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How Uganda Oil Pipeline Deal Slipped Out Of Kenya’s Hands

Kenya’s President Uhuru Kenyatta is generally a very jovial man. However at the 13th Northern Corridor Infrastructure Summit held at the weekend in Munyonyo, Kampala, he seemed to be the reverse of his usual self.

Days to the summit, it had been concluded, and perhaps he had even been briefed early enough, that Uganda had chosen the southern route through Tanzania for the proposed multi-billion dollar crude oil export pipeline.

The political manoevering

With an election not so far away, according to insider accounts, Mr Kenyatta had hoped for his country to snap up the deal via the Northern route to the Lamu Port on the Indian Ocean. The project commencing in a pre-election year meant investments, jobs and other associated benefits–which undoubtedly would go to his government’s credit.

Ugandan technocrats, however, knew clearly and very early enough, after several feasibility studies, that nothing worked in Kenya’s favour. President Museveni, a close ally of Mr Kenyatta, as well had been briefed several times on the odds between the Northern and Southern routes. But how to eliminate Kenya cautiously, a long-standing bilateral partner, from the equation is why the final position had to be subjected to re-inspections of routes, reassessing feasibility studies, and the back and forth meetings.

In the final technical report, a copy seen by this newspaper, Ugandan technocrats from the Petroleum Directorate in the Ministry of Energy maintained that the southern route to Tanga port on the Indian Ocean coastline was the “least cost option.” According to the report, the Port of Lamu lost out on all grounds of comparisons, which left it at a loss of the lucrative pipeline deal.

The Japanese engineering consultancy firm, Toyota Tsusho Corporation (TTC) had recommended Lamu in a feasibility report submitted to the two governments in 2014. TTC cited the need to tap into the already existing economies of scale between Uganda and Kenya, and further to tap into the benefits of $25b LAPSETT infrastructure corridor–the ambitious infrastructure corridor conceived by Kenya, Ethiopia and South Sudan.

French Oil giant, Total SA, parent company of Uganda’s Total E&P–one of the three International Oil Companies (IOC) licensed to operate in Uganda from day one opposed this route not only for security concerns–Lamu port borders the restive Somalia where the Islamist al-Shabaab militias operate–but also the rough terrain with slopes above 25 degrees.

Total contracted the US-Houston (Texas)-based Gulf Interstate Engineering to undertake a feasibility study on the alternative, Tanga route, and which was found more viable and less challenging to get oil from Uganda to the international market.

Insiders also recounted that when in August last year, Presidents Museveni and Kenyatta, signed the first MoU to actualise a pipeline from Hoima to Lamu the Kenyans complicated the matter by wasting the already lost time in arguments over preconditions Uganda had set–such as guaranteeing security, upfront financing, and tariffs not higher than offered by the alternative. Whilst this was a heads of state decision, the technocrats had already put their feet down for Tanga.

In October the same year when Uganda signed another MoU with Tanzania, the Kenyans were awakened, quickly returned to the drawing board and expressed interest in revitalizing discussions to court Uganda for the deal.

After months of deliberations: the Ugandan team met with both the Kenyan and Tanzanian teams, and later the Ugandan officials met with top authorities of Total, who in fact promised to source financing for the project. At this stage it became clear Kenya had lost out on the deal.

Early in March this year, President Museveni met Tanzanian President John Magufuli on the sidelines of the 17th Ordinary East African Community (EAC) summit, and the two sealed the deal for the project.

Two weeks later, President Magufuli met the Total SA vice president for East Africa Javier Rielo, and the two agreed the company will start construction of the 1,410km (876-mile) pipeline “as soon as possible.”

A week later, President Kenyetta called upon President Museveni to salvage the deal, and much as the two tasked technical teams from both countries and Tanzania added, to go back to the drawing board and even to consider the route to Mombasa, it was late.

Technical considerations

According to reports and insider accounts, before even the security aspect in Northern Kenya was made a factor, there was concern that construction of the port of Lamu–part of the LAPSETT corridor was almost two years behind schedule and thus was not the best option for the route.

This delay would mean Uganda would only get to export crude oil in the second quarter of 2022, with only 80 percent of the work complete.

