Journeying through rural Sembabule District is both laborious and exciting. The bumpy roads, slippery on rainy days and dusty on dry days, and refreshing tracts of green acreage, from farmlands to thickets, are the hallmarks of the trip.
Sembabule, home to several top shots in government, is bordered by Mubende to the north, Gomba to the northeast, Bukomasimbi to the east, Lwengo to the south, Kiruhura to the north-west, and Lyantonde to the southwest.
To the northeast, River Katonga separates Sembabule and Gomba. On Sembabule side, in Rugushuru Sub-county, the expansive tract of farmland adjoining the river is owned by a senior Cabinet minister. The expansive idle farm land on Gomba side is owned by a top Electoral Commission official.
The East African crude oil pipeline (EACOP) will be stretching through both farms. It will be moving via Gomba, from Hoima, Kikuube, Kyankwanzi, Kakumiro and Mubende districts, through Sembabule to Lwengo, Kyotera and Mutukula Town (Rakai District) at the Uganda-Tanzania border.
The Ugandan section of the pipeline is about 296km and passes through 10 districts, 25 sub-counties and 172 villages, of the total length of 1,443km from the proposed pump station in Hoima to Chongleani terminal near Tanga port on the Indian Ocean.
In between the fast-turning news cycle, of terror attacks next door in Nairobi and the merrymaking over Primary Leaving Examinations results in the week of January 18: the French oil major Total’s chief executive and chairman, Patrick Pouyanné, jetted into the country for discussions with President Museveni.
Mr Pouyanne’s, who was named chief executive of the French multinational oil giant in October 2014, first visit to Uganda was in mid-December, 2015 to among others underpin his company’s choice of the southern—Hoima to Tanga—route for the proposed crude oil export pipeline, now known as the East African Crude Oil Pipeline (EACOP).
His recent visit was purposely to review the [slow] progress of operations in Uganda; the issues at hand included closing the Anglo-Irish Tullow Oil’s farm down transaction: particularly the contention on paying Capital Gains Taxes (CGT), and resolving some of the sticking issues that clouded the ongoing EACOP negotiations.
The sticking issues included co-existence of Uganda’s proposed refinery alongside the pipeline which presented a challenge of crude oil supply and led to shuffling on an agreeable pipeline business model.
In developing the EACOP business model, initially the government and oil companies were working with recoverable oil volumes between ranges of 1.4 billion and 1.7 billion, out of the confirmed 6.5 billion volumes. However, for purposes of approaching international financers both parties agreed to zero down on “derisked” volumes.
In statistical representation, three models were advanced; Probability (P90)—that the 1.4/1.7 billion barrels are available or could even exceed: P50 for the moderate estimates, and P10 that the volumes could be lower.
Sources familiar with ongoing discussions told Daily Monitor that the safest model the both parties decided to work with—the lowest financers are willing to work with anyway—is the P50: in effect bringing down [recoverable] volumes to 1.046 or roughly 1.1 billion barrels.
“The business model helps you to determine how much you can make—invest and make—so you have to work with conservative estimates,” one official explained on condition of anonymity given sensitivity of the matter. “It is not that the crude oil disappeared, no! We are continuing with appraisals (improving knowledge of the oil field) so there could be more or less crude, but for now that is treated outside the bracket of P50.”
The revision of oil volumes led to reviewing the pipeline business model several times, sources added, including the oil companies one time revising the transit tariff from $12.2 (about Shs44,492) per barrel detailed in earlier feasibility studies which formed basis for adopting the Tanga route in Tanzania, to $16 ( about Shs58,351).
The transit tariff is determined by the amount of crude moving through the pipeline, the capital and operating expenditures, respectively, and the return on investment. The pipeline is a merely a medium to take Uganda’s crude oil to the international market, wherever prices are favourable; so the higher the tariff/transport the less benefits, added to other costs of getting it (oil from the ground or cost oil).
In the same regard the oil companies—Tullow, Cnooc, and Total E&P—had wanted the refinery delayed so the pipeline takes all the crude oil for the pipeline business model to make sense.
When the two parties first signed a framework for commercialisation of Uganda’s crude oil in February 2014, the government was nursing ambitions of a smaller refinery of 30,000 barrels per day (bpd), which it was also agreed would get a first right of call to crude, but along the way government changed to 60,000bpd.
This posed a dilemma, but government insisted on both projects being developed simultaneously. This too became a sticking issue as government is already in separate talks with a consortium of Italian and American firms to develop the refinery.
