Moody’s sees Kenya, Uganda oil plans stall on low prices of oil

Construction of oil pipelines, terminals and other supporting infrastructure is unlikely to take off any time soon if the low price of the commodity on the international market persists, rating agency Moody’s has said.

Kenya and Uganda, already agreed on a joint refinery investment in the latter, plan a pipeline to Lamu although Total, a stakeholder in the Kampala oil blocks, has been pushing for it to pass through Tanzania.

Moody’s annual Global Sovereign Outlook says the low prices on the international market will delay projects in both Kenya and Uganda.

“Elsewhere in the SSA (sub-Saharan Africa) region, delays in exploration in Uganda and Kenya may have a longer-lasting impact because of the long lead times in getting facilities up and running,” says the annual outlook report.

Oil is trading at under $50 (Sh5,100) per barrel, a four-year low and below the $96 price explorers have cited as the minimum that would justify local production.

Some of the proposed projects include an oil pipeline from Uganda’s Hoima region to the proposed port of Lamu.

The fall in the price of oil was expected to benefit consumers but Moody’s report said possible gains will be eroded due to the strengthening of the dollar and its impact on local economies.

“For countries whose growth is already under pressure due to exogenous factors — most notably commodity price declines — the impact on growth is likely to be more severe. In sub-Saharan Africa, Uganda, Ghana, Kenya, Zambia and Mozambique are particularly vulnerable,” says the report.

An oil and gas report by PwC released earlier in the year said the current oil prices, however, present a chance for oil and gas companies to buy assets at low costs which could then be developed when prices rise.

Octant Energy of Canada recently bought Afren Energy’s Kenyan assets for an undisclosed amount, but analysts speculate that the price was heavily discounted.

“Whilst the financial details of the proposed transaction have not been disclosed it is likely that the acquisition value will see a significant discount, given that they’re being picked up in an administrator’s fire sale. The assets have seen considerable investment since Afren acquired them in 2010, with 3D seismic shot across the acreage,” said analysts at Standard Investment Bank.

READ: Canada’s Octant buys Afren Oil Kenya, Tanzania assets

Overall Moody’s notes Kenya is amongst countries that will face additional pressure if interest rates are raised in the US. This will catalyse capital outflows which would further weaken local currencies.

“An increase in capital outflows would put pressure on foreign exchange reserves and further weaken their currencies. The increase in the cost of capital would then likely force fiscal adjustment, which would come at the expense of public investment projects and thus have longer-term implications for growth.

Several sub-Saharan countries are already in a weakened position due to the fall in commodity prices or domestically generated shocks, which has limited their capacity to adjust to higher US rates,” said the report.

Other economists note US rate hikes would cut remittances based on past experience.

“Historically, diaspora remittances into the Kenyan economy have shown susceptibility to adjustments on the Federal Funds Rate with decline accompanying monetary tightening,” said a report by StratLink Africa.