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What’s going on? Cracks appear in oil company partnership as pipeline saga drags on

Just when it seemed that Uganda’s oil export pipeline was finally agreed, everything is up in the air again.

By Nick Young

Graphic:  The southern route being considered in fact terminates at Tanga port, near Tanzania´s border with Kenya, not at Dar es Salaam as shown here.

The southern route being considered in fact terminates at Tanga port, near Tanzania´s border with Kenya, not at Dar es Salaam as shown here (Graphic;

In August 2015, the Presidents of Uganda and Kenya issued a joint communique saying they had “agreed on the use of the Northern Route i.e. Hoima-Lokichar-Lamu for the development of a crude oil pipeline” that would export most of Uganda’s and all of Kenya’s oil.

Yet only two months later the governments of Uganda and Tanzania agreed to study an alternative pipeline route to the Tanzanian port of Tanga.

So what’s going on?

According to John Bosco Habomugisha, Assistant Commissioner for Pipelines Development in Uganda’s Petroleum Exploration and Production Department (PEPD), it’s a simple matter of making sure that Uganda finds the most cost-effective route.

Nothing is yet ruled out, he told a meeting on regional oil infrastructure convened by International Alert in Entebbe last month. The agreement with Kenya, he pointed out, was subject to financing and security conditions that have not yet been met.

And, with no near end in sight to low oil prices, it certainly makes sense for Uganda to find the best deal possible for getting the oil to market.

Yet, while money is doubtless the bottom line for all concerned, that line is blurred by competing national, political and corporate interests. These can be seen by looking at who is rooting for which route, and why.

The northern route

The Government of Kenya strongly favours a northern route as part of a larger effort to develop its northern regions.  For many years, Kenya has been promoting a ‘LAPSETT’ (Lamu Port-South Sudan-Ethiopia) project to create road, rail and pipeline transport corridors to landlocked neighbours from a new port at Lamu.  This would not only boost Kenya´s national economy, it would also help to correct a historically unbalanced development pattern that left the country´s north economically marginalised, with some areas only barely integrated into the post-colonial nation state.

LAPSETT has so far remained more vision than reality. In July 2015, three years after an official ground-breaking ceremony, a Chinese contractor finally started work on the first three berths of the planned port.  But the transport corridor plans lack finance. Ongoing conflict in South Sudan massively undermines that country’s credibility as a partner in regional pipeline or infrastructure projects, and Ethiopia does not seem fully committed.  The Uganda pipeline would add at least some momentum to the flagging, LAPSSET dream.

Kenya’s 2012 oil discovery made a pipeline from Hoima to Lamu even more attractive for Kenya.  The Lokichar (Lake Turkana area) oil could feed into the international pipeline, reducing the costs of getting Kenya’s oil onto the world market.

Tullow, the company that discovered the oil in Turkana, declared in early 2014 that its 600-million-barrel discovery was commercially viable. But since then the oil price has crashed and Tullow’s continued drilling campaign in Kenya and Ethiopia has proved rather disappointing, failing to add any significant, new finds.

This means that if Kenya invested in its own oil pipeline to the coast to export the Turkana oil, profit margins for companies and government could be wafer thin at best.  So it is no surprise to find Tullow and its commercial partners in Kenya, Africa Oil and Maersk lobbying for the transnational, northern route.

Support for a northern route also comes from at least some parts of northern Uganda’s Acholi community. Professor Morris Ogenga-Latigo has argued that Uganda´s richest oil finds lie not in Bunyoro, but in the Acholi ancestral hunting grounds of Murchison Falls National Park. Therefore, he says, Acholi people should share the benefits of oil production, including having a central processing hub and the starting point for the pipeline situated within Nwoya District.

Fearing the troubled north

The main drawback to the northern route is the lack of security in northern Kenya.  The pipeline would pass through hundreds of kilometres of land that is sparsely populated but preyed upon by armed bands including, most notoriously, Al Shabaab terrorists crossing the porous border from Somalia.

The French oil company, Total, has raised this objection most consistently. This is not surprising, given their recent experience elsewhere. ISIS-linked terrorists killed 11 workers on a Total oilfield in Libya in February. The company also has holdings in war-torn Yemen, as well as Algeria, where in 2013 Al Qaeda-linked terrorists killed 40 hostages in a gas plant. The recent ISIS attacks in Paris may have added to Total’s sense of vulnerability.

