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Uncertainties persist over African pipeline route

A pipeline to ship oil from Kenya and Uganda to Africa’s east coast has become essential, but agreements on the route are far from settled

A number of options are on the table for a pipeline to make east Africa’s oil better felt on international markets. Uganda President, Yoweri Museveni, signed a deal in August 2015 to create the route through Kenya. But, two months later, Uganda's energy ministry announced a memorandum of understanding (MOU) with Tanzania and France’s Total to study the viability of an alternative route to the Tanga port, in Tanzania, bypassing Kenya altogether. In April 2015, Japanese company Toyota Tsusho presented a study to the Ugandan government showing that a pipeline route running from Hoima-Lamu was more feasible than the first alternative, the Hoima-Nairobi-Mombasa route. A number of oil companies are involved, each with various motives for supporting the different routes.

For Total, security is paramount. The company has raised concerns about the Lamu route, which would run close to the Somalia border where al-Shabaab, an Islamist group linked to al-Qaeda, is active. Last November’s Paris attacks and Islamic State’s assault on Total’s Mabruk field in Libya earlier in 2015, when 11 workers were killed, might justify those apprehensions.

The terrorist group, which seeks to overthrow Somalia’s Western-backed government, has carried out regular attacks in the Lamu district, supposedly in retaliation for Kenya’s involvement in the African Union peacekeeping force in Somalia. Lamu also borders the Garissa district, where al-Shabaab killed 148 people, mostly students, at a university in April 2015. Local residents give other reasons for these attacks, saying they reflected anger about the loss of Muslim territory in Lamu. It has been suggested that building critical infrastructure so close to the porous Kenya-Somalia border may invite further attacks. Total says it has “consistently pleaded” for a southern route through Tanzania which it considers “the “safest, most reliable, and lowest-cost solution”. The company’s chief executive met Museveni on 22 December and made his preference plain.

Conversely Tullow described the signing of the Lamu pipeline agreement as a “major milestone”, saying it would allow the project to move into a new technical and commercial phase. Its partner in Kenya, Africa Oil, agreed, saying the Lamu route was the most viable option, though the firm’s boss Keith Hill also said last year he was “confident” the Kenyan government would provide security for either route. In any event, Africa Oil is pushing ahead. On 11 January, the Kenyan government approved its plan to sell blocks 10BB, 13T and 10BA to Maersk – a move Hill says means his company won’t need more equity financing before first oil, and should let Africa Oil weather the price slump.

The Kenyan government says the Lamu route will strengthen regional trade and increase energy cooperation between east African states. It would form part of a $25.5bn development in the region, the Lamu Port South Sudan Ethiopia (Lapsset) corridor project, which would involve a mega-port in Lamu, taking some of the strain off Mombasa’s over-capacity port.

Museveni and Kenya’s President Uhuru Kenyatta are to hold further talks – but Kenya says its pipeline to Lamu plan will not be derailed.

“As far as Kenya is concerned, the agreement with Uganda for a route for the pipeline along the northern corridor ending at the port of Lamu still stands. Uganda may be testing an alternative route for comparison purposes and we will wait for that comparative analysis,” says Hudson Adami, senior principal geologist at Kenya’s energy ministry. For all Kenya’s investments, security is the government’s priority, he says. “The pipeline will not be an exception.”

In its feasibility study, Toyoto Tsusho estimated that the pipeline to Lamu would cost $4.7bn. Kenyan and Ugandan officials have mooted a plan that would entail the pipe allowing for reverse flow of imported petroleum products from Lamu to Kampala, while sending crude the other way. Of course that would raise the price tag. The pipeline would have seven pumping stations and capacity of 300,000 barrels a day (b/d) with another 130,000 b/d available at full-flow capacity.

Cost imperatives

The southern route to Tanga, a port about 340km north of Dar es Salaam, could also pose security risks. Ethnic tension and community demands have repeatedly stalled projects there. Exotix & Partners, an investment-services firm, says cost will be the decisive factor. “In this respect the results of the feasibility studies currently underway are important,” says Exotix economist Alan Cameron. “If the Tanga route proves significantly cheaper, we think it will be incumbent on Kenya to make a counter-proposal to revamp the existing route through Eldoret to Mombasa,” significantly reducing the overall length of the pipeline.

Uganda energy officials insist the goal of the new MOU with Tanzania is to select a route that results in the lowest transportation cost and constitutes the most viable option for the pipeline project. “If we can get a least-cost pipeline to the East African coast, our crude oil will be exported cheaply,” the secretary-general at Uganda’s energy ministry, Fred Kabagambe-Kaliisa, said when the MOU was signed in Dar es Salaam last October.