After the Mr Museveni and Mr Pouyanné meeting, it was indicated that the latter’s side would put the deliberations into writing as a declaration of commitment and share the communique with President Museveni in Davos, Switzerland the week that followed: when the two principals agreed to meet again on sidelines of the World Economic Forum.
Sources confirmed to this newspaper that the communique detailing Total E&P’s commitments was shared with government at the end of January. The commitments include paying some Capital Gains Tax on top of the Shs85 million paid by Tullow out of the $167m (Shs609b) tax assessment; as a result it is expected that Total E&P and Cnooc will pool $82m (Shs302m).
Cnooc told this newspaper “the CGT issue is still under discussion: so far no conclusion has been reached from neither partners nor government.”
The matter is still under intense discussions including a payment schedule, but in the likely event that Cnooc balks on payment of the the CGT it means Total E&P will have to go at it alone.
Tullow sold 21.57 per cent of its stake in the upstream/oil fields—Exploration Areas (EA): EA3 (Kingfisher) with one production licence, and EA 3A and EA2 (now called Tilenga) with nine production licences—to Cnooc and Total E&P, respectively, for $900m (about Shs3.4 trillion). The CGT off this transaction is $167m.
Tullow, however, maintained a 10 per cent stake in a non-operator position.
CGT is a tax on the profit when you sell (or dispose of) something (for example an asset) that has increased in value over time. Sources indicated that both parties—oil companies and government—are now working on a payment schedule of the CGT.
Other commitments included fixing the transit tariff to $12.77 (Shs46,316), and supporting the Uganda government efforts of developing an oil refinery, including acquiring 11.5 per cent stake in the project.
The same commitments were reiterated by the Total E&P Uganda general manager, Mr Pierre Jessua, in a February 1, memo describing the Museveni-Pouyanne meeting as “warm and fruitful” leading to significant progress on the issues at hand.
In the memo, Mr Jessua reinforced the company’s support for Uganda’s 60,000 barrels per day (kpbd) refinery: fixing the tariff to $12.77—cannot go above this mark regardless of the project economics: a “pragmatic approach” to finalising Tullow’s farm down: and, “smoothly working towards translating all elements of the Inter-Governmental Agreement (IGA) which the governments of Uganda and Tanzania signed in May 2017, “into law to create the necessary framework for the pipeline.
It has also been resolved that the pipeline will take 230,000 barrels per day (bpd), pending the refinery. When the refinery, which particularly President Museveni has remained fervent about despite its debatable economics, comes on board whenever, it will get its share of 60,000 barrels lessened from the 230,000bpd feed to the pipeline.
Both government and industry sources described the January 18 meeting “as a good visit” that loosened up things—to speed up negotiations and conclusion of the Host Government Agreement (HGA).
The HGA— a precursor to other key agreements such as the shareholders agreement, and establishment of a pipeline company (PipeCo), which will in turn negotiate the Project Financing Agreement and Transportation Agreement—details the rights and obligations of each of the parties involved in the multi-billion-dollar project.
The parties are, Uganda through the National Pipeline Company (NPC), and Tanzania through its national oil company— Tanzania Petroleum Development Corporation (TPDC): and Total E&P, Cnooc, and Tullow. NPC is the subsidiary of the Uganda National Oil Company (UNOC), which is mandated to handle the country’s commercial interests in the petroleum industry.
Mr Jessua, told Daily Monitor in an interview that following January 18 meeting they now have up to “summer”—between June and September—as deadline for negotiating all agreements and announce Final Investment Decision (FID).
“I’m optimistic that the deadline given is feasible, and when I see the momentum I think it is reachable,” Mr Jessua, who took up the Uganda job last August and is charged with steering Total E&P’s operations through FID and execution, said.
Total E&P backed the Hoima-Tanga route as the least cost route for Uganda to transport its oil to the international market on among other grounds, convenient constructability (flat terrain), highest availability (fully functional), lowest environmental footprint, and provided the shortest schedule for seeing first oil export—earliest mid-2020. This was of course besides Tanzania’s convenient land tenure of no freehold system.
The route was concretised in 2017 with signing of the Heads of State Agreement, and the Intergovernmental Agreement (IGA) that binds the Uganda and Tanzanian government on the project; from signing, the IGA took another four months for ratification by both countries.
The IGA deals with horizontal issues that concern the pipeline infrastructure as a whole, such as co-operation, land rights, harmonisation of tax structures applicable and issues relevant to the project implementation while the HGA deals with vertical issues , among others governmental obligations, investor duties, environmental and other relevant standards, liability, and closure of the project.
