of infrastructure development and market expansion of the master plan, pipeline is identified as a major and significant infrastructure for natural gas transportation and distribution. The South-North pipeline, i.e., Ajaokuta-Kaduna-Kano (AKK) pipeline option, requires large upfront investment running into billions of dollars and is also characterized by long lead time as many years may elapse before revenues begin to accrue. Because of the large upfront expenditure required for this project, it is imperative that investors are well informed of the risk to which their capital is exposed. This research seeks to evaluate using appropriate techniques for the economic justification of AKK. In assessing the economics of the AKK pipeline option, the discounted cash flow analysis (DCF) was employed using the following project profit indices viz; NPV, IRR and pay back. Initial investment cost (IIC) comprises cost of constructing pipeline and cost of compressor stations. Based on industry practice, operations and maintenance costs were assumed to be 2% of IIC, debt ratio is 60:40 and pipeline capacity was estimated using the Weymouth formula as provided in pipeline’s rule of thumb. The cost of equity and cost of debt were accounted for using average weighted cost of capital. Finally, a probabilistic analysis using “@risk” was run on key inputs to test their sensitivities. AKK was estimated to have an annual gas delivery of 2.3bcm, investment cost of $2.009 billion and a discount rate of 15% was used. The pipeline was found to be viable, with an NPV of $484 Million, IRR of 17.7%, payback period of 7 years for forty years of operation. The pipeline cash flow model was sensitive to discount rate, CAPEX and Pipeline capacity. The Ajaokuta- Kaduna-Kano pipeline has a positive NPV of approximately $484.40 million for the period of forty years of operation. This results in an average of about $12.11 million present value of operating net cash flow per annum which means that the business cash flow can meet up with all the operating costs and still return a positive net profit. Keywords: Profitability, Risked variables, Viability, AKK.