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Tanga time

Tanzania and Kenya fought hard to win Uganda’s approval for an oil-export route. Tanzania won

A DECISION has, at last, been made. On 23 April, Kampala said the route to take Ugandan oil to sea would pass through Tanzania. It’s an outcome that will shake up the East African Community, too. There is no avoiding it: Uganda has snubbed Kenya – until now, the dominant member of the bloc and for a long time the seemingly obvious choice to ship the oil.

Now, however, Kenya has been left to build its own pipeline from oilfields in its north west, while Tanzania has seduced Uganda with a safer and simpler option – along with promises to take a share in Uganda’s proposed refinery project.

The final decision “is a huge victory for Tanzania, both economically and politically”, says Emma Gordon, of Verisk Maplecroft, a risk management firm. “Kenya is currently the dominant player in the East African Community, partly due to other member country’s reliance on its ports and trade routes”, she says. “The Tanzanian government will now seek to use the pipeline to spur diversification of these trade routes.” For Kenya, she says, the decision is “a clear blow”.

Ever since commercial oilfields were discovered in landlocked Uganda, near the town of Hoima on the shores of Lake Albert in 2006, neighbouring Kenya seemed the likeliest route to ship the crude to international markets. Production should eventually rise to 200,000 barrels a day, leaving as much as 140,000 b/d for export.

Kenya became an even more attractive potential partner when, in 2012, Tullow Oil found oil at the Lokichar field, in the country’s northwest. The reserves also sit close to the route that South Sudan’s crude could take to the sea, if it is to avoid flowing north, through Sudan – a route that at present forces the young country to pay steep transit fees to its former rulers in Khartoum.

So advocates of the Kenyan route were confident: they had oil in need of a new outlet and a plausible way to take it to market. Tullow, which had pioneered the Hoima discoveries along with Heritage Oil, saw a clear opportunity for synergies. But Total, which had farmed into the Ugandan blocks some years earlier, was sceptical, worrying about the risk from terror attacks in northern Kenya. Disputes over land rights in Kenya also added complications that Tanzania did not have.

Gradually, Tanzania’s proposal to build a 1,410km pipeline round the southern shore of Lake Victoria and on to its northern port of Tanga started to make more sense. Tanzania has already built a successful gas pipeline along the southern part of its Indian Ocean coastline, so could claim some experience and a track record. Moreover, Tanga is an existing port – and so the pipeline project wouldn’t depend on the timely development of other major infrastructure.

Growth paths

Kenya in fact had two alternative proposals. The northern route would have gone from Hoima through Lokichar on its way to an as-yet-unbuilt port at Lamu. The pipeline would have been an anchor project for the proposed Lamu Port Southern Sudan and Ethiopia Transport corridor, or Lapsset, which would also include a railway and refinery as well as the oil pipeline. The alternative Kenyan route would have run to the existing major port of Mombasa, passing close to the capital, Nairobi on its way, and including a loop up to Lokichar. Both were big projects, costing between $4bn and $5bn apiece, and requiring around 1,500km of pipe to be laid.

For Tullow, taking advantage of economies of scale by routing the pipe through both the Ugandan and Kenyan fields made clear economic sense. “The opportunity cost of Uganda and Kenya not cooperating on the pipeline is enormous,” the head of Tullow’s Africa business, Tim O’Hanlon insisted in a recent interview with Bloomberg. “A joint pipeline has real tangible economic value, measurable value for the individual countries, Uganda and Kenya, and East Africa in general.”

The fight for the pipeline arguably reached its zenith at the East Africa Oil and Gas Summit held in Dar Es Salaam at the end of March. At the conference, O’Hanlon told delegates: “We at Tullow have earned our seat at the negotiating table, by virtue of having found oil in both countries.”

However, that sense of justice could not outweigh the financial heft of Total, which appears to have landed the killer blow in mid-March when it said it could provide the $4bn financing needed to build the pipeline through Tanzania to Tanga. Pressing home the advantage, Total’s Uganda country head, Adewale Fayemi, told the conference: “With all the studies done, it is clear the best route is to go to Tanga.”

