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Uganda-Tanzanian pipe dream

The Uganda-Tanzania oil pipeline route is close to becoming a reality. Kenya will have to go it alone

Anyone in the Kenyan oil sector still hoping that the Ugandan government would change its mind and route its oil to the coast for export via Kenya have been disappointed. The announcement in late May that Kampala and Dodoma have signed a framework agreement to build a $3.5bn, 1,440km pipeline through Tanzania instead was a test of faith.

Uganda surprised many in the industry last year, when it ditched plans to build a pipeline to be shared with Kenya running to Lamu in favour of a Total-supported project for a 200,000-barrels-a-day-capacity pipeline through Tanzania.

The new agreement adds flesh to that plan, firming it up into what looks like a done deal. Implementation timelines, elements of the pipeline design, local-content requirements and tax breaks have been detailed. The Ugandan energy ministry says the completion date remains set at 2020, at which point the country will finally be able to exploit recoverable reserves currently standing at up to 1.7bn barrels and with 6.5bn barrels of oil in place.

Total, which is managing the project, says it will be the world's longest electrically heated pipeline-technology necessary to let the high-viscosity Ugandan oil flow. The transit tariff is estimated by the Ugandan government at $12.20 a barrel.

Total, along with Tullow Oil and Cnooc, was among those that objected to the Kenyan route. These dissenters cited concerns over the threat of terrorism against the pipeline in northern Kenya—a region which has been subject to attacks in recent yearsand claimed the Kenyan route would have been more expensive, given the likelihood of cheaper Tanzanian pipeline tariffs.

The decision was a blow for the Kenyan government, which was hoping to use the northern route to take its oil reserves, and possibly those of South Sudan, to the coast, as well as using it to kick start its ambitions to turn the Lamu area into a regional energy and industrial hub. The inclusion of Uganda oil reserves would have brought economies of scale to infrastructure development at the port.

1.6bn - High resource estimate for South Lokichar Basin in Kenya

It was also a setback for companies working in Kenya's fast-developing on-shore oil exploration sector, including Tullow, Africa Oil Corporation and Maersk. Some of the Kenyan route's supporters doubt that the Tanzanian pipeline option will prove cheaper overall for Uganda, or that attacks against the pipeline would have been a major risk.

Keith Hill, Africa Oil's chief executive, told the Africa Independents Forum (AIF), held in London just before the announcement of the framework agreement, that a pipeline to cater for Kenyan production alone would be viable, but that the door could be left open for Uganda to change its mind and join the project for "at least another year" to allow people "to come to their senses".

But, while anything's possible until the Uganda-Tanzania route is actually under construction, it now looks like Kenya will be going it alone with its own pipeline.

Discoveries mount

The good news from Kenya is that exploration in the Lake Turkana region in the northwest is providing some success. Tullow estimates that 10 oil accumulations in the South Lokichar Basin add up an estimated mean resource of around 750m barrels. Its partner Africa Oil Corp puts the upside at 1.6bn barrels.

A drilling campaign that started in late 2016 already includes a significant discovery at the Erut-1 well in the north of the basin, which, the companies claim, de-risks that area for further exploration. Meanwhile, nearby basins within Kenya's portion of the East African Rift Valley have also been the targets of exploratory wells with varying degrees of success, and with more test wells to come.

Africa Oil farmed out 25% stakes in three Kenyan blocks to Maersk in a deal completed in February 2016, leaving it with 25% and Tullow, as operator, with 50% of each. Hill says that deal helped Africa Oil to a position where it has $450m in cash and potential for up to $480m in additional development carrying finance from Maersk, depending on resource growth and timing of first oil.

Preliminary plans for Kenya's pipeline are already in train. Tullow and its partners hope to produce 80,000-120,000 b/d for pipeline shipment, starting in 2020, if they can. Ian Cloke, Tullow's vice president of new ventures, told the AIF that a joint-development agreement between the partners and the government to develop a proposed 885km pipeline from Lokichar to Lamu was in the final stages of negotiation. Environmental and social impact assessments are under way and front-end engineering and design is scheduled to start in the second half of 2017. Financing will come from the partners, the government and various multilateral institutions.

Whether will come from the timetable can be met remains to be seen, but a much more modest early oil project was scheduled to start in June. This entails transporting 2,000 b/d of oil from Tullow's early production more than 1,000km from northern Kenya to Mombasa port by road and rail, from where it will be shipped onwards to Asian markets.

This is unlikely to be a hugely profitable exercise. However, part of the idea, according to the government, is to get Asian refiners used to this new Turkana sweet crude, while also providing a rehearsal for the dramatic changes that are likely to affect the Turkana region, if the oil boom really takes off.

To that end, the early oil project could already be said to be doing its job. Residents of the southern Turkana area have threatened to block the oil trucks heading for Mombasa if talks with local communities on revenue sharing, jobs for local people and local infrastructure projects do not make further progress. As usual with such projects, it won't be easy to keep everyone happy when the big bucks start being made.

Source: Petroleum Economist
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