Deal on crude exports route paves the way for faster oilfield developments

Investments hate uncertainties. And this is where investors in Uganda and Turkana oilfields have been over the past year.

Last week, the uncertainty on the joint crude oil pipeline route was removed when the two presidents of Uganda and Kenya re-affirmed that the pipeline from Uganda shall follow the Turkana route to the port of Lamu.

I emphasise “re-affirm” because the infrastructure/trade MoU signed about two years ago by Kenya, Uganda and Rwanda specified a Turkana/Lamu route.

However, the upstream investors in Uganda later proposed an alternative southern route. They contended that a route via Eldoret and Nairobi to Mombasa would be quicker, cheaper and more secure. This is what made the pipeline routing to be re-opened for discussions.

As long as the route decision remained an open agenda, it was difficult for investors to firm up their budgets. And this may have partly contributed to reduced oil and gas foreign direct investments into the two countries over the past year. Of course there have been reduced cash inflows attributable directly to global oil prices volatility.

The resolution of the pipeline routing is just one hurdle that had to be settled. Still to be discussed and agreed by the two countries are the capital structure, financing, implementation and management of the inter-state joint venture pipeline project. And this shall invariably require political inputs by the two nations. If decision making is prolonged, there shall be opportunity costs associated with the delays.

A pre-FEED feasibility study recently done shall of course lead to a FEED study that provides the finer details of project costs and timelines. The year 2021/22 has been projected as the first oil export date, but this of course depends on how decisions on the project ownership and financing are finalised.

The news of the pipeline routing re-affirmation last week was welcomed by Kenyans who are directly or indirectly associated with the Lamu Port (Lapsset) project. Those who are familiar with the genesis of the Lapsset project will recall that it was premised mainly on a crude oil pipeline from South Sudan to Lamu.

The crude oil export pipeline was an anchor Lapsset project that held together several project components like the refinery and petroleum products distribution and export infrastructure.

As South Sudan maintained their crude oil exports through Port Sudan, the new Ugandan and Turkana oil came in to provide continued justification for the Lapsset pipeline project. Relocating the export pipeline to the south would have upset the wider socio-economic justification for the entire Lapsset corridor.

In Kenya, the certainty over the pipeline route will no doubt quicken the crude oil production development implementation in the Lokichar basin.

This together with the pipeline construction shall be new sources of jobs and business opportunities especially in the areas of engineering, construction and logistics.

Progressing independently of the export pipeline decision-making is the 60,000 barrels per day (bpd) Uganda refinery development, which is likely to be completed by 2020.

The refinery investment which has attracted support from the regional states, including Kenya, will certainly change the products distribution patterns through a matrix of new products pipelines connecting Uganda, Kenya and Rwanda.

Shall there be a refinery somewhere along the Lapsset route in Kenya? My considered opinion is that in the near to medium term we may not have a Lapsset refinery.

Firstly, we do not as yet have enough Kenyan crude oil to sustain an economically sized refinery. The confirmed reserves in Turkana will most likely produce up to 100,000 barrels per day of crude oil which may not be adequate to justify both an export pipeline and a refinery. If we discover more oil either in Turkana or elsewhere, it will be a different scenario.

Master plan

The Lapsset feasibility study was adopted in 2011, and since then a number of critical assumptions and scenarios in respect of petroleum infrastructure projects have shifted.

It may, therefore, be timely to re-open the Lapsset document for update, especially in the areas of refining and petroleum products distribution. I am saying this aware that there was a Petroleum Master Plan completed recently, and the two documents may need harmonisation.

With the pipeline route agreed, we need to fast-track a number of essentials. These include the passing of the Upstream Petroleum Bill, giving priority to community discussions on the subject of pipeline land acquisition; and, of course, finalising the joint-ownership structure for the pipeline.

Delays may impact the date when initial oil revenues are realised.

Wachira is the director Petroleum Focus Consultants. [email protected]