Oil firms prefer Tanga pipeline route to Lamu

Sunday September 13 2015

An oil pipeline. Uganda is looking for an

An oil pipeline. Uganda is looking for an appropriate route to the international market when oil production begins. PHOTO | FILE | AFP  

By HALIMA ABDALLAH, TEA Special Correspondent 

Oil companies in Uganda are in discussions with Tanzania for an alternative pipeline route through Tanga despite a recent agreement between Presidents Yoweri Museveni and Uhuru Kenyatta.

Whereas President Museveni of Uganda and his Kenyan counterpart President Kenyatta sealed a deal that if implemented with see Ugandan oil exported through Kenyan port of Lamu, oil companies believe the Tanga route is cost effective.

The EastAfrican has learnt that besides security concerns, the companies are also uncomfortable with the cost of the Lamu route, arguing that the southern route through Tanzania would be cheaper and offer better commercial terms to the users.

“We are evaluating all viable options and the Tanzania route is one of them,” Total’s corporate affairs manager Ahlem Friga-Noy told The EastAfrican.

Total’s senior vice president for Eastern Africa, Javier Rielo  on August 22 met with Tanzania’s President Jakaya Kikwete and discussed the possibility of building a crude oil pipeline from Hoima to Tanga.

President Kikwete supported the proposal as it fits within Tanzania’s ongoing preparatory works to upgrade Tanga port’s capacity to off load petroleum products.

Total E&P, Tullow Oil and China National Offshore Oil Company are equal partners in Uganda’s upstream sector, where 6.5 billion barrels of oil, 1.4 billion of them recoverable, have so far been confirmed.

Sources in the Ugandan government revealed that the Tanga route is also being considered even though the state has no hand in the ongoing discussions led by the oil companies.

A senior Ugandan official said while the country had in principle agreed to the Lamu route as reflected in the MoU that Kenya and Uganda signed during President Kenyatta’s recent visit to the country, the concerns Uganda raised such as the cost and security, mean that the Tanga route could still be explored.

The official added that Uganda would soon commission a feasibility study for the Tanga route, but this would be strictly for benchmarking purposes against alternative routes to the north and determining comparative costs for them.

In the MoU that the two presidents signed affirming the Hoima-Lokichar-Lamu route, it was conditional that Uganda get a low tariff pipeline. Other conditions included Kenya guaranteeing security on its side of the pipeline, quick implementation of the project and mobilisation of the finances, which would be a joint effort.

Although one Ugandan official describes President Museveni’s conditions as just being “precautionary,” the security provision is being seen by the oil companies as likely to push the tariff beyond what alternative routes would offer.

However, Earnest Rubondo, director at Uganda’s Petroleum Exploration and Production Department (PEPD), said all the three possible routes — Lamu, Mombasa and Tanga — are still on the table until conclusive studies are completed.

Last month, the Japanese company Toyota Tsusho, handed to the government a study showing that the Hoima-Lokichar-Lamu routing for the pipeline was more feasible than the alternative — Hoima-Nairobi-Mombasa route.

Besides the pipeline construction, the Kenya government will have to foot the bill to establish supportive infrastructure like roads, water, electricity that are crucial even before the pipeline construction begins.

A constant and quality electricity supply to heat the pipeline all along the way to ensure a smooth flow of oil will also be necessary. Uganda’s crude oil is waxy, and solidifies at 39 degrees. This will be a costly undertaking considering also, that northern Kenya is a water-stressed area.

“The tariffs charged on pipeline usage depend on the overall construction the cost. From what we are seeing Uganda will not get a cheaper tariff on the northern route when cost of supportive infrastructure has been factored in,” an industry player said.

According to initial estimates, Uganda will pay a tariff of $15.2 per barrel of crude oil, a figure seen to be too high in light of current global prices for crude oil.

According to the study, the northern route is the cheapest at a cost of $4.7 billion compared with $5.4 billion for the southern route. The southern route cost is inclusive of compensation of project affected persons.

According to a separate study commissioned by the oil companies on both routes, whose results have also been shared with the Uganda government, the Hoima-Nairobi-Mombasa route can be developed at $4.5 billion, inclusive of compensation for project affected persons.

On the other hand, the northern route will cost about $5.2 billion, inclusive of necessary infrastructure. The companies therefore remain in favour of the southern route as the cheapest option. Overall, the companies need about $15 billion to develop the upstream and midstream infrastructure.

Concerns have also been raised over the terrain in the north — undulating topography compared with the southern route, where the terrain is even with the ground dropping in extended segments. This makes the northern route technically more challenging and time consuming.

“We are taking into account a lot of criteria like urbanisation, existence of national parks, national forests and game reserves. We do not want the pipeline to cross these areas, we also need to find a route to areas that are not too steep,” said Loic Luarandel, former general manager of Total &P in an earlier interview.

Tullow said an estimated 600 million barrels of crude oil in Kenya is recoverable but this is yet to be confirmed since data on flow rates and the total volume of crude oil in place has not been made public.