OIL PIPELINE: UGANDA AT CENTER OF HIGH STAKES GAME

Uganda finds itself playing the coy bride in a high stakes competition as neighbours Kenya and Tanzania court it for the right to pipe its oil to the Indian Ocean.

Last week Dar es Salaam announced that they were intent on fast tracking development of an oil pipeline from Uganda to the seaside port of Tanga and that French oil firm, Total had already earmarked $4b for the project.

In October Uganda and Tanzania announced that they were exploring the viability of a joint pipeline barely weeks after an August announcement by Kampala and Nairobi on the same subject.

An oil pipeline through Kenya via its northern oil fields would tie in nicely with the much touted LAPSSET (Lamu Port South Sudan Ethiopia Transport), a $20b project aimed at developing Lamu port, an oil pipeline from South Sudan, a road network and coal powered electricity.

Total however expressed disquiet about passing the pipeline through northern Kenya and onto Lamu for fear of terrorist attacks from neighbouring Somalia.

Total, CNOOC (China National Offshore oil Corporation) and London-listed Tullow Oil are partners in the development of the oil reserves in western Uganda.

Uganda’s reserves were upgraded to 6.5 billion barrels last year. Development has stalled as government and the oil companies negotiate production licenses, which the energy ministry had promised would have been issued by the end of last year.

"Last year Uganda laid down its conditions for Kenya to meet before it could put pen to paper – Kenya had to meet the cost of a risk guarantee on the project, pay for any cost overruns, offer affordable tariffs for use of the pipeline and, what is considered a potential deal breaker, that its eastern neighbour establish commercial viability of its oil reserves...

Kenya’s reserves are currently estimated at 600 million barrels, however commercial viability has not yet been established.

Commercial and geopolitical reasons are pushing the latest thinking and in light of cratering oil prices time is of the essence for Uganda to reignite the momentum in the development of its oil resource, experts say.

Oil explorer Tullow needs the pipeline to pass through the oil fields of Lokichar near Lake Turkana, where it is also the lead explorer, to make the fields even more attractive to potential investors.

Oil explorers, often smaller operators than the oil majors, make their money by finding commercially viable oil fields and on selling them to the bigger oil companies. Accessibility of the fields is a major determinant in the final price they can get from a buyer. In land fields are invariably more attractive if the oil can be evacuated easily for export, hence the need for the pipeline.

Total, who is championing the southern pipeline, is not only averse to bypassing the highly insecure eastern Kenya but also sees the Tanzania as more cost effective.

Last year Uganda’s southern neighbour discovered more natural gas boosting their known reserves to 55 trillion cubic feet and is working on a pipeline to transport the gas from its southern astern shores to Dar es Salaam.

This find is key because of the nature of the Ugandan oil, which is waxy and solidifies under 40 degrees centigrade. As a result a pipeline to ferry the oil will need to be heated regularly along the length of the pipeline. Experts estimate that there will be a need for a two megawatt power station every 20 kilometers on the pipeline.

Total’s planners think that gas powered power stations would be more effective as along the northern line the extra infrastructure to get power to the heating stations would be an added cost they do not need in this time of historically low oil prices.

"US oil futures bottomed at $26 a barrel in February for deliveries in May. A brief rally last year saw the same prices peak at $60 a barrel, a far cry from the peaks in July 2007 of $140, around the time that commercial viability of the Ugandan fields was established....

In addition the Hoim-Tanga port route is shorter than the Hoima-Lokichar-Lamu route by about 150 km, which has obvious cost implications.

Uganda seen to be dragging its feet on the issue of developing its reserves by industry players, is determined to extract the maximum value for its oil that it can when it still can negotiate.

Kampala has been holding out for more recovery from its estimated reserves. All the 6.5 billion barrel reserve cannot be recovered mostly due to technology limitations. The proportion of the reserves that can be recovered is often a sticking point. If the anticipated recovery is too low the country can miss out on revenues and if it is too high it would affect the affordability of the project.

Negotiations have brought the figure up to about 30 percent from a low of as little as 10 percent.

In addition Uganda also made it a condition that the first call on the oil would be to the planned $2.5b oil refinery. The oil companies’ preference was to pipe all the crude oil out of the country and impasse that was only broken in 2013.

"The refinery which will initially handle 20,000 barrels day building up to 60,000 barrels daily is expected to spawn oil related industries in plastics, fertilisers, pharmaceuticals and other oil based derivatives like Heavy Fuel Oil used in power plants and bitumen, used for paving roads....

In addition the huge iron ore deposits established in the Kigezi region, of southern Uganda last year make a possible tie in with the infrastructure development – transport and energy infrastructure, surrounding the pipeline good economic sense.

In June the energy ministry announced that following surveys of the area that at least 200 million tonnes of iron ore worth about $16b had been verified. To optimally exploit these resources billions of dollars in investments in power generation, road and rail transport will be required in coming years.

Government planners also the development of the southern pipeline as a means to break decades long over reliance on Kenya for its access to the sea. This dependence means that more than 80 percent of Uganda’s external trade is funnelled through Mombasa currently. Historically disturbances in Kenya, most recently during the post-election violence in 2007, have left Uganda particularly vulnerable, triggering fuel shortages, trade blockages and subsequent price hikes.

"A fringe element also thinks by passing the pipeline through northern Kenya, making the LAPSSET economics more attractive, would shift South Sudan’s interest away from Uganda. Before the civil war broke out at the end of 2013 trade with our northern neighbour racked in more than a $100m a month, which has fallen drastically since but is expected to resume when things settle down in the troubled nation...

Tanzania of course is glad to have such a project passing through, making the planned Tanga port more viable and may even shift business away from Mombasa, especially from Rwanda, Burundi and the Democratic Republic of Congo.

Kenyan officials will be in Uganda in a fortnight’s time to address Kampala’s concerns about the pipeline and one can expect John Magufuli’s government will be casting a wary eye on developments then.