Tanzania has joined Kenya and Uganda in the search for a least cost option for a pipeline that will take crude oil from East Africa to export markets and allow its natural gas to be exported to neighbouring countries.
After fact-finding missions last week to the competing ports of Lamu, Mombasa and Tanga, technical teams went back to the drawing board to look for an optimum solution that also ensures the strategic interests of the three countries are accommodated.
Their findings are expected to form the basis of discussions first at a meeting between Tanzania and Kenya to be held in Nairobi on Tuesday, March 29, where Tanzania has been invited after it complained of having been left out of the talks led by President Uhuru Kenyatta and President Yoweri Museveni in Nairobi last Tuesday.
The findings will also inform discussions at a follow-up meeting between Uhuru and Museveni in a week’s time in which Tanzania will also participate.
Variations of the rival lines – Hoima-Lokichar-Lamu and Hoima-Tanga -- are in consideration but the accommodation of a parallel line to enable Tanzania sell its natural gas to the rest of East Africa is the major addition to the previous proposals.
Kenya undeterred by new Tanga pipeline deal
“Uganda raised the concern by Tanzania that the gas pipeline was not considered in the oil pipeline route. The issue has been taken in and Kenya and Uganda are looking into the construction of a gas pipeline from Tanga alongside the route that will be agreed upon by Kenya and Uganda,” said Kenya’s Energy and Petroleum Principal Secretary Andrew Kamau.
“Both Uganda and Kenya are in need of gas and the gas through the two countries from Tanzania will be beneficial. However this will depend on Tanzania’s decision,” he added.
The tweaks to the rival lines that are under consideration include Kenya abandoning the quest for a pipeline to Lamu and instead linking the Turkana oil fields to Hoima in Uganda from where crude oil will flow into the Uganda pipeline enroute to Tanga.
There is also the option of another pipeline linking Hoima to Nakuru in Kenya, where a branch line will connect from Lokichar, enroute to Mombasa. These options will involve Kenya dropping its quest to have a pipeline terminating at Lamu that would have opened up northern Kenya for development.
Kenya and Uganda had until late last year agreed to construct a pipeline from Hoima to Lokichar enroute to Lamu but fears of insecurity in the region bordering to Somalia and huge compensation costs for privately owned land, saw Uganda explore the southern route through Tanzania to Tanga.
“Kenya is East Africa’s most terror-affected country and Total [France] is not ready to pay ransoms for its workers if they are kidnapped by Al Shaabab,” said a Uganda official who declined to be named. Total has committed to funding the Hoima-Tanga line at a cost of $4 billion.
Tanzania has also poured cold water on the viability of the northern Kenya pipeline on the same grounds as Uganda, with its Minister for Energy and Minerals Sospeter Muhongo saying Tanga was closer to the Uganda oilfields than Lamu. He also said construction would be cheaper along the route because of the gentle terrain compared with the escarpments in Kenya.
The Tanga route proposal, however, is already raising eyebrows among environmentalists. Serengeti Watch, a non-governmental organisation, said it will institute legal action over the project.
“The pipeline and accompanying road will be a barrier for migrating wildlife and a high-risk area for oil spills. Any attempt to construct such a pipeline across the Serengeti would immediately revive legal action in the East African Court of Justice,” said Serengeti Watch director Berry Blanton.
The NGO last year won a court case stopping Tanzania from building a highway through the park. Mr Blanton added that the possibility of oil spills will be higher because of seismic activity in the Serengeti.
Kenya’s Energy PS Mr Kamau said insecurity was no longer a sticking point. “These are no longer issues for discussion for the construction of the joint pipeline and the two presidents, Uhuru and Museveni, have agreed that these are government issues that should not hinder the pipeline construction,” he said.
Total had given examples of pipelines in Yemen and Libya that are secured 24 hours, making them more expensive to run. Kenyan officials rejected the comparison saying those were cases of groups involved in civil war sabotaging infrastructure unlike terrorists who target human beings.
Mr Kamau said Kenya and Uganda agreed during the Nairobi meetings and after the site visits that the least-cost solution for construction of the pipeline remained the most desirable option.
“A regional pipeline offers the greatest synergy and lowest tariff for both Kenya and Uganda,” he said. Uganda has set itself an April 21 deadline to decide on the pipeline route so that financing arrangements can be put in place for the construction to start.
The cost: Gains and losses
A report tabled at the meeting and seen by The EastAfrican shows that East Africa stands to lose about $6.6 billion in revenue if Kenya and Uganda fail to agree on a joint pipeline.