Kenya, Tullow and partner Africa Oil would clearly be the losers if Uganda backs the Tanzanian route.

“By-passing Kenya by proposing a route through Tanzania is essentially playing on long-standing competition between Kenya and Tanzania in terms of attracting foreign investment but especially securing trade routes to the countries that are not linked to the coast, Uganda, Burundi and Rwanda,” says Control Risk’s lead Kenya analyst, Paul Gabriel.

On 8 January Tanzania’s ministry of Works and Transport announced it had suspended plans to build a $10bn port at Bagamoyo, approximately 150km south of Tanga. The intention is to focus on the country’s existing marine facilities. “This makes Tanga a more realistic choice for the pipeline terminal,” says Dar es Salaam-based Strain.

East African oil infrastructure

Wood Mackenzie’s sub-Sahara Africa upstream analyst Alasdair Reid says that there are clear benefits of scale to be made by tying the Uganda and Kenya developments together via a single export route. “We model the northern route to Lamu as our base-case (most likely) option. Until a planned feasibility study is completed, the Tanga route is very much seen as a wildcard”.

Tanzania has yet to discover oil. A number of junior oil and gas exploration companies such as Swala Oil and Gas are currently exploring onshore including in the Pangani licence area which is very close to Tanga but none is yet seriously contemplating any big oil finds in the country.

If they have any success this will certainly add weight to the argument for locating the terminal in Tanzania, says Strain.

Reid believes the project will go ahead, but there is very little incentive for the oil companies to sanction it until the oil price begins to recover. “As such, there is perhaps less urgency than might be expected for the operators.”

Compromising terms

There’s still debate about who would pay for an export pipeline. One solution, says Devine, might be for the oil companies that build it to recoup their cost through tariffs payable by third-party users. But that would only work as long as demand from third parties was sufficient. It would also mean the investors would have to build a pipeline with spare capacity in excess of their own needs.

Reid says a third-party joint venture involving the upstream partners, governments and other interested stakeholders will likely build and operate it. “As the projects have not been sanctioned, the costs are still uncertain at this stage. The pipeline ownership structure will also impact each other’s total share of the development,” he says.

A pipeline decision may be urgent for the companies, but Uganda doesn’t seem to be in a hurry. Elections are scheduled for February, when Museveni will seek another term. Angelo Izama, a Ugandan independent energy researcher, says clarity on the pipeline route won’t emerge until after the electoral dust settles, probably around April or May.

It could all take a while. Any routing decision will need bilateral political agreements as well as commercial deals between the upstream oil companies. For now, all options remain on the table. Tullow says it is targeting a final investment decision in Uganda in 2017, and expects the route will be finalised by then.

“What is clear is that an export pipeline is crucial for the long-term economic viability of these developments and project development will not move forward until a route has been set,” says Reid.

Ugandan energy officials have said it would take five years to build the pipeline once a route is agreed – meaning the earliest a pipeline could accept oil is now 2021. For now, it is up to Uganda’s idiosyncratic president to find a compromise with Kenyatta. Until he does, questions over the pipeline route will remain the single biggest impediment to Uganda becoming, at long last, an oil producer.

Options for Tullow

Uncertainties over the pipeline route are not helping the developers. Weak oil prices have already curbed investor appetite. Tullow, heavily in debt and with significant stakes in the region, will have to be creative. The company told Petroleum Economist that it was likely to farm out more acreage in Uganda. That’s likely in Kenya, too, given the market’s weakness, grim forecasts for 2016, and mounting debts. The company says it wants its equity stakes in both countries to be around 30%, the “correct equity balance” for Tullow and its partners.

The company had identified 600 million barrels of oil on permits 13T and 10BB in the Lokichar basin before its most recent discovery at the Etom-2 well, in a previously underexplored block in northern Kenya. The company holds equal partnership with Total and China’s Cnooc in Uganda’s Albert basin upstream, where 6.5 billion barrels of oil, 1.4 billion of them recoverable, have so far been confirmed.

But now might be the wrong time for Tullow to be selling, says Richard Devine, an oil and gas partner at law firm Clyde & Company. “Uncertainties over the potential costs of building the pipeline and the security of various routes create additional risks that are difficult for a buyer to price,” Devine says. The swooning oil price and lack of commercial production or history of it in either Kenya or Uganda are also dampening investors’ appetites.

Weak oil prices and big capital commitments mean Tullow’s near-term financial situation is tight, says Wood Mackenzie’s sub-Sahara Africa upstream analyst, Alasdair Reid. The company is already seeking partners for its TEN project in Ghana, a move which would reduce its capital exposure, says Reid.

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