Since the 2013 attack on Nairobi´s Westgate shopping mall, and the gunning down of more than 120 students at a north-eastern university campus the following year, Kenyan security forces have done little to inspire global confidence in their ability to prevent or contain terrorism.  A recent Institute of Strategic Studies research report describes mass arrests and harassment of Somali Kenyans and extrajudicial killings of coastal Muslim leaders, and notes that such indiscriminate and brutal measures may simply ‘radicalise’ disaffected citizens, provoking an ongoing spiral of violence.  Mwenda Kailemia, a Keele University criminologist, has also warned of the “toxic mix of corruption and the structural alienation of Kenya’s Muslim population.

Kenyan officials are now reportedly considering building a wall along the border with Somalia, to keep terrorists out.  This mediaeval containment strategy is unlikely to impress the Total board of directors.

The Lamu route presents technical challenges as well as security concerns, according to PEPD Assistant Commissioner Habomugisha.  Lamu, he says, has no natural harbour, making it difficult to load tankers in all weathers, and so it would be necessary to build very large storage facilities at the terminus, adding to the project cost.

The southern route

Total’s concerns appear to have been decisive in persuading the government of Uganda to reconsider a southern pipeline route, through usually peaceable Tanzania to the Indian Ocean.

The choice of Tanga over Lamu as an oil terminus would be a significant boost for Tanzania. The country is a natural competitor with Kenya in collecting profits from providing downstream transit and harbourmaster services to inland countries. It is now investing heavily in a new port at Tanga, and is eager to upgrade road and rail links to emerging interior markets with huge potential for future growth.

Critics of the southern route argue that, without any oil of its own to export, Tanzania would lack the direct, commercial incentive to keep pipeline construction and maintenance on track.

Yet, according to Tanzanian media reports, Tanzania is also looking at the Tanga route to export its natural gas to Uganda. According to a report carried by the state-owned daily Habari Leo in October, the Head of the Tanzania Petroleum Development Corporation, Dr. James Mataragio, alluded to talking to Total about that option. Tanzania sits on more than 55 trillion cubic feet of natural gas and has already implemented some impressive projects to get its product to both domestic and international markets.

One thing that would make the Kenyan project more viable though would be more finds, but exploration has ground to a halt and the Commissioner for Petroleum says there is no interest from companies in taking up any relinquished acreage onshore. The interest is offshore, he says. That too does not bode well! But generally, many industry-connected people in Kenya almost entirely agree that the northern route is their only option, arguing that the southern route cuts across so many communal fault lines.

Critics of the southern route also point out that if Uganda opted for a Tanzanian route, the construction and operation costs would have to be recovered entirely from Uganda’s oil.

However, the Lamu route was also looking very costly. According to a report in The East African, studies have showed that USD 15.2 would be charged for every barrel of Ugandan oil travelling down the pipe from Hoima to Lamu.  That would make it very difficult to squeeze any profit from the oil without a substantial rise in world prices.

So Total and the Government of Uganda say they need to take a closer look at the Tanzanian option, to see if it might offer a route that is cheaper as well as safer.

The middle way

But it is also possible that in looking towards Tanzania, Total and the government of Uganda hope to pressure Kenya into offering better terms, or accepting the middle—and shortest—route, from Hoima to Mombasa.

On the expected, public-private partnership model, private investors will cover most of the construction costs and then operate the pipeline, recovering their investments and making a profit by charging the oil companies to use the pipeline.  Governments may also levy transit fees.

It is not clear whether the quoted USD 15.2 dollars per barrel cost of the Lamu route includes a charge levied by the Government of Kenya, or whether the Kenyan oil joining the pipe would enjoy a preferential rate. There may be room for Kenya to offer a better deal by reducing its expected take.

Alternatively, Kenya might be persuaded to abandon its preferred route to Lamu, and accept a pipeline through its own south to Mombasa, with a spur coming down from Turkana.  This would be a relatively short route for the Ugandan oil, with some cost sharing, and it would be less insecure than a northern Kenya route.  This may be a compromise on which the three oil companies, Total, Tullow and CNOOC, could agree.

Delay is the only certainty

But with cracks appearing in the partnership between Total and Tullow, and possible shifts in relations between Uganda and her coastal neighbours, deliberations over a pipeline route will likely drag on for some time yet.

Certainly, nothing will be decided until after Uganda’s elections in early 2016.

Tullow’s Chief Executive has said his company doesn’t expect to make a final investment decision before 2017, after a pipeline route has been “firmed up.”   Even then, the pipeline would take three years to build, which makes 2020 the earliest date that Uganda could start exporting.

A recovery in oil prices might spur on the decision making process, but while prices remain low, investor confidence will also remain low, and the decisions will be tough.

The only other certainty is that, in this heady mix of commercial interests and regional politics, a ‘Memorandum of Understanding’ or an ‘Agreement’ counts for rather little until it has actually been implemented.

Additional reporting by Chris Musiime.

Nick Young is the Founding Editor, Oil in Uganda.