First oil considerations

The Tanga port on the other hand is already operational, with 98 percent availability, and means if Uganda opted for it, would start exporting crude by earliest 2020. “The Kabaale [Hoima]-Tanga route is the only option to secure first oil export,” the final report reads in part. Kabaale in Buseruka sub country, in Hoima is the poised to be the center of activity.

It is here that government earmarked 29sqkm of land [about 13 villages] for the construction of a Greenfield oil refinery. This will be the collection point for crude oil from all oil fields both from Northern Uganda (so far from Nwoya district where Total operates) and western districts of Buliisa (Tullow/Cnooc) and Hoima (Cnooc).

Terrain

The route to Lamu (1,038km)via North East Uganda to Kenya’a Lokichar, where the country discovered oil, to the port posed serious terrain challenges with hilly and steep slopes above 25 degrees. The Tanga route (1,239km) on the other hand was deemed flat with slopes, if any, below 15 degrees.

On the Ugandan side, the terrain around Mt Moroto were noted to be having considerable challenges in the construction of the pipeline. The terrain around the area would increase the cost by at least 5 times, compared to a flat terrain..

Infrastructure constraints

Even if the Lamu route were to be considered, the existing infrastructure in Kenya caused more headache. There are no existing roads and railway network along the route. Only a network of 183km of tarmac roads and 250km roads of usable murram roads are close by the project right of way. This road network was described as “not suitable for heavy trucks.”

The Tanga route has existing roads with 1101km of tarmac roads and 582km of usable murram roads, and a railway along the project right of way.

The Lamu option was also considered expensive because of the cost of construction at the Port itself. Construction of the port was contracted to a Chinese company, China Communications Construction Company (CCCC) in 2013 but no significant work has been undertaken since–only a campsite is standing.

The port construction alone is Shs16.3 trillion ($5b).

The plan presented by the LAPSSET secretariat is to have the first berth standing by 2018, and a second and third berths erected by 2019 for general, bulk and containarised cargo, which further made it complicated. This update, according to one official was presented during a meeting in Tanzania on March 30.

Besides, the officials noted, the contractor had to undertake dredging of the port, estimated at a cost of Shs359b ($110m), which in their view was underestimated.
More hiccups came with land reclamation at the port likely to cost between Shs2.6b and Shs3.2b or ($800m and $1bn).

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The concern, insiders noted, is that all these costs could have an effect on the resultant tariff that Uganda will have to pay to use the export pipeline. All this is because the port remains underdeveloped.

“On the other hand, the Tanga port is fully functional,” a report dated April 11 reads in part. This means the port did not require additional infrastructure to cater for the pipeline. In fact, officials, noted the Tanga port enables the pipeline operations to start immediately.

Environmental concerns

The route through Kenya presented a challenge, in that it would result in moving through ecologically sensitive areas. This posed a considerable threat to the environment and would result into increased campaigns against the project from environmentalists.

The Hoima – Lockichar – Lamu route specifically has to go through four forest reserves, national parks, the Lake Kyoga area that is considered ecologically fragile and would have to cross the Nile at a width stretching about 1.2kms, which is considered a project risk.

Lamu alone is considered a Unesco World Heritage site because of the coral reefs, the mangrove trees, fish breeding, and also there was a campaign titled “Save Lamu” that could result in endless litigation, which would in turn delay the project.

On the other hand, the Kabaale – Tanga route, doesn’t move through any national park and protected areas with the exception of the Biharamulo Game reserve for a stretch of about 33kms. In Uganda, the major environmental crossings will be wetlands, the Pangani River, and the River Kagera. Placed on a weighing scale, the Tanzania option presented less environmental risks.

Land acquisition

The land is an important factor in the construction of the pipeline. In Uganda, the land acquisition process would be obvious considering that there’s freehold, customary, and mailo land tenure system. That means there will be compensation to the various landowners in the area. Uganda often struggles to complete the compulsory land acquisition and it wouldn’t want to have that same experience delay a project. However, once the pipeline crosses into Kenya or Tanzania, it presents a different ball game.

“Land acquisition process is estimated to be at least 1 year longer in Kenya than in Tanzania,” the Ugandan government notes in one of the technical reports.

In Tanzania, the example given was the land acquisition process for the construction of the Mtwara – Dar es Salaam 542kms pipeline. It took nine months to acquire a way-leave for the pipeline. In Kenya on the other hand, acquisition of land for the Standard Gauge Railway project lasted at least more than 2 years because of land disputes.

