Fight over oil pipeline

By Ronald Musoke

The French could scuttle Chinese plans for Uganda oil

Tullow Oil Uganda, Total E&P Uganda, and the China National Offshore Oil Company (CNOOC) are the three partners in Uganda’s upstream sector. But a rift appears to be starting to emerge in their relationship over the routes the oil pipeline should take. Such rifts could delay or even scuttle an already late project. Until mid this year, the Chinese and the Irish firm, Tullow Oil, appeared to have the pipeline deal in the bag. But in July, President Yoweri Museveni held talks with Jabier Rielo, Total E&P’s vice president for Eastern Africa, over the development of a pipeline.

On Aug.22, Rielo proceeded to Dar es Salaam to meet President Jakaya Kikwete, and it appears, the idea of building the pipeline via Tanga moved from a possibility to a real prospect.

On Oct. 12, a new memorandum of understanding on Uganda’s proposed crude oil export pipeline was signed in Kampala by senior government officials from both Uganda and Tanzania.

The signing of the memorandum, which was also witnessed by officials from the Tanzania Petroleum Development Corporation, and Total E&P Uganda, is intended to study the possibility of developing a third route for export of Uganda’s 6.5 billion barrels of crude oil from Hoima via northern Tanzania to the Indian Ocean port of Tanga.

Observers say these new developments on the pipeline could further complicate the commercialisation process of the country’s estimated 6.5 billion barrels of oil industry.

After years of insisting on value addition at a refinery based in Uganda as the sole means by which the country’s crude oil would be implemented, the government finally buckled to pressure from oil companies and agreed on a pipeline to evacuate the bigger portion of its oil for export.

A refinery would be good for Uganda and the region as it would end the importation of expensive petroleum products. But the pipeline is a bigger priority for the production companies as they see it as the only way to make a decent return on their massive investment. Although the refinery project has acquired land and a lead investor, the producers will not pump even one barrel from the ground until the pipeline to the Indian Ocean is operational.

The government is desperate for oil to start flowing.  It has banked on the billions of dollars of oil money as the main driver to the ‘paradise’ of middle income status for Ugandans. But where the hunger for oil money is high, the process of getting it is low.

The government has until now been pushing to identify and assess the comparative merits of two pipeline routes — both through Kenyan ports; one via Mombasa and the other via Lamu. The entry of the Tanga option is a major re-organisation of this decision-making landscape.

The Tanzania deal

A decision appeared imminent in August during President Uhuru Kenyatta’s state visit to Uganda.  The two Presidents appeared to have agreed on the northern Lamu route. Under the plan, a crude oil pipeline would roll from the Albertine Region in north-western Uganda through northern Kenya via Lokichar and finally to Lamu on the Indian Ocean coast. In mid-September, technocrats from both Kenya and Uganda met in Nairobi as the two Presidents directed them to fast-track arrangements towards construction.

The Chinese mutely favoured this route because it was expected to easily incorporate oil exports from landlocked-South Sudan, which endures an unreliable route via Port Sudan and has often been the point of bickering between Juba and Khartoum.

At the time, Manoah Esipisu, Kenyatta’s spokesperson, told Kenyan media following the talks between the two leaders that although the two governments were yet to settle on the best funding option, work on the Hoima-Lokichar-Lamu oil pipeline would start “as soon as possible.”

But barely two months later, Uganda appears open to other deals.

Total E&P has been the most vocal against the northern route and the company’s top officials have been engaged in discussions with the East African governments.

Adewale Fayemi, the general manager of Total E&P Uganda, described the October memorandum with Tanzania as a milestone, adding that Total is committed to supporting the route and collaborating with all the partners involved.

Total E&P have made it public that they want the pipeline route changed in favour of the Hoima-Tanga route. The French firm often cites insecurity and a challenging terrain as the main reasons for its disapproval of the northern route.

But industry sources say Tullow – and definitely Kenya – do not want to even take a cursory look at the southern route because they have a “vested interest” in the pipeline passing through northern Kenya where they have discovered close to a billion barrels of oil. The route through that region is thus best-suited for Tullow and Kenya as it would make massive economic sense for them.

Possibly sensing that considerations of an alternative would arise soon, Kenya pushed Uganda and Rwanda to contract a Japanese firm, Toyota Tsusho, to do the feasibility studies.

For Uganda, the route via Tanga, which is an Indian Ocean port about 340 km north of Dar es Salaam and is just about to be upgraded to offload more bulky cargo, is longer.

The studies showed that the design and construction of the northern corridor route via Lamu would cost only $4.7 billion while the southern corridor route via Tanga would cost a total of $5.26 billion – a difference of about $600 million. In terms of the distance, at 1,500km, the studies showed that the northern route is shorter compared to the southern route by about 45km.

However, the cost to move the oil appears the same on all routes. Moving one barrel of crude oil from Hoima to the coast would cost the oil companies $15.2 via Lamu and $15.6 via Tanga.

The third option for the pipeline is the route through Nairobi from Uganda to Mombasa. However, sources say this particular route is not favoured by the oil companies citing the congestion inherent on this route. This is the reason the two governments also ruled it out completely and shook hands in agreement on the northern route.

Uganda’s Energy ministry officials insist the goal of the new memorandum with Tanzania is to select a route that results in the lowest unit transportation cost and constitutes the most viable option for the pipeline project.