Over the 25-year life of the oilfields, the report shows that Kenya will lose $3.32 billion and Uganda $3.2 billion in revenues. The losses will arise from increases in the tariff by $4.07 per barrel ($300 million per year) in the case of Uganda and $6.96 per barrel ($250 million annually) in the case of Kenya if they operate separate pipelines.
Through the northern route, Uganda will pay $12.56 per barrel of oil and Kenya $7.04 per barrel of oil moved to Lamu.
Moving the oil through Hoima-Nakuru-Mombasa will cost Uganda $11.79 per barrel and Kenya $9.29 per barrel via Lokichar-Nakuru-Mombasa.
Through Lokichar-Hoima-Tanga, Kenya will pay $18.18 per barrel and Uganda $11.19 per barrel. Were the two countries to go it alone, Kenya will pay $14 per barrel (Lokichar-Lamu) and Uganda $15.86 per barrel (Hoima-Tanga).
“If Kenya and Uganda decide not to build a joint pipeline, each will bear the cost of constructing individual facilities. Tanzania will earn port fees by offering Uganda a pipeline route. Tanzania has not discovered oil,” said Eduardo Associates managing consultant Patrick Obath.
The 1544km Hoima-Tanga route favoured by Total will cost $5.5 billion, the central route through Kenya favoured by Uganda will cost $4.4 billion and the northern route preferred by UK’s Tullow Oil and Kenya will cost $4.2 billion.
Total has committed to supporting construction of a refinery at Hoima with $3.8 billion funding (to complement Uganda’s 40 per cent contribution) and the Tanga pipeline. This consideration is expected to have a big influence on the decision Uganda makes because under the northern route, each country was to fund its own section.
“Uganda is having financing challenges. Lamu port has not been built and the entire Lapsset project is behind schedule. It is practically impossible for Kenya to complete construction of the port by 2018. The port of Tanga has already been built,” the Uganda official said.
President Kenyatta is scheduled to visit Europe between April 4 and 6 where the pipeline is expected to feature in discussions with French President Francois Hollande. After Paris, Uhuru is expected to discuss matters of insecurity with German Chancellor Angela Merkel.
Kenya has already started discussions with the World Bank’s IFC and British and Chinese oil companies on financing the joint pipeline, with Uganda, which is expected to have an initial throughput of 300,000 barrels per day (200,000 barrels for Uganda and 100,000 barrels for Kenya). This will earn the pipeline companies $1.66 billion a year, which will be shared between the countries according to throughput.
An independent analyst in Tanzania, John Magafu, said the unfolding events reflected the changing political scenario in the region especially after the isolation of Burundi and Tanzania under the Northern Corridor initiatives between Kenya, Rwanda and Uganda dubbed the Coalition of the Willing.
“This coalition relied on the distrust of now retired Tanzanian president Jakaya Kikwete who was considered unreliable. Tanzania’s new president, Dr John Magufuli, has given Tanzania a completely new face. Members of the Coalition of the Willing Museveni and Paul Kagame of Rwanda, seem to give the impression that they find Dr Magufuli a reliable leader they can do business with,” Mr Magafu said.
Prof Muhongo, Ugandan Energy and Minerals Development Minister Irene Muloni and a representative of Total signed a memorandum of understanding and a project implementation plan for the Tanga route during the EAC Heads of State Summit in Arusha earlier in March.
Decision on the crude oil pipeline route is vital for Tullow Oil Plc, Africa Oil Corporation and Marserk Oil to make final investment decisions of South Lokichar basin.
The same applies to Tullow, Total and China National Offshore Oil Corporation (CNOOC) who are working oilfields in the Albertine basin in Uganda.
Kenya and Uganda require at least $10 million to be invested before commercial production of inland crude oil discoveries starts. Upstream development has stalled due to lack of progress on the export route for inland discoveries.
London-based consulting firm GlobalData said the impact on economic development could be great if the discoveries were commercialised, with the governments’ share of revenues expected to be about 30 to 50 per cent.
“Discoveries in these countries are above the volume threshold for commercial development; however, without an economical export route, inland discoveries will remain commercially unviable at today’s prices,” said GlobalData’s upstream analyst Jonathan Markham.
Capital expenditure on upstream projects over the next 10 years is forecast at about $7 billion in Uganda and $3 billion in Kenya once exploration firms that have made discoveries are allowed to move to production.