Government has effectively closed the curtain on the much-talked about Kudu Gas to Power Project after Finance Minister, Calle Schlettwein, said it should be abandoned.
The project is part of Namibia’s plans to reduce electricity import dependence, but it has been delayed for almost 25 years.
In an interview with the Windhoek Observer on Thursday, Schlettwein said the government is not willing to take on the risk of a project that it considers to be not financially viable.
According to Schlettwein, the Kudu Gas to power project is not affordable both from a capital outlay and tariff point of view.
He said developing Kudu means the financially-hamstrung government will have to close the door on other potential alternative sources of energy.
“We have told NamPower to stop the project,” the finance minister said.
“The financial risk is too big so we will not concede with funding it or accept financial risk. The much better option is for us to diversify our basket of the fuel that we use for power and concentrate on alternative sources.
“The tariffs that would be required to recoup the capital are far higher than what we can get from many other alternatives. The principal concept of the Kudu Gas to Power Project is not viable and it should be abandoned.”
As it stands, the project operators would have to charge tariffs of N$2.70 per kilowatt instead of N$1 to recoup their capital investment.
“It is far too high, it is a wrong project, and they must do something about it. It remains a big potential - a raw material that can be used - but the gas to power concept is not viable for Namibia,” Schlettwein said.
The minister’s comment comes at a time when NamPower insists that there is huge appetite from international funding institutions for both debt and equity funding in the project.
In an interview with the Windhoek Observer, the power utility’s Managing Director, Kahenge Haulofu, said the project requires government guarantees to provide assurances to investors and financiers that it is viable.
“Any large project of this magnitude in a regulated industry requires government guarantees to give comfort to investors and financiers alike,” Haulofu said.
He said refusal by government to give guarantees is effectively killing the project.
“Obtaining the necessary government guarantees could be the biggest challenge that will further delay the implementation of the project,” Haulofu said.
Haulofu added that Kudu is in the final phase of project preparation with several agreements almost nearing finalisation.
The agreements include gas sales, power purchase and transmission connection agreements.
“The project will be presented to the relevant structures for Final Investment Decision (FID) once all preparation and packaging activities both for the upstream and downstream are completed. This is envisioned to be in the fourth quarter of 2018,” Haulofu said.
NamPower announced in April that the planned Kudu Power Station would be down-sized from 850 megawatt (MW) to 442.5 MW after off-take agreements with South Africa’s power utility Eskom and Zambia’s Copperbelt Energy Corporation failed to materialize.
Last month, Mines Minister Tom Alweendo also said that he does not think that the project is viable.
Alweendo said he was not sure that the project would take off after years of delays due to the related export agreements.
In a report released in 2015, the finance ministry reiterated its reluctance to be the guarantor of the Kudu Gas Project, saying that it was too risky.
The ministry estimated that government would have to spend more than N$10 billion in cash and provide a further N$32 billion in guarantees between 2016 and 2020 if it opts for the Kudu Gas project.
According to the report, the government was to end up making a financial commitment of N$42 billion for Kudu between 2016 and 2020.
On top of that direct financial injection, government is also expected to grant guarantees worth N$22 billion over the lifetime of the power plant.
This means that government would have to make an immediate payment as the guarantor should the borrower fail to meet obligations.
Another red flag raised by the finance ministry in the report is that guarantees to Kudu will significantly exceed the limits set out in the government's sovereign debt management plan leaving no room for government to issue further guarantees to other state owned enterprises to undertake projects of national importance.
The Kudu gas to power project has suffered several setbacks over the years.
In 2014, Ireland's Tullow Oil abruptly withdrew from the project—where it was the operator—leaving the government without a downstream partner.
Tullow, along with Japan's Itochu, which also pulled out, had a combined 46 percent interest in the Kudu offshore gas field license.
The decision to withdraw came despite the government pledging N$4.3 billion to fund the continued participation by the state-owned National Petroleum Corporation of Namibia (Namcor), which had a 54 percent stake.
Tullow, which had completed front-end engineering design (FEED) work on developing an offshore gas production facility and pipeline connections, had been expected to make a final investment decision on the project by end-2014.
However, following a strategic review, the firm said that, although Kudu was "an excellent project for Namibia", other projects currently ranked higher in its capital allocation process.
The government responded by inviting Chinese firms to take up the Tullow/Itochu interest.