Uganda, TZ target ‘flexible’ European pipeline funding

KAMPALA. Uganda, Tanzania and French Oil Company Total E&P, the lead joint venture partner on the Greenfield crude oil export pipeline, are expected to work with European lenders to collect the $3.55b (Shs12.8trillion) capital expenditure for the project.
Drawing the list of potential lenders, sources familiar with ongoing discussions, say it is still “in early stages” pending completion of the Front-End Engineering Design (FEED) study tentatively by next month.

The FEED, whose contract was awarded last December (slightly behind schedule), to Houston-based Gulf Interstate Engineering to examine technical aspects to give a clear picture of the project, is expected to lead to Final Investment Decision (FID) by latest December to give way to Engineering, Procurement and Construction (EPC) in January 2018.

But the head of corporate communications for Total’s Africa business, Ms Ahlem Friga-Noy, in an email to Daily Monitor, said: “Negotiations with potential lenders will start before FID and an agreement should be formed with a pool of lenders at the time the FID is taken.”

“Exact timelines have not yet been established. However, pipeline construction and detailed engineering is scheduled to start after the Final Investment Decision (FID) targeted at the end of 2017,” Ms Friga added.
All the project finance agreements will be completed in the months following the FID.

Flexible Europeans
Much as several financing options are still being explored, European lenders are the first option, sources said, thanks to their flexibility to circumstances and efficiency.
The other bonus is European lenders also do not usually impose terms on borrowers compared to international financial institutions such as World Bank or export credit agencies like China’s EXIM Bank.

Besides, Uganda is already indebted to the neck to various lenders, chief among them is EXIM Bank, which for months has been dragging its foot to release $2.3b (Shs8 trillion) for construction of the first phase of the Standard Gauge Railway running from Malaba to Kampala.
The main worry for lenders is the degree of political risk especially in Uganda. But sources said both the government and President Museveni, during various discussions, have assured of stability.

The plan is to raise 70 per cent of $3.5b capital development financing from international lenders while the remaining 30 per cent capital will be collected through equity by Total and its joint venture partners, the Anglo-Irish Tullow and China National Offshore Oil Corporation (Cnooc), and national oil companies of both countries; Tanzania Petroleum Development Corporation and Uganda National Oil Company.
Discussions are ongoing to form a Special Purpose Vehicle (referred to as Pipe Co), to construct, own and operate the East African Crude Oil Pipeline (EACOP).

This will also negotiate the Shareholder’s Agreement, Project Financing Agreements and Transportation Agreement between oil shippers from Tanga Port to the international market. Pipe Co will pay back the lenders from the project returns.
Pipe Co shareholders will fund EACOP through a mix of equity and project financing, seeking to achieve between 60 per cent and 70 per cent of external debt. Once formed, it will be Pipe Co, to negotiate with the recommended European lenders.
Sources also say Imperial Bank of China (IBC) has been brought on board to advise Cnooc on Chinese liquidity.

Early this year, Thomson Reuters ranked SMBC in the third position with $7.39b, behind Mizuho Financial Group and Mitsubishi UFJ Financial Group in the first place, as the world’s top three providers of large-scale project financing in 2016, when prices for Brent crude continued in free fall and resource development projects remained a risky bet.

The plunging of oil prices, since early 2015, has had far reaching impact not only on oil companies but on financial institutions/big banks focused on project financing.
Ms Friga in the email said the lenders are interested in projects where “risks are well controlled and where they get comfort that they will be repaid” in full and on time.

“They expect strong support from the States hosting the project, providing ad-hoc regime and Legal and Fiscal stability, and a group of experienced Shareholders with demonstrated capability in managing huge and complex projects who are also ready to invest equity into this project. They are also expecting that the project will be developed according to international best practices, which guarantee a good execution, and protects the reputation of the Investors.”
She said, the 1,445-kilometre pipeline planned to run from Hoima in mid-western Uganda to Tanzania’s southern Tanga Port, “is such a project thus making it attractive for debt financing.

Before going to lenders, both Uganda and Tanzania are putting on table different assurances including joint political will at the highest level, which are intended to make lenders comfortable that the project is bankable since they [lenders] will only have recourse to the revenue stream generated by the pipeline company (Pipe Co.)

Other risks associated with the project, sources said, will be offset by the applicable insurance schemes but ongoing discussions are yet to reach level. Also, given the cross-border nature of the project, one lawyer familiar with project financing told this newspaper separately, that several risk assessments will have to be undertaken in the period leading to meetings with potential lenders.
The other concerns, especially on the Ugandan side, include corruption that has previously impaired nearly all large infrastructure projects and nauseating bureaucracy, which will be dealt with along the way.

Besides the “bankability” of the project, the foot print of reputable oil companies, Cnooc China’s largest oil and gas producer, and Total, one of the seven global oil giants is expected to add clout to the process of borrowing- other factors kept constant.

The advisors
Total has brought on board two “powerful” London based transactional advisors, Clifford Chance to advise on legal matters and Sumitomo Mitsui Banking Corporation Europe Ltd (SMBCE), the Europe affiliate of the Sumitomo Mitsui Banking Corporation (SMBC), the second largest bank in Japan by assets, to advise on sourcing of financing and assessing anticipated costs and benefits of funding options including valuation of the debt tenors (the length of time to maturity, or repayment, of debt).
SMBCE, working closely with Total as Standard Bank (Stanbic), will be advising the Ugandan and Tanzanian governments, respectively.

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