The Uganda government was concerned about Kenya noting that they had larger land related risks.

There is also need for increased consultations with county governments, the communities, and the National Land Commission.

In Tanzania, the case is different. “All land is vested in the President as a trustee and no freehold system exists. The president has the power to revoke private land titles to give way to the project of public or national interest,” the report by the Uganda government reads. In summary, it would take 10 months in Tanzania and two years in in Kenya.

Project costs

“This was the last nail in the coffin,” said a senior official who declined to speak on the record. The Tanga pipeline, according to the report presented to the heads of state, including catering for all costs from Hoima was estimated to cost Shs11 trillion ($3.55b).

The Lamu pipeline, going through some swampy areas and hilly terrain (which are very cold in the night) on the other hand was tagged to a cost of Shs13.7 trillion ($4.2b). This capital expenditure, excluding heating costs for the pipeline (the oil from Uganda being very waxy), dredging and land reclamation and other required work at the Lamu.

In the report submitted by Toyota Tsusho, the “realistic” project cost for the pipeline was put at Shs16.6 trillion ($5.1b). When the oil companies did their own estimates, Total put the cost at Shs18.9 trillion and Cnooc at Shs16.9 trillion ($5.2b).

Weather challenges

The Tanga port is shielded from the periodical strong ocean winds by Pemba Island, which forms part of the Zanzibar Archipelago in the Indian Ocean. Lamu port on the other hand located on the coastal Lamu Island, is not shielded from the Monsoon winds (seasonal winds blowing from Asia) by the surrounding islands, Pate and Manda–which make up the Lamu archipelago.

The above findings, among others were discussed by teams from Uganda, Kenya and Tanzania and a report submitted to the three heads of the state; President Museveni, Rwandan President Paul Kagame and Kenya’s Uhuru Kenyatta. Tanzania was represented by Foreign Affairs minister Dr Augustine Mahiga,

As they convened in Kampala on Saturday, the final position on the matter had been concluded—that the Uganda will construct its pipeline to Tanga.

“There is no more paralysis on that matter, we are now moving,”, President Museveni remarked at the end of Saturday’s meeting.

“I have agreed with President Kenyatta that, let the two pipelines go ahead, one from Lokichar to Lamu and another from Hoima to Tanga,” he added. It was also agreed that Kenya will construct its own pipeline from its Lockicahr oil belt to Lamu. So it is now a done deal.

Uganda’s oil reserves are currently estimated at 6.5 billion barrels. Kenya also recently announced discoveries of 600 million barrels. On the basis of the pipeline going to Lamu because the two countries made oil finds, a senior official, told Daily Monitor that, Kenya was “actually” yet to appraise (to establish the limits of the reservoir, productivity of wells) its discoveries, and coupled with the challenges on their route “it did not make any sense.”

The Summit was also attended by the South Sudanese presidential advisor on Economic Affairs Aggrey Sabuni and Ethiopia’s deputy premier Debretsion Gebremichael.

Reacting to the decision, the Total E&P Uganda corporate affairs director, Ahlem Friga-Noy, in a statement described the development as a “major milestone towards the development and the production of Ugandan resources.”

“We commend the thorough work conducted by the government of Uganda in the process of analysing and selecting the best route to transport the Ugandan oil and to ensure the maximization of its value.”

A day before the Saturday summit, President Museveni met a delegation from Total led by the Africa director for exploration and production, Guy Maurice and the Uganda business general manager Adewale Fayemi, where they discussed how to go forward with the Tanga pipeline.

Tullow Oil [Uganda] general manager Jimmy Mugerwa, said that: “While we have always believed that a joint Uganda-Kenya export pipeline was the most cost-effective option, we are clear that both Uganda and Kenya’s oil resources can be developed separately.” Tullow also operates in Kenya. “We will now work with both the government of Uganda and our joint ventures partners CNOOC and Total on further moving the Uganda project towards development.”

What next

It has been estimated that the Tanga pipeline will create around 15,0000 jobs. The project will be developed under a public-Private partnership, and now Total, Tullow and Cnooc, will embark on discussions on project financing, engineering, procurement and construction (EPC), and facilitating pre-resettlement action studies, before announcement of the official date of commencement of project start.

source: All Africa

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Written by PH

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