Several hurdles standing in the way of East Africa’s early oil extraction plans

Saturday May 26 2018

Trucks submerged after floods left roads impassable in Turkana and West Pokot counties in Kenya. PHOTO | JARED NYATAYA | NMG

Trucks submerged after floods left roads impassable in Turkana and West Pokot counties in Kenya. PHOTO | JARED NYATAYA | NMG 

By JULIUS BARIGABA
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As East Africa’s oil producers race to meet their production targets, funding and infrastructural development hurdles threaten to delay the projects.

Uganda, for instance, has been forced to rethink its early oil production date of 2020, after it became evident that the refinery at Hoima, which is expected to serve the domestic and neighbouring markets, will delay even further, because regional countries are yet to commit to the joint project whose final investment decision is expected within two years.

The project operators now target 2023 to start producing petroleum products, including jet fuel, petrol, diesel and liquefied petroleum gas. According to 2017 figures, by refining oil locally, Uganda will save $1.7 billion annually.

In Kenya, President Uhuru Kenyatta is gearing up to roll out the Early Oil Pilot Scheme (EOPS), which will involve trucking the oil to Mombasa, on June 3. This programme has been marred by logistical and legal hurdles in the past year, leading to delays.

Impassable roads

Even as officials insisted that the scheme was set for launch, there were doubts that it would immediately succeed, as Turkana County, where the South Lokichar oil basin is situated, has experienced massive flooding that has left its roads impassable and the vital Kainuk bridge further dilapidated.

It remains to be seen if the two companies contracted by Tullow Oil Plc will start moving the target 2,000 barrels to Mombasa next weekend.

Government officials would not be drawn to discuss the logistical challenges in the way of the scheme, but a source in the Petroleum Ministry said at least four trucks were ready for the launch.

In Uganda, besides a series of studies and decisions as well as sourcing and securing funding, which will then inform the final investment decision that would lead to construction of the $4 billion refinery, officials are also edgy about Kenya and Tanzania, which seem to have grown cold feet over investing in the project.

The two countries, which were invited along with other East African Community partner states to take up shares in the refinery, which will be operated as a for-profit venture, are waiting for Uganda to start pumping crude oil before they can come on board.

“We are doing a commercial viability assessment of the project. They [Kenya and Tanzania] cannot commit yet until they know that the refinery will get crude,” said Michael Mugerwa, general manager of Uganda Refinery Holding Company (URHC).

This is in spite of the fact that on April 10, Uganda signed an agreement with the Albertine Graben Refinery Consortium (AGRC) that will build the refinery, giving the sense that the project was finally taking shape.

Under this agreement, oil firms Total E&P and China National Offshore Oil Corporation that were given production licenses for the oilfields that they operate, are supposed to feed the refinery with crude oil.

The companies are racing against time to beat government’s target to produce first oil by end of 2020, but this “is looking less likely”, an industry source told The EastAfrican during a tour of the oilfields.

No infrastructure

The source said that infrastructure such as the crude oil pipeline from Kabaale in Hoima District to the Tanzanian port of Tanga, the central processing facilities and some of the roads were not yet in place.

Kabaale Airport, another component of the infrastructure that is expected to ease transportation of heavy equipment, company executives and supplies, will also not be completed till 2021.

The airport’s construction started in April this year, and its completion time is 36 months. According to the contractor’s senior project manager Mikhail Gorachinov, the runway will be ready for use by aeroplanes.

“We are committed to 2020 provisionally for what is possible for landing,” he said.

The framework agreement signed last month will not come into force “for another couple of weeks” after which the processes to actualise the refinery will start.

“The agreement that was signed [April 10] becomes effective soon. That is when the clock starts ticking,” says Mr Mugerwa.

This will see the first of a series of major decisions towards construction of the refinery within five months, leading to the launch of the project’s front end engineering design.

Meanwhile, the refinery operators AGRC and URHC will also conduct commercial and market studies to determine whether the refinery should focus on gasoline or diesel, a process that could take another 15 months before the companies get a final report on this.

Officials also cite the process of raising financing through private equity as one that takes time.

With all the pieces in place, construction of the 60,000 barrels of oil per day capacity refinery will start and take a period of three years.

The operators also worry that the refinery could lose time as they mobilise financing from private equity and credit agencies.

The refinery, located at Kabaale in Hoima District and sitting on a 29km2 spread, will host other facilities including the crude oil pipeline from Kingfisher, about 40km south of the site, a crude oil export hub, cargo projects, fertiliser complex, staff quarters and a polymer plant.

Tanktainers

The AGRC is a special purpose vehicle comprised of Mauritius incorporated Yaatra Africa (a subsidiary of Ventures LLC) and Lionworks Group Ltd (Mauritius), Nuovo Pignone International SRL — Italy incorporated subsidiary of General Electric, Saipem SpA from Italy and Intra Continental Asset Holdings, a Mauritius private equity fund.

Uganda discovered commercially viable oil reserves in 2006 in the Albertine region estimated to be 6.5 billion barrels, but the country has missed several deadlines it set to start production as oil companies, which favoured export of the crude, haggled with the government over viability of a local refinery.

Meanwhile, in Kenya, Multiple Hauliers EA Ltd and Oilfield Movers Ltd are understood to be mobilising flatbed trucks to move crude oil in tanktainers provided by Primefuels Kenya Ltd to Mombasa for storage pending export.

Each tanktainer is expected to carry about 130 barrels of crude.

“Preparations for trucks to deliver first cargo of crude to Mombasa are in high gear,” an official close to the operation told The EastAfrican.

President Kenyatta on Wednesday met with Petroleum Cabinet Secretary John Munyes officials of Tullow Oil Plc, Total SA and Africa Oil Corporation, and Turkana County leaders led by Governor Josphat Nanok to discuss the EOPS.

“We are ready to get started. This is important for our country as a whole, and for the community in the producing area,” the president said.

—Additional reporting by Kennedy Senelwa