Oil pipeline: Which way for Uganda?

The long-awaited pronouncement on a deal between Uganda and Tanzania to develop a crude export pipeline via the Southern route came on Tuesday last week. Not surprising though, the development did not draw a lot of excitement

Monday March 7 2016

An expert watches a flaring experiment at one

An expert watches a flaring experiment at one of the wells in the Albertine Graben. Government is looking to establish a refinery as well as a pipeline to transport oil for trade. FILE PHOTO 


Kampala. The long-awaited pronouncement on a deal between Uganda and Tanzania to develop a crude export pipeline via the Southern route came on Tuesday last week. Not surprising though, the development did not draw a lot of excitement.
At least three senior technical people in the oil industry contacted on the matter, each referred to the other, understandably seeming to decline to comment on a decision of the presidency.
But they had a point. Last August, the presidents of Uganda and Kenya meeting at State House, Entebbe, reached a similar agreement to develop a pipeline that would snake from Uganda’s Albertine Graben in south western Uganda via the north East en route to the Lokichar basin; where Kenya is currently in the exploration stage for cumulative commercial oil quantities.
President Museveni and his Kenyan counterpart inked a Memorandum of Understanding (MoU) to that effect. There was a problem though. In the communiqué issued by Uganda, there were four clauses that had been sneaked in, which the Kenyan technocrats fervently contested.
The clauses, for the pipeline to go to Kenya, its government had to guarantee upfront financing for the project and other supporting infrastructure required; guarantee transit fees/tariffs not higher than any of the alternative routes; guarantee no delays, and most crucially guarantee security in the security restless Turkana sub region where the Lokichar basin is located.
This left the Kenyan deal hanging. The government technical people, still, were lukewarm in discussing a decision announced by the President.
Due to the sensitivity of the matter, one official, however, said much as the Kenyan route was the most “preferred politically, discussions with Tanzania for the Southern route had been kick started.
Indeed, two months later, Uganda’s technical team led by the permanent secretary in the Energy ministry, Mr Kabagambe-Kaliisa and his Tanzanian counterpart Ngosi Mwihava signed an MoU for a crude export pipeline framework.
At the signing of the MoU in October, Mr Kaliisa said the framework would enable the parties to continue working together to fine-tune studies and fieldwork on the Tanga route in order to further appraise the merits of a crude export pipeline option through Tanzania with a view to achieving the lowest unit transportation cost for crude oil from Uganda. This time around, however, one of the three international oil companies (IOCs) licenced in Uganda, Total E&P, was party to the framework.
Mr Ernest Rubondo, the executive director Petroleum Directorate, the government’s technical arm overseeing the oil sector, was not readily availbale for comment as he was reported away in Arusha for the East African Community (EAC) summit.

The Kenya-Tanzania conundrum
Uganda is good neighbours with both Kenya and Tanzania. However, comparatively, Uganda is very good neighbours with Kenya.
More than 90 per cent of Uganda’s cargo, for example, goes through Mombasa port while only two per cent goes through the Dar-es-Salaam port, according to the Ministry of Trade statistics.
Kenya and Uganda [including Rwanda] under the ‘Coalition of the Willing’ a loose outfit of the EAC, have collaborated on several infrastructural projects among others, prominently the multi-billion dollar Standard Gauge Railway.
The presidents of the three countries have held many bilateral meetings in which they had agreed on 14 key regional projects without the participation of Tanzania.
Therefore, when the government and IOCs signed an MoU in February 2014 that set down a framework for a pipeline refinery and development of oil fields, the odds were that the pipeline was going to Kenya.
With the brewing oil bonanza in South Sudan, Kenya and Uganda, later that year, the Japanese consulting and engineering firm Toyota Tsusho snagged tender for a feasibility and engineering study of a 1,300 km pipeline running from Hoima via Lokichar to Lamu Port at the Indian Ocean coast; where Kenya, Ethiopia and South Sudan had conceived the ambitious LAPSETT infrastructure corridor.
Rwanda, similarly, came on board and expressed interest in investing in $4.5 billion (Shs15 trillion) Uganda-Kenya pipeline. Earlier on, Uganda had been looking at a pipeline route from Hoima-Eldoret to Mombasa but in April last year, Toyota presented a study to the government indicating that the Hoima-Lamu route was more feasible than the Hoima-Nairobi-Mombasa route, and is the “cheapest option” of transporting Uganda’s oil to the international market.

Why it is getting difficult
Total E&P which is involved in Tanzania’s vast natural gas reserves, however, put the spanner in the works. The company, with its big financial chest, undertook feasibility studies for a southern route ((Hoima-Masaka-Bukoba-Shinyanga-Siginda-Tanga).
After a sequence of meetings, sometimes between Total officials and the Energy ministry technical team, the MoU was signed in October.
Total’s main reservations about the Lamu route is the security situation in northern Kenya which is not “guaranteed”, according to some quarters in government. That part of the country borders Somalia, a hub of the militant al-Shabaab.

According to government’s official position, in looking at both the North eastern and Southern routes for the pipeline, the objective is to select a route that will result in the lowest unit transportation cost and constitutes the most viable option for the project.
The key phrase in the MoUs with the two neighbours is “lowest unit transportation cost for crude oil from Uganda”. But to some industry players the argument does not add up.

It is about balancing regional interests delicately which explains why, notwithstanding the pile of technical assessments that have been undertaken, Uganda is still moving at leisure.
Project economics is secondary, an official in the Ministry of Energy said. However, he added, the Tanzania route makes a lot of sense in that “currently all our eggs are in one basket by relying on Kenya which has its political ups and downs compared to Tanzania.”
In announcing the Southern route, a statement from State House indicated President Museveni was “reciprocating” the role Tanzania played in the guerilla war that helped him capture power in 1986. The project cost whichever way it goes is estimated at $4.5b.

The pipeline is supposed to be developed by the IOCs which has complicated the situation.
UK’s Tullow Oil plc which operates in Kenya has its weight behind the Lamu route so does China’s Cnooc, according to insiders, for reasons of economies of scale from the Lapsset while Total, which is the biggest of all, is routing for the Southern route.
How to harmonise the companies’ interests remain a big issue at hand and likely to cause delay to the next stage of production.
The pipeline project will be developed under a Public Private Partnership (PPP) because regional governments cannot finance such an ambitious project. Uganda is already also toiling with the idea of a $4.5b refinery infrastructure.

At the dawn of last year, the global Total CEO, Mr Patrick Pouyanné, was in the country and held meetings with Mr Museveni, where he underscored his company’s interest for the pipeline going to Tanga.
And with the gloom hanging over the oil sector world made worse by the falling oil prices, Mr Pouyanné, indicated they were ready to leap to the next stage of production.
What is evident for now is that the oil industry is being slowed by infrastructure deficits and long delays in government making decision which explains why Ugandans might wait a little longer to see the first drop of oil.
Between $10billion (Shs33.7 trillion) and $15 billion (Shs50.5 trillion), about the size of Uganda’s Budgets for the next two financial years is required to start production.

The refinery
The pipeline will supplement the 30,000 bpd oil refinery that government is pushing. The greenfield refinery, whose tender, was already awarded RT Global Resources a consortium, led by Russia’s Rostec, a defence and technology corporation, is also estimated to cost about Shs15 trillion.
Current oil reserves stand at 6.5 billion barrels with a recoverable rate (what can actually be got out of the ground) of 1.4 billion. There are indications the reserves could soon hit 8 billion barrels.