Speaking to Petroleum Economist at the conference in Dar, before the final decision was made, Peter Bofin, a Dar Es Salaam-based industry analyst, said going via Lokichar in Kenya “could potentially drive down tariffs”, as it would provide the Kenyan fields with an outlet. But buying the land needed for the pipeline would be costly – the government recently forked out as much as $0.5m per acre to buy land to build a railway. In Tanzania, by contrast, the state owns the land, making acquisition and compensation “a much more straightforward matter”, Bofin said.

Representatives of the two governments also took to the platform to give their pitch. In Kenya’s corner, Daniel Kiptoo, a legal advisor to the energy minister, gave a presentation setting out the numbers. Transporting oil from Hoima to Lamu would cost $12.56 a barrel, while from Lokichar it would cost just $7.04/b, he said. A pipeline from Lokichar to Lamu, not including Uganda, would cost $14/b; and that from Hoima to Tanga, $15.86/b.

Tullow estimated that the Hoima-Lamu pipeline would be economically viable at an oil price of around $25/b, which implies that the Tanzanian option would work for Ugandan oil at $30/b and above. The margin is small enough for other considerations – such as security from terrorist attacks, and the length of time the project would take to get off the ground – to come into play.

James Mataragia, managing director of state firm Tanzania Petroleum Development Corporation (TPDC), said other costs should be kept in mind. Tanzania’s port of Tanga is already operational and, he pointed out, financing has already been secured for an upgrade and expansion. Lamu, on the other hand, is essentially still a fishing village. According to Total, the front-end engineering and design for the Tanga pipeline could be done by as early as the fourth quarter of this year, allowing a decision to proceed to follow in 2017. This could mean, optimistically, it would be operational by the end of the decade.

Tanga itself has other plus points, Mataragia said in his pitch at the conference. “Tanga port is naturally sheltered by Pemba Island – it’s the only port in East Africa that is naturally sheltered.” High currents mean that without a shelter, shipping the oil would not be possible for 40 days a year, he claimed. So while vessels could keep loading oil year round at Tanga, they wouldn’t be able to at Lamu or Mombasa. With a natural depth of about 30 metres, Tanga wouldn’t need to be dredged either, said Mataragia.

Analysing risk The politics were always at least as important as the practicalities. Kenyatta hoped that lobbying French President François Hollande in Paris in March would soften Total’s support for the Tanzanian option. One of the French firm’s principal arguments is the security situation in Kenya, which has been hit by several Al Shabaab attacks in recent years. Tellingly, the theme of the Paris meeting – the first Kenya-France presidential summit in 14 years – was co-operation on fighting terrorism.

But it proved impossible to persuade Total. Kenya hasn’t been an easy place for oil companies, even if they have not been explicit targets of the Somali terror group. As Bofin points out, “Tullow has also faced constant low level disruption in Turkana, including the need to shut down operations in 2013. This can be expected again in field development and pipeline construction.”

Tanzania can offer a more peaceful environment – and a political set up that Museveni can get along with. “While Kenyatta is likely to be re-elected in 2017, the political configuration for 2022 is quite unknown in Kenya”, says Bofin. “Museveni would like to know who he will be dealing with. For now, he doesn’t. For Tanzania, he has much greater certainty over the political future.” Magufuli and his ruling party, Chama Cha Mapinduzi (CCM), have a good chance of two five-year terms ahead of them.

Some ideological affinity – namely a leaning towards statist policies – might be found between Museveni’s party, the National Resistance Movement, and Magufuli’s CCM. Kenya’s rulers, by contrast, have shown a bent to a more freewheeling capitalist model, Bofin says.

TPDC’s Mataragia insisted at the conference in Dar that the decision over the pipeline will not be political but technical. “At the end of the day the Ugandans will pick the least-cost route.” Sometimes, though, the costs depend on the eye of the beholder. In any case, Mataragia said the Tanzanian government would supply a “number of incentives” – though he wouldn’t share the details. These “incentives” would be presented to Museveni, “and Kenya will do the same”.

The Tanzanian government’s incentives, it turned out, included waiving transit fees for an initial period, according to Verisk Maplecroft’s Emma Gordon. Tanzania also announced they would take an 8% stake in Uganda’s oil-refinery project. Though Kenya’s offer has not been disclosed, it is likely that it at least matched Uganda’s in terms of tangible incentives. It seems the safer and simpler project won out in the end – but if Kenya get their Lamu pipeline up and running, perhaps they’ll ultimately show the Ugandans what they are missing.

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