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Ideas & Debate

What Uganda-Tanzania crude oil pipeline pact means for Kenya

Workers at a Tullow oil rig in Turkana. A Kenya-Uganda pipeline would have cut oil export costs. PHOTO | FILE
Workers at a Tullow oil rig in Turkana. A Kenya-Uganda pipeline would have cut oil export costs. PHOTO | FILE 

Last week the presidents of Uganda and Tanzania signed a deal to construct a pipeline to transit crude oil exports from Uganda through Tanzania terminating at Tanga.

A previous agreement between Kenya and Uganda to have the same pipeline pass through northern Kenya failed when Total, a French oil investor in Uganda, insisted that the region was insecure for the investment.

Total had earlier proposed an alternative route via south of Kenya with the oil from Turkana linking up at Eldoret or Nakuru.

Although it is now water under the bridge, we cannot pretend that the Tanzania route is a non-issue for Kenya. The country has lost out on valuable potential transit business that rightfully belonged to Kenya.

There was to be incremental foreign direct investment and jobs for Kenya during construction and transit fees subsequently.

Worse still, the Tanzania line now offers a competing route for future crude oil exports from other Great Lakes countries, especially Eastern DRC and South Sudan.

The Total factor is likely to play out prominently in the Great Lakes petroleum infrastructure. Across Lake Albert in DRC, Total owns controlling interests in the new oil discoveries which are essentially an extension of Ugandan oil basins.

Further, across the Uganda border with South Sudan, Total is a partner in the oil exploration Block B which although no discoveries have been made is thought to be an extension of the Ugandan oil bearing geology.

Total regional linkage will most likely influence consignment of oil from these neighbouring countries via the Tanzanian pipeline.

Current oil from the existing wells in the northern parts of South Sudan, and which was the main assumption for the Lamu Port South Sudan Ethiopia Transport corridor (Lapsset) study, is expected to continue flowing through Port Sudan on the Red Sea.

There exists no current political or economic justification for Juba to re-consign this oil via Kenya, despite South Sudan having finally joined the East African Community (EAC).

Going forward, Kenya shall now proceed to develop an infrastructure to export Turkana oil discoveries via Lamu.

The chances are that the pipeline shall be constructed and managed by the Kenya Pipeline Company with the possibility of a public private partnership financing structure.

This may also be supplemented by project guarantees from multilateral agencies that appear supportive of the project. This ownership and management model allows the pipeline to be operated as a common user facility with open access to any oil investor with oil to pump through.

We however wait to see what investment arrangements the government shall agree with the Turkana oil investors who include Tullow, Africa Oil and Maersk. This is of course subject to investors final decisions to commit investments, which also includes timing for such commitments.

The Turkana-Lamu pipeline project is not to be confused with the recently announced crude oil export arrangement by road and rail via the Mombasa refinery.

This is referred to as “early crude oil production” and commercialisation as happens in many projects around the world when a country or investors wish to make some early cash as they await the full development of crude oil production and export infrastructure which could take much longer time.

The span for early crude oil production arrangements is normally “temporary” in nature and uses the least cost logistics options.

Reports indicate that the Turkana oil road/rail project shall truck crude oil in iso-containers from Lokichar to Eldoret where the containers shall be transferred onto wagon flatbeds on existing rail systems.

At Mombasa, crude oil shall transit through the existing refinery storage to be pumped straight into export ships at the existing jetty at Kipevu.

This short-term export procedure was always under consideration with or without the Uganda/Kenya joint pipeline.

I will now try to do a reality check on the overall Lapsset project which was adopted by the government in 2011. South Sudan and Ethiopia were critical parts of the Lapsset assumptions.

As I have discussed earlier, South Sudan relevance to Lapsset now hangs in the balance. Ethiopia has also recently intimated that they will construct a petroleum products pipeline from Djibouti to Addis Ababa which essentially makes Lapsset products pipeline to Ethiopia a non-starter.

The Lamu refinery and its products pipeline network were premised on crude oil from South Sudan when Kenya had not discovered own crude oil.

The confirmed quantities of Turkana oil are currently not large enough to support a refinery at Lamu or anywhere else, since priority is on crude exports.

This leaves three critical pieces of infrastructure for the Lapsset project. There is the Turkana-Lamu crude oil pipeline; the port and its three berths; and the Lamu-Isiolo-Lokichar highway.

The highway should be prioritised to feed and evacuate the port, because without it a port shall be of reduced economic significance.

It is also the highway that has the highest catalytic impact on the economy and security of northern Kenya due to trade mobilisation and urbanisation along the highway.

The highway is a project that by now should be in the budgetary commitment stage. Specifically, a highway shall make construction of the pipeline easier through improved access.

Finally with the apparent fallout between Kenya and Uganda on the subject of crude oil pipeline, I expect there to be less engagement between the two countries in respect of co-operation on the new Uganda refinery and the proposed products pipeline between Eldoret and Kampala.

For Kenya, the crude oil pipeline was the key and most urgent of the inter-state infrastructure.

For Tanzania, a new pipeline is an unexpected gift they never asked or planned for. The country is already pre-occupied with the development of massive offshore natural gas discoveries especially in the South eastern parts of the country.

Although the country has so far not struck any oil, the presence of oil export infrastructure will encourage oil and gas exploration further inland.

Mr Wachira is director at Petroleum Focus Consultants. [email protected]

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