“If we can be able to get the least cost pipeline route to the East African Coast, our crude oil will be exported cheaply,” Fred Kabagambe-Kaliisa, the permanent secretary in Uganda’s energy ministry, said in a statement.

“As a country, we are evaluating the routes with the idea that we have the least-cost route because we would like to ensure that our crude oil has value.”

The concern about the cost is important because the total cost of the pipeline is to be offset from the proceeds of the crude sales. That would mean that a cheaper pipeline project would leave a bigger chunk of profits for Uganda.

The security question

But Ngosi Mwihava, a Tanzanian Energy ministry official, insisted that the crude oil export pipeline via Tanga was the best mode of transportation especially considering the nature of Uganda’s crude oil – it is waxy and thus needs intermittent heating along the way. Also, Mwihava said the infrastructure “would stand the test of time in our regional cooperation”.

It was a thinly-veiled reference to long-term political stability, which appears to be Tanzania’s unique selling point. Unlike Kenya, post-independence Tanzania has not suffered major political instability.

Total CEO, Patrick Pouyanné, responsible for implementing the company’s strategic vision, recently told Reuters that the firm’s decision to push through the Tanzanian route was influenced by security concerns on the Kenyan route.

“The debates on security within Kenya are very important to us,” Reuters quoted him as saying. “We are working with the governments of Kenya, Tanzania and Uganda and we will reach a solution that would be beneficial to Uganda and neighbouring countries.”  The Independent has learned that the question of security was a focal point of discussion between officials of Kenya and Uganda.

A technical and project steering committee report mentioned four key issues for consideration on the routing.

First, the northern corridor route pact is subject to Kenya guaranteeing security on its side of the pipeline; secondly, agreeing on financing arrangements; thirdly, guaranteeing transit/tariff fees, which are not higher than any of the alternative routes, as well as guaranteeing no delays in the implementation of the project.

However, some of the issues, for instance, political upheavals, as was witnessed in the bloody violence in 2007, are definitely not easy for any government to predict leave alone to insure against or prevent.

Almost every election cycle in Kenya causes unease across the borders and neighbours warily keep fingers crossed about an eruption of violence. Uganda has, therefore, been seeking ways of hedging its risk through the Tanzania route. Meanwhile, experts say cross-border oil pipelines are susceptible to rousing their own conflicts.

Prof. Paul Stevens, an extractives expert from the Centre for Energy, Petroleum, and Mineral Law and Policy, at the University of Dundee in Scotland has written on it.

In 2003 he wrote a paper titled; “Cross-border Oil and gas pipelines; problems and prospects” in which he noted that while most existing pipelines around the world have avoided problems, some cross-border pipelines have had a history of vulnerability to disruption and of generating conflict.

Stevens wrote in the UNDP/World Bank paper that risks perceived in cross border pipelines may increase costs.

“Often many of these conflicts are based on economic issues, ranging from failure to agree on the terms of transit and on profit and rent sharing to issues regarding the obsolescing bargain,” he stated.

Annet Kuteesa, a research fellow at the Makerere University-based Economic Policy Research Centre, told The Independent on Oct.19 that Uganda is right to look at the political considerations too because this is a volatile Great Lakes region that is always bubbling with political conflict.

Kuteesa says the Tanzania route could be longer and therefore more expensive to construct but probably the government is also weighing which route could be the safest.

“Take the recent political unrest that was born out of the 2007 election violence in Kenya, which disrupted the flow of goods from Mombasa along the railway to Uganda,” she said. “If the same thing happened along the pipeline, it would be disastrous for Uganda.”

She added: “Uganda cannot afford to lose out on its crude oil exports if there were disruptions for a day or two, assuming the northern corridor route finally gets the final nod.”

Unlike Kenya, Tanzania has not suffered major political instability since independence in 1961 – which therefore makes it less risky for an investment of such magnitude, Kuteesa says.

Dozith Abeinomugisha, a top official at the Petroleum Exploration and Production Department in Uganda’s Energy ministry, told The Independent on Oct. 13 that the priority for Uganda is a least-cost route to the market, and that is why the country is looking at a third option through Tanzania alongside the two options in Kenya.

“The least-cost route would give Uganda’s crude value while if it takes a costly route, it will load the value through the tariff,” he says.

Other experts argue that it should be the companies and technocrats and not the politicians to drive the pipeline investment agenda.  Fred Muhumuza, a research and advocacy specialist at the Financial Sector Deepening Uganda, told The Independent on Oct. 16 that the pipeline is largely a private sector affair and the oil companies should be given the mandate to determine the route that is most feasible. He also suggested that given the battering that the price of crude has received in recent years, the stakeholders would be precautious when it comes to making a good business decision.

“It should not be politics to guide this but business [considerations]. Company decisions depend on cost of construction and maintenance that is also influenced by the terrain and distance,” he said.

Meanwhile, Kenya is pushing its plan. Following the publication of the memorandum between Uganda and Tanzania, Daniel Kiptoo, the legal advisor to the Kenyan Energy ministry, told Kenyan journalists in Nairobi that the two countries would stick to the Presidents’ agreement until a new communication is made to the contrary.

“We cannot divert from the agreement signed by Kenya and Uganda,” Kiptoo was quoted as saying.

Indeed, a couple of  days later after Kiptoo’s firm statement, Irene Muloni, the Energy Minister skipped an important review of the performance of the energy and mineral sector over the last financial year to travel to Nairobi to clarify the Uganda government position.

Kiptoo could be right.