Ideas & Debate

Fast track Turkana-Lamu pipeline to beat Uganda to global oil markets

After nearly three years of talks with Uganda, we now have to construct our own pipeline to transport some 600 million barrels of oil from the Turkana oilfields to Lamu for export.

This was an outcome which did not surprise many of us who have closely followed the pipeline negotiations.

With the route “duel” now over, the next psychological contest is which pipeline ( Lamu or Tanga) shall dispatch the fist barrel of crude oil into the international markets, and at what delivered unit costs.

Therefore, the critical challenge for Kenya is to implement a timely pipeline project that results in competitive tariffs.

I would like for a moment to analyse the aborted pipeline negotiations in case there is a lesson to learn.

As far back as mid 2014 it was evident that the negotiations were essentially “impossible” because the positions taken by Uganda and Kenya were apparently irreconcilably divergent.

The Ugandan investor Total was categorical that the northern route was a “no-go” route because of perceived insecurity which for the company was a deal breaker. It was also evidently clear that Total was not going to relax this position.

The company was however consistently supportive of the Uganda-Eldoret-Mombasa route with a branch from Turkana. The Tanzanian route was their default position in case the southern Kenya route failed.

On the other side, the Kenyans were unmovable on the Lamu Port South Sudan- Ethiopia Transport corridor (Lapsset) “policy route”.

This was apparently the absolute official government position with no apparent flexibility for an alternative route within Kenya.

Our team therefore vehemently argued for the Memorandum of Understanding (MOU) sanctioned policy route, and mentally blocked out any consideration of an alternative route in Kenya apparently irrespective of economics.

Our team may also have failed to recognise early enough that the real force on the Ugandan side was actually Total who were gradually and increasingly tilting the balance of power in the negotiations.

For the company, it was either the southern Kenya route or they shift attention to a Tanzanian route.

Finally Total played their trump card and put on the table an explicit offer that President Yoweri Museveni could not possibly resist, and which Kenya could not ever match.

The deal comprised of a “no-cost” passage guaranteed by the government of Tanzania; a US$4.0 billion project funding from Total coffers; project management by Total; a project completion timeline of 2020 which is not tied to global crude prices; and finally a cash sweeter for the Uganda refinery.

I also think that president Museveni, who has recently won the presidential elections, is under pressure to deliver oil dollars within the five years of his new mandate.

Uganda discovered oil in 2006 and the president has since then gone through two elections in which commercialisation of oil featured prominently.

This time around he looks set on exporting oil before the next elections in 2021, and the Total offer gives him the best chance to meet this expectation.

Back to the Kenyan pipeline project. There should be no problem raising the necessary funding for the project from the international money markets.

Going by hints already thrown around, the Kenya Pipeline Company (KPC) may be the entity that shall steward the project. The KPC has proven experience in implementing pipeline projects and in raising syndicated funding from consortiums of banks.

It is widely understood that the Breton Woods institutions are supportive of a pipeline through the Lapsset corridor because of its socio-economic impacts and its influence in fostering security. This implies that the World Bank may readily offer guarantees for the project funding.

However the project cost management shall require a lot of diligent attention so that threshold project returns are achieved while delivering unit costs that shall enable our crude oil to be competitive in the international commodity markets.

Without the previously anticipated throughput from Uganda, the project has lost obvious cost synergies and economies of scale, leaving unit costs as a major challenge.

The Front-End Engineering Design (Feed) studies have to be urgently undertaken to provide indicative tariff levels, because this information is a critical input for investor decisions to commit budgets for developing Turkana oil production.

The other threat to early pipeline project implementation remains the prevailing global oil prices which have to be high enough to motivate investors to allocate budgets for oil production development in Turkana.

Apparently this is now a non-issue for Uganda since Total has committed budgets irrespective of level of global oil prices.

There are other preparatory activities that the government should already be finalising because they shall expedite investor and project financier decisions.

By now we should already have in place an upstream petroleum law and regulations, because in the absence of these no investor in Turkana is likely to commit money to produce oil.

And without commitments on oil production, no financier shall commit funding for the pipeline.

Further, even without pressure from Uganda, we should proactively ensure that effective security systems and capacity are in place along the Lapsset corridor early enough.

Basic infrastructure like roads, power, and right of way shall all need to be provided in good time.

Mr Wachira, Petroleum Focus Consultants, [email protected]