The pipeline will run 1,445km from Hoima in mid-western Uganda to Chongoleani terminal in Tanga at the Indian Ocean.
Different parties, each with different interests
Negotiations on the HGA commenced in August 2017, but are taking longer than expected.
Technocrats from Uganda and Tanzania convened in Kampala on January 25 for the third round of discussions on the HGA and again in Dar-es-Salaam a fortnight later in an attempt to harmonise the two HGAs but that did not materialise.
In Kampala, the weeklong discussions started with meetings of technocrats and climaxed with the meeting of ministers of Energy, Finance, Lands, and Constitutional Affairs from both sides; the meeting which was earlier scheduled to run up to 4pm run until 9pm. When they eventually came out, disagreement was clearly written on their faces.
Energy minister Irene Muloni and her Tanzanian counterpart Medard Kalemani during the Kampala meeting said the two sides had failed to agree on “certain aspects” such as arbitration which they said had been referred to the Heads of State for more guidance before each side can pronounce itself on the matter.
There are two HGAs for Uganda and Tanzania being negotiated in parallel, but require harmonisation. Once the two have been harmonised, the two sides will negotiate the same with the oil companies and subsequently sign.
The National Pipeline Company general manager, Mr John Habumugisha, told Daily Monitor that the HGA details aspects of fiscal regime (taxation), local content, movement of labour/contractors and material, among others.
“The good side here is the shareholders of PipeCO are the state owned companies of Uganda and Tanzania, and the oil companies; the more you develop it with up streamers the better because an external party in the upstream would be looking for the highest possible tariff. What we have is a good structure in that we have a shared goal in terms of what the pipeline is meant for,” Mr Habumugisha added.
“So we had to structure a company that allows Uganda as an oil producer to also achieve its interests of maximizing value in the upstream, but for that to happen you needed a low tariff because it’s about how much barrel you produce and what is the price of the barrel less cost of the transport, which is called tariff: so the lower the tariff the better.”
Mr Habumugisha exuded optimism that the remaining agreements can be concluded and FID announced in the next months within the set deadline.
The capital expenditure for the project is $3.55b (Shs13 trillion), 70 per cent of which will be raised from international lenders. Each of the party has financial transactional advisers—Stanbic Bank for Uganda and Tanzania, Japan’s Sumitomo Mitsui Banking Corporation Europe Ltd for Total E&P, and Industrial and Commercial Bank of China Limited (ICBC) for Cnooc—on board.
Cnooc told this newspaper in an email that as partners they will finance the project “at the respective level of their equity in upstream.” The composition in upstream/oil fields is Cnooc and Total E&P each 37.5 percent shareholding: Tullow with 10 percent: and Unoc with 15 percent, although the financing structure of the pipeline is yet to be built.
Uganda will be taking a 15 per cent stake in the pipeline to match the interests in upstream; the big question, however, is where the money, approximately $230m (Shs838b), will come from. No one has the answer for now.
Officially Tanzania is yet to decide how much stake they will take in the project. But according to the country’s lead negotiator on EACOP, Mr Goodluck Shirima they are already in the “initial” process of mobilising their equity.
Sources indicated that the dragging on the HGA is the need to harmonise interests of all parties.
Uganda as the oil exporting country is mostly interested in optimal development: the oil companies are interested in steady crude supply and cheap project: while Tanzania’s main concern is taxes and greater leverage on local content, for which they are actually playing hardball.
Eighty  per cent of the pipeline, 1,147km, will be on the Tanzanian side, and it is estimated that 80 per cent of the project capex will be spent in Tanzania.
Notwithstanding, the EACOP project director, Mr Maxim Marchenko, separately told this newspaper that all preparatory activities—such as the technical Front End Engineering Design (FEED) studies to define characteristics of the pipeline to evaluate the costs in the schedule of implementation, pipeline designs, mapping of the pipeline corridor from Hoima to Tanga, environmental social impact assessment, resettlement action plan studies, geotechnical and geophysical studies—have been completed.
“The major cornerstone of this project is the Inter-Government Agreement which we are now translating into the Host Government Agreement; one for Uganda, and another for Tanzania, with the aim of giving a stable and harmonised project frame for investors, and shippers of oil from Tanzania, a stable regime; which is being finalised, but hope can finalise everything soon,” Mr Marchenko said.
Phases. The project Engineering, Procurement and Construction tenders have been divided in three lots; the Tanzanian pipeline segment will be constructed in two parts, to be awarded to separate contractors, and one lot for the Ugandan segment.
