Uganda, Tanzania oil pipeline deal unlocks more funding options

Saturday May 27 2017

Ugandan Energy minister Irene Muloni and Prof

Ugandan Energy minister Irene Muloni and Prof Palamagamba Kabudi, Tanzania's Minister for Constitutional and Legal Affairs, sign an intergovernmental agreement for the construction of a $3.55 billion crude pipeline. PHOTO | MORGAN MBABAZI | NMG 

By HALIMA ABDALLAH

The pipeline that will take crude oil from Uganda to export markets has moved closer to financial closure after the waiver of taxes on the product by Tanzania paved the way for the signing of a bilateral agreement between the two countries.

Ministers from the two countries signed an agreement on May 26, itself a formality since Presidents Yoweri Museveni and John Magufuli had thrashed out the contentious issues a week earlier during the EAC Heads of State Summit in Dar es Salaam.

The accord frees financiers led by Total to start firming up funding options for the pipeline, especially because the tax waiver makes the oil more competitive and the project more bankable.

“It will unlock East Africa’s oil potential by attracting investors and companies to explore the potential in the region,” said Total’s General Manager Adewale Fayemi.

He added the pipeline would increase foreign direct investment in the two countries by 60 per cent.

Design report

Details of the financing, however, are not expected until August this year when Gulf Interstate Engineering, a consultant, gives a report on the specifications and costs of the pipeline from its Front End Engineering Design study.

The contract was awarded in December 2016, under a determination to have pipeline related activities run concurrently with a 2020 target for getting the crude to markets. The FEED will enable Uganda and Tanzania approach financiers.

The pipeline concept paper targets a mix of debt and equity with the former ranging between 60 and 70 per cent.

Initial estimates put the cost of the 1,445km East African Crude Oil Pipeline at $3.55 billion, meaning the two countries could borrow up to $2.5 billion. The 24-inch diameter will move 216,000 barrels of oil per day at a cost of $12.2 per barrel. This will save Uganda $3.7 per barrel from the tariff had the pipeline had passed through Kenya.

Break-even point

After Uganda opted for the Tanzania option, Kenya will construct a $2.1 billion pipeline covering 855km from South Lokichar in Turkana to Lamu on the coast. The tariff along the section will be $14 per barrel, largely because of land compensation costs and the government’s reluctance to waive taxes. A shared pipeline across the two countries would have cost $5 billion.

The tariffs would have been lower for the two countries had the pipeline followed a central corridor route from Hoima through Kampala to Kenya’s Nakuru town to link with the pipeline from Lokichar to Mombasa. Uganda would have paid a tariff of $11.79 and Kenya $9.29 per barrel.

But Tullow, the UK explorer driving the Kenyan crude project, still believes Kenya, with a break-even point of $25 including pipeline fees, will be among the top 10 least cost producers of oil. With the tax waivers, Uganda’s oil is expected to reach the market at the same price, if not slightly lower.

The lower the break-even point, the more profitable the oil is. Angola’s break-even is at $35.40 and Nigeria’s $31.50. The East Africa production costs are however about three times those in Kuwait ($8.50) and Saudi Arabia ($9.90), according to Rystad Energy, an oil and gas consultant.

Tax waivers

Following the drawn-out negotiations, Tanzania and Uganda are slated to lay the foundation stone for the construction of the crude oil pipeline to the port of Tanga. The presidents have instructed technocrats to set a date for the ceremony.

The pipeline will transport Uganda’s crude oil from Kabaale, in Hoima district, northwest of Kampala to Chongoleani peninsula, near the Tanga port in Tanzania.

The countries had been haggling over fiscal regimes. The agreement waives VAT on project related services and goods during the three-year construction phase. The pipeline depreciation rate has also been fixed at 5 per cent using a straight-line method throughout the lifetime of the asset.

“The application of branch profit tax should be reviewed by the two states as and when the pipeline company structure is complete and communicated to the two states,” says a communiqué issued by the two presidents.

Securing tax waivers is significant to Uganda, as it helps contain any friction with the companies who had in the past argued that charging VAT is premature because it amounts to taxing investments as opposed to profits. The companies also argued that charging VAT was against international principles.

Besides that, the companies argued that charging VAT was contrary to the provisions of the Production Sharing Agreements, which provided that the companies invest until production begins before governments can earn revenues from royalties, profit oil margins, share capital and income tax.

The tax waiver vindicates Uganda’s decision to abandon the Hoima-Lokichar-Lamu route.

“Some of the terms in the fiscal incentives package offered by Tanzania necessitated amendment of the tax laws,” said Irene Muloni Uganda’s Energy Minister.

Some of these laws are the Public Finance Management (Amendment) Act, Petroleum Exploration and Production Act as well as the Land Act.

“Countries have to harmonise their laws to fit within the agreement. In Tanzania, all laws are within agreement. We only have to take the signed agreement to parliament for ratification,” said Palamagamba John Kabudi, Tanzania’s Minister for Constitutional and Legal Affairs.

Pre-heated pipeline

It was agreed in January that all activities leading to oil production will be done concurrently so as to achieve first oil by end of 2020.

Besides FEED, Economic and Social and Environmental Impact Assessments are ongoing.

The pipeline will be pre-heated and covered 1.2 metres underground. There will be temporal facilities such as coating plants and pipe storage yards, access roads, burrow pits, hydro-test dams, a marine terminal and a jetty.  Technocrats are optimistic all this will be accomplished by 2020.

The building of the pipeline will start at different points: Tanga, Hoima and others in between, said Mr Kabudi.

Meanwhile, in Kenya, the Mombasa facility to handle and store crude oil being drilled in South Lokichar is now complete. And at Changamwe, the Kenya Petroleum Refineries has installed two bays for offloading crude for export from two tanktainers transported by trucks under the early oil pilot scheme.

Petroleum Principal Secretary Andrew Kamau said the KPRL had refurnished two tanks to store crude transported by Oilfield Movers Ltd and Multiple Hauliers EA Ltd in tanktainers provided by Primefuels Kenya Ltd.

— Additional reporting by Kennedy Senelwa