ContourGlobal’s methane extraction and generation project on Lake Kivu, Rwanda, stretches the definition of essential infrastructure. It may, though the stress should be on may, prevent an ecological and human catastrophe that would claim thousands of lives around the lake. But the lake’s unique chemistry means that the technical, and to a lesser extent financial lessons, can only be applied to future projects on lake Kivu, and nowhere else.

Lake Kivu is one of three exploding lakes, whose lake-beds contain huge quantities of carbon dioxide (the other two are in Cameroon) and the only one that also contains large quantities of methane. The presence of the gases is thought to be the result of the interaction between micro-organisms and the volcanic rock underneath the lakes.

The lakes are given to large-scale and sudden releases of gases, which could at the very least suffocate much of the population living near a lake, and in the case of Kivu’s flammable deposits, cause damage to flora and infrastructure. For most of the past decade, the Rwandan government has looked to exploit these deposits, although it is only as the country gained a reputation as a stable destination for foreign investment that the project began to take shape.

The Rwandan government, through the Rwanda Energy, Water and Sanitation Authority, signed a 25-year power purchase and concession agreement with ContourGlobal, for a 100MW project, of which a 25MW first phase has been financed and is under construction. The agreement benefits from a sovereign guarantee, and the project’s ability to reduce methane levels in the lake serves as a powerful incentive to the government to keep current on its obligations.

The project involves the installation of a gas gathering and processing system on a barge that will be moved into position close to the middle of the lake, construction of a pipeline to carry this gas to the shore, and then construction of a power plant at the shore that will burn this gas and turn it into electricity. In common with its neighbours, Rwanda will be able to diversify its generating mix away from oil and hydro capacity. Unlike its neighbours, it will not have to pay for its fuel.

The power purchase agreement features little dispatch or fuel risk, however, with Rwanda retaining the risk that the lake does not contain reserves capable of fueling the project. This is unlikely however, because the lake contains an estimated methane resource of up to 65 billion cubic metres, of which up to 45 billion may be easily recoverable. The reserves lie at depths of between 120m and 365m and Contour’s project is at the shallower end of that range.

But lenders still had to be comfortable that the gas extraction and generation technology would work together properly, since the project lacks a single overall engineering, procurement and construction contract. The 64 by 24-metre barge contains gas extraction and processing equipment, with South Africa’s Civicon as contractor. The barge will be stationed 13km from the shore, and lift, separate and process the gas dissolved in the lake. The technology has some equivalents in oil and gas processing, though it has never been used in this setting.

A pipeline will carry the gas to a 25MW turbine in Kibuye, on the shore of the lake, where Wartsila will build a power plant. The Wartsila technology is proven, although lenders will need to be comfortable that it can run on the output of the extraction plant. The barge has already been launched, and work on both the onshore and lake components is underway.

The unusual circumstances of KivuWatt dim the usual concerns about offtake counterparty risk. Given the probable role of the project in reducing the risk of a catastrophic overturn, the cost of power from the project is just one of the factors that the Rwandan government has to take into account in evaluating its utility.

Rwanda lacks a framework for independent power projects, but KivuWatt, if it performs as planned, will be less seasonal than hydro, and less expensive to run than diesel. Still, given Rwanda’s harrowing recent history, and earlier disputes between the government and a previous developer of a methane extraction project on the lake, the sponsor’s decision to cover its equity with political risk insurance looks sound.

The construction-plus-13-year financing comes from the African Development Bank, with a $25 million loan, the Emerging Africa Infrastructure Fund, also with $25 million, and the Netherlands’ FMO, which provided a $41.5 million commitment, of which it sold down $10 million to Belgium’s BIO. The debt complements $50.5 million in sponsor equity, which benefits from political risk insurance from MIGA.

The KivuWatt deal mainly serves as a template for follow-up projects on the same lake, of which there could be many. In theory biogas, landfill gas, or even coal-bed methane projects in the region might learn something from the exercise, but the technology risks will be vastly different. Rwanda may decide to broaden the private sector’s involvement in its infrastructure, and a positive experience with KivuWatt would do much to make that happen.

ContourGlobal KivuWatt Ltd
STATUS: Signed 29 August 2011, funded December 2011
TOTAL PROJECT COST: $142 million
DESCRIPTION: 25MW phase 1 of a lakebed methane-to-power project ␣at Lake Kivu, Rwanda
OFFTAKER: Rwanda Energy, Water and Sanitation Authority
SPONSOR: ContourGlobal
EQUITY: $50.5 million
DEBT: $91.5 million
PROVIDERS: African Development Bank, Emerging Africa Infrastructure Fund, FMO, BIO
EQUITY PRI PROVIDER: Miga
INDEPENDENT ENGINEER: Royal Haskoning
OWNER’S ENGINEER: IV-AGA
LENDERS’ INSURANCE ADVISER: INDECS
BORROWER’S INSURANCE ADVISER: Moore McNeill
BORROWER ENVIRONMENTAL ADVISERS: Sinclair Knight Merz and Exponent
MODEL AUDITOR: Mazars
LENDER LEGAL: Clifford Chance
SPONSOR LEGAL: Norton Rose