Construction is expected to take at least 36 months, creating some 10,000 jobs and a lot of local prospects for local content for both countries. The pipeline represents the largest trade deal between Tanzania and Uganda currently comprising $120m (Shs425b) annually in each direction.
On the Tanzanian side, the pipeline will pass through 25 districts; in Kagera, Geita, Shinyanga, Tabora, Singida, Manyara, Dodoma and Tanga regions.
Uganda and Tanzania in May 2017 signed the Inter-Governmental Agreement (IGA) that binds the two governments on the pipeline project, with a specific clause (Article 3) detailing land rights framework, including fair, transparent, legally enforceable and clear terms in favour of the project, availability of land rights and integrity for the pipeline system, allowing uninhibited implementation of the project, and allowing lenders to take legal, valid and enforceable first priority security.
The IGA, which has since been ratified by both governments, is yet to be fully translated into law and as a result, the issue of land rights remains a sticking issue. For example, the pipeline will cross Lwengo-Kyotera road and 15 other national roads, which land reserves belong to the Uganda National Roads Authority, but under the ongoing plans should belong to the yet-to-be formed pipeline company.
Likewise, the pipeline affects other 46 district roads and 97 community access roads under the respective local governments. It will affect three 132kilovolt and two planned 220v kilovolt electricity transmission lines, whose reserves belong to the Uganda Electricity Company under the Electricity Act. It will also affect a railway line between Sembabule and Mubende under the Uganda Railways Corporation and the Uganda Railways Corporation Act and swamps gazetted under the National Environmental Act. It is expected that the Host Governments Agreement (HGA), whose negotiations are ongoing, will build further on aspects on land in both countries. Before that, the clear land rights ownership remains in limbo. The pipeline project director, Mr Maxim Marchenko, told Daily Monitor that the resettlement action (RAP) studies across the entire route have been finalised and are currently undergoing review by the two governments.
“What we are doing today is have surveys finished, identify all land rights and land user rights owners, and we are reviewing all that,” Mr Marchenko said during an interview. “We have commitments and also to the international banking society to respect the rights of the locals, but also in part to avoid the pipeline intruding in the lives of the people.”
The RAP studies indicate that an estimated 10,500 people will be affected by the project in Tanzania. The pipeline construction start date remains unknown owing to a list of agreements yet to be finalised and related activities such as mobilisation of funds and announcing the final investment decision (FID), which will lead to the engineering, procurement and construction (EPC) phase.
According to the resettlement framework report for Tanzania, signed off last September, most land in the project area is held under customary tenure, with registered or titled land being limited mainly to urban centres (avoided by the pipeline route planning).
In total, the pipeline section in Tanzania requires access to more than 9,884 acres; 98 acres for a pipeline coating yard, 86 acres for two construction camps with marshalling yards, 432 acres for 10 construction camps, 182 acres for access roads, among others.
Mr Marchenko said “the good thing” is that project footprint is mainly in areas with low human footprint, which was deliberate.
Initially, both Uganda and Tanzania had approved a 50km wide route corridor. It was gradually reduced to 30 metres on recommendation of the technical front end engineering designs studies, whose report was submitted in December 2017.
Land in Tanzania is a responsibility of the government through the Ministry of Lands, Housing and Human Settlements Development in close collaboration with regional and district authorities. As such, land acquisition is hustle free, for investors. Notwithstanding, the country’s lead negotiator on EACOP, Mr Goodluck Shirima, speaking in Dar-es-Salaam last November, revealed that they were working with the international companies “on a hybrid solution” to ensure local regulations were harmonised with international best practices.
Some of the international best practices, one senior official told this newspaper, include International Finance Corporation Performance Standard 5, which require companies to avoid involuntary resettlement wherever possible and to minimise its impact on those displaced through mitigation measures.
The other standards, which specifically the oil companies have to subscribe to, is the Equator Principles (EP)—a risk management tool adopted by a dozen financial institutions in 37 countries for identifying, assessing and managing environmental and social risks. It states that as a project may be seeking funding from EP-leaning financial institutions, the process for land acquisition, compensation and resettlement must recognise the applicable international standards.
Currently, 55 per cent of the land surveyed for the pipeline in Tanzania is currently used for cultivation: 22 per cent with cultivations interspersed with dwellings: and 23 per cent with no dwellings, little or no cultivation. Cultivation is mostly carried out in the Tanga and Tabora regions while cultivation with dwelling is high in Kagera and Geita regions.
The resettlement framework policy indicates that the cost of land is a function of the area of land to be acquired by the project. For permanently-acquired land, market rates as determined during professional valuation will apply dependent on location and on the category of land (residential land, bare farm land, etc.). For project-affected residential dwellings, owners will have a choice between cash compensation and the provision of replacement structures, while crop owners will be eligible for cash compensation.
Disclosure of rates and holding of consultative meetings for the project affected persons is said to be ongoing.
Mr Marchenko said TPDC will acquire the land for the project and in turn lease it to the EACOP project.
Uganda’s land acquisition law, the 1965 Land Acquisition Act, details steps for acquiring private land. They, among others, include prior planning to determine land for the project, publishing a notice to inform owners/ occupants in a designated area that government intends to acquire their land, and holding consultative meetings to brief the project-affected persons about the project but also for them to express their opinions.
This is followed by payment of “fair and adequate” rates,’ approved by the chief government valuer. Most times, project-affected persons accept the money offered while a few may reject it, either out of intuition that they are being cheated or after engaging private valuation companies, which usually return with hefty sums, leading to protracted negotiations.
A senior official in ministry of Lands, who requested for anonymity, told Daily Monitor that the main problem as has been faced before on other projects like roads and alike, is the failure by districts to develop or keep an updated chart detailing rates of property, from land to crops.
On the 296km-Uganda pipeline section, at least 4,121 persons will be affected, of whom 2,199 are bibanja holders, 1,056 are land owners and 866 are licensees.
Mubende is the most affected, with 33 villages crossed by the pipeline, followed by Kakumiro with 25, Kyotera and Kikuube districts have 20 villages, while and Lwengo and Sembabule have 19 villages each.
Lands minister Betty Amongi said mapping of the pipeline corridor through the 10 districts and compilation of a cadastral report have been concluded, and submitted to the chief government valuer—who is compiling a report for resettlement action plan.
“We are looking at a timeline not exceeding March to finish all our activities,” Ms Amongi said.
In Kabayola Village, Sembabule District, where one of the four proposed main camps for storing construction material will be situated, the family of 19, whose 46 acres was surveyed for the camp, expressed frustration at being told not to undertake any further activities on the land.
“We are worried because the project is delaying. We were told that we could get paid but then if the project takes forever, we are the ones at loss. We cannot farm, build or do anything,” 37-year-old Alice Namukasa, one of the family members, said.
Ms Namukasa revealed that as a family, they reached a decision to settle for Shs20 million per acre, and at least Shs25,000 for the other crops to be destroyed.
“We did not know anything at first and were not selling our land, but they (surveying team) educated us; we also think that our price is fair,” she said.
The head of the district land board, however, indicated that an acre of land, according to the available rates, is priced at Shs4 million while fruit trees are valued at Shs78,000.
For a stump of robusta coffee with yields of 90kgs, he said each kilogramme is valued at Shs2,000. Banana plantations are paid depending on the grade but averagely a bunch in grade one is priced at Shs60,000. This is on top of a 30 per cent disturbance allowance.
During the course of this reporting, several project-affected persons put a high value to their property—land or crops, and yet both the pipeline project team and ministry of Lands say they will pay rates only approved by the chief government valuer.
Of all the 10 districts, only Hoima, ostensibly due to long presence of oil activities, had updated property rates.
This is where the challenge lies and will likely spark off back and forth shuffling when the compensation process commences.
The executive director of the Petroleum Authority of Uganda, Mr Ernest Rubondo, acknowledged that land acquisition for the pipeline, being a linear project, will likely face some encumbrances.
“But what makes this different is that you might find that for most people we are just touching their land, and not taking the whole of it,” Mr Rubondo said.
“But also most of these districts have for long been backward. Now this process has lifted them: in one way, it sounds challenging but we shall find away,” he added.
Therein lies another problem of high expectations and hopes. In the greater-Masaka region, which comprises districts such as Lwengo, Kyotera and Rakai, some civil society actors are using the pipeline as a ticket to speak out on government’s long neglect of service delivery in the districts. In effect, they think a lot more should be done in the region on the basis that a multi-billion dollar infrastructure transits through their area, Mr Yisiti Kayinga, who heads a civil society group-COTFONE- told this newspaper in Lwengo.
The resettlement action reports are currently under review to tie loose ends but when the actual land acquisition process starts, that is where the uphill task is; for it has never been in Uganda.
Tomorrow, we take a peek into the lingering environment and social concerns