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Tanzania’s Ugandan oil coup

East African producers now have a timetable for exports. Their oil will reach the sea by 2020

EIGHT months is a long time in the East African energy sector. Last August, Uganda and Kenya finalised a route for a pipeline to take oil from reserves in landlocked Uganda to the Kenyan port of Lamu, seemingly making good on a long-standing plan. But by March, Uganda said it was considering an alternative route to Tanga on the Tanzanian coast. By April the two countries had sealed the deal.

The schedule for the Tanzanian pipeline should see construction start later this year, for completion by 2020. If that happens it will mark the culmination of a long battle by the international oil companies operating in Uganda to monetise oil first discovered in the Albertine Graben section of the East African Rift Valley in 2006.

Since then a consortium of UK-based Tullow Oil, France’s Total and China’s Cnooc has been struggling to make headway in efforts to move to production, while investment and wider exploration have been hampered by contractual, tax and land disputes, as well as prolonged uncertainty over how the oil would reach global markets. They now have four years to prepare the ground for exports.

Uganda estimates it could have reserves of around 6.5bn barrels of oil in place and 0.5 trillion cubic feet of gas, though recoverable oil is estimated at 1.8bn- 2.2bn barrels. Discoveries made so far could yield production of up to 250,000 b/d. The pipeline itself is likely to have a capacity of around 200,000 b/d.

The debate about the pipeline route has put the partners at loggerheads. Tullow wanted to build the Kenya pipeline, which would also have served as a route to get the country’s oil production − in which Tullow has a stake − to the sea.

But Total lobbied the Ugandan government for the Tanzanian route, voicing its concerns about the security of the proposed Kenyan pipeline, which would have run close to the Somali border in an area where terrorists have previously carried out attacks.

Other reasons besides security – and Total’s views – will have weighed on the decision.

Uganda became impatient with the sluggish progress Kenya was making with its plan. Difficulties in buying land from private owners is a political hot potato in Kenya – and Uganda – but less so in Tanzania.

Cost checks

The 1,400km pipeline from Hoima, in western Uganda, to Tanga port, close to Tanzania’s border with Kenya, may also work out slightly cheaper. Reliable costing of the pipeline is difficult at this stage, though a figure of around $4bn has been touted by Tanzanian officials, compared with up to $5bn for the Kenya route, which would have passed across more difficult terrain.

Meanwhile, a technical report which the Ugandan government said informed its decision suggested tariffs imposed on oil using the Tanzanian pipeline would be around $12.20 a barrel, while those for the Kenya route would have been around $17/b.

According to the Ugandan government, Tanzania has offered to waive some land fees, transit charges and taxes associated with the pipeline for an initial period, but no detail has been provided. Before the pipeline agreement’s announcement, Tanzania also said it was interested in taking an 8% stake in an oil refinery that Uganda has been planning for several years.

Such sweeteners would have played a role in Uganda’s decision, as would any offer of financial support from the companies involved. Tanzania says Total has offered to provide direct funding for the pipeline, which, if it materialises, would make a contrast to Kenya’s shaky efforts to finance its route via a public-private partnership.

Total has not commented on financing, though close ties between the French firm and Tanzania – Total has onshore exploration and other interests in the country – would provide the company with added confidence over any substantial investment.

Despite Uganda’s previous vacillations, it looks like the country’s president Yoweri Museveni will stick to his decision this time.

“I think the Uganda-Tanzania pipeline will go ahead. There have already been discussions in Uganda between the government and private landowners about giving up land for the Tanzania pipeline route and plans for further development of Tanga port are advancing,” says Adjoa Anyimadu, a research associate at London-based think tank Chatham House.

Tanzania’s announcement in early May that it was planning to build a pipeline to supply natural gas from its massive offshore reserves to Uganda – the first of Tanzania’s neighbours to be lined up for this supply – also shows a deepening energy relationship between the two countries, she notes.

More in the pipeline?

Tullow has said that, while it preferred the Kenya route, it now supports the Tanzania route along with the construction of a separate pipeline in Kenya to get that country’s potential oil production to the coast.

Since the collapse of the Uganda pipeline deal, Kenya has been trying to nail down an agreement to bring oil from its northern neighbour, landlocked South Sudan, to Lamu. South Sudan is keen to find an alternative to its existing pipeline to the coast in Sudan, with which it was previously unified and with which it has volatile relations. However, the South Sudan government has said it is now considering an alternative route through Ethiopia to Djibouti, rather than going via Lamu.

Kenya nonetheless wants to press on with its plans to build a pipeline from oil reserves in the Lake Turkana region to Lamu. Financing for this may still be possible, backed by funding and guarantees from the international donor community. But whether President Uhuru Kenyatta’s hugely ambitious $25bn Lamu-South Sudan-Ethiopia transport corridor initiative, Lapsset, can survive without the oil and the prestige provided by the Ugandan pipeline is now a big question.

Tanzania, meanwhile, will receive a substantial boost to its economy from the pipeline project, which could convert Tanga – just 130km south of Kenya’s main port Mombasa – into a major hub. It will also place Tanzania, sometimes regarded as an outlier within the East African Community nations, nearer the centre of regional trade and power.

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