Hello

Your subscription is almost coming to an end. Don’t miss out on the great content on Nation.Africa

Ready to continue your informative journey with us?

Hello

Your premium access has ended, but the best of Nation.Africa is still within reach. Renew now to unlock exclusive stories and in-depth features.

Reclaim your full access. Click below to renew.

Pipeline deal: Oil firms set date for final investment decision

President Museveni (with hat) and his Tanzania counterpart John Pombe Magufuli sign the agreement on the oil pipeline in Chato District, Tanzania, on Sunday. PHOTO | PPU

The government and oil companies - French Total E&P, and China’s Cnooc - are eyeing December or January as the new dates for taking the final investment decision (FID) for development of the oil fields and the proposed East African Crude Oil Pipeline (EACOP).
Early investments in development of the oil fields—Tilenga in Buliisa and Nwoya districts operated by Total E&P, and Kingfisher in Hoima and Kikuube districts operated by Cnooc—and the 1,445km EACOP running from Hoima to Chongoleani terminal in Tanga at the Indian Ocean, is tagged to a capital expenditure of $10b (about Shs36 trillion).
The renewed optimism follows the signing of the host government agreement (HGA) for EACOP last Friday between government and Total E&P. The ceremony was witnessed by President Museveni and Total global chief executive Patrick Pouyanne.
Also signed on Friday were addendums to the earlier production sharing agreements [re]assigning operatorship of the oil fields—Tilenga to Total E&P, and Kingfisher to Cnooc, respectively, following Tullow Oil’s pending exit.
Also signed was a deed enabling the Uganda National Oil Company (UNOC)’s 15 per cent stake in both the Tilenga and Kingfisher projects. UNOC is the statutory body mandated to handle the country’s commercial interests in oil sector.
The HGA, which details some 54 clauses, is the cornerstone of the multi-billion-dollar project. It details, among other issues, governmental rights and obligations, investor duties, environmental and other relevant   standards, liability, legal framework, arbitration, and closure of the project.
Negotiation of the HGA between Uganda and Total E&P, and Tanzania commenced in August 2017 and took longer than expected, consequently eating into the earlier stated timelines to the FID.
Matters were further complicated by the collapse of Anglo-Irish Tullow Oil PLC’s sales agreement last year in August and subsequently Total E&P, the lead project developer, froze all activities relating to EACOP until a deal was reached and announced back in April of Total E&P buying out the former.
But then there were several sticking clauses in the HGA, including which laws would be applicable governing the contract—but a compromise was reached to use the laws of England: the transit tariff of $12.2 (about Shs44,492) adjusted for inflation. The other issues were decommissioning of the project for which it was agreed to establish a decommissioning/escrow account for which all parties would deposit and be signatory to instead of Uganda and Tanzania alone, and insurance for the project.
Following Friday’s signing, Mr Museveni on Sunday flew to Tanzania where he signed a joint communique of endorsement of the principles of the HGA with his Tanzanian counterpart John Magufuli.

About the agreements
There are two HGAs for Uganda and Tanzania, which were negotiated in parallel, and require harmonisation.  Following Uganda’s signing of its HGA it is expected that Total E&P and Tanzania will now fast-track negotiations of their HGA, which is expected to be concluded by mid-next month, other factors remaining constant.
The permanent secretary in the ministry of Energy, Mr Robert Kasande, told this newspaper yesterday that following resumption of negotiations “in earnest” leading to signing of the HGA, “we remain committed to our timelines for reaching FID.” The clearing of the HGA now paves way for commencement of negotiations on two key agreements for commercialisation of EACOP, the shareholders agreement that details the sharing holding structure, and the transportation agreement between Uganda as a supplier of crude oil and the proposed pipeline company that will sell the oil to the international market.
Currently, the tentative shareholding structure is; both Total E&P and Cnooc each taking a 37.5 per cent stake, Uganda through the National Pipeline Company, a subsidiary of UNOC, taking 15 per cent, and Tanzania through its national oil company, Tanzania Petroleum Development Corporation (TPDC), taking a 5 per cent stake. Insiders say Tanzania promised to up its stake to 25 per cent but is yet to commit further.
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—Standard Chartered Bank for Uganda and Tanzania, Japan’s Sumitomo Mitsui Banking Corporation Europe Ltd and Standard Bank for Total E&P, and Industrial and Commercial Bank of China Limited (ICBC) for Cnooc—on board.
UNOC is expected to receive the first tranche of funding to finance its equity stake in the next financial year.
UNOC’s legal and corporate affairs manager Peter Muliisa said yesterday that conclusion of the HGA “significantly reduces work on the remaining key contracts,” leading to FID within the stated timelines.

How pipeline will be shared
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 capital expenditure will be spent in Tanzania. The Ugandan section of the pipeline is about 296km through 10 districts, affecting at least 4,121 persons.
Mr Kasande said following resumption of activities on the project, the relevant authorities will likewise resume the resettlement action processes on the proposed right of way.
The HGA is the second EACOP agreement to be signed following the Inter-Government Agreement (IGA) that binds the governments of Uganda and Tanzania on the project, which was signed in May 2017. 
In keeping up with the spirit of fast-tracking the FID, Total E&P, the lead developer on the project, has already out sourced engineering, procurement and construction for the project. 
Project construction is expected to start mid-next year and take 36 months, leading to creation of more than 10,000 jobs.  The pipeline represents the largest trade deal ever between Tanzania and Uganda, currently comprising $120m (Shs425b) annually in each direction.
The big question is whether the timelines can be met. For Uganda, the coming months until next February will packed with politics and given the high political stakes, sometimes the financiers prefer to watch events from an arm’s length.

Project expenditure
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—Standard Chartered Bank for Uganda and Tanzania, Japan’s Sumitomo Mitsui Banking Corporation Europe Ltd and Standard Bank for Total E&P, and Industrial and Commercial Bank of China Limited (ICBC) for Cnooc—on board.