Rwanda and Uganda have terminated the contract for the construction of a major oil pipeline between Eldoret and Kigali.

Tamoil East Africa Ltd (Teal), a Uganda based subsidiary of the Libyan African Investment Portfolio (LAIP) won the bid to construct the Eldoret-Kampala pipeline in 2006, and later in 2008, to extend it from Kampala to Kigali. However, the company’s performance bond has expired before any progress has been made.

The governments of Uganda and Rwanda have resolved to terminate the contract for the Rwanda-Uganda deal over Tamoil’s failure to fulfil any of the milestones agreed under the Memorandum of Understanding (MoU) of 2008.

“The two governments have given a six-month termination notice to the company as per the MoU. The project will now be pursued under the East African Community framework,” Uganda’s Energy Minister, Irene Muloni told a Parliamentary Committee on Natural Resources.

The recent discovery of large deposits of crude in Uganda also means that Kenya and Uganda can redesign the key regional infrastructure to see a reversal of the pipeline’s direction of flow as well as enhance its capacity to pump crude rather than processed petroleum products.

Technocrats argue that EAC’s handling of the project will save the countries from sourcing for finances individually, allowing them to do so as a bloc. A new feasibility study is being done and funds have been secured for extension of the pipeline up to Bujumbura.

The decision is likely to spark off protracted legal battles with huge costs as it becomes evident that Tamoil East Africa Ltd will not take the move lightly.

“We have replied to the notice with enough evidence to show that the governments have delayed the projects. We have so far spent $12 million on engineers, and there is paper work to show that we have surveyed the land from Kenya to Uganda and recorded every single farmer, but evaluating the land took the governments years,” said Tamoil East Africa’s chairman Habib Kagimu.

The re-designing of the pipeline too, that included expanding the pipe sizes from 6 to 10 inches and engineering a reverse model that will let oil flow in both directions, was done in consideration of oil movement from Uganda to the coast as Uganda intends to refine its oil domestically.

This redesign added to the delay in the project and also pushed its cost to $300 million, up from the original $80 million. It is this figure that raises further doubts over Tamoil’s capacity to finance the project without help from Tripoli.

Even then Tamoil’s other project — the Eldoret-Kampala oil pipeline — hangs in the balance. Its links to Libya, which is expected to bankroll the project, raises two issues: First if the company has capacity to meet the financial obligations to completion of the work, and secondly if the company is legally permitted to operate owing to UN sanctions on Libya.

In March, the UN Security Council resolved to impose among other restrictions an asset freeze on Libya following the ongoing rebellion that seeks to oust Gaddafi from power.

The freeze on assets applies to funds, financial assets and economic resources in any territories of the UN member countries. According to the resolution, it does not matter whether the assets are run by an individual or entities directly or indirectly acting on behalf of the Libyan government.

Due to these sanctions, the Kenya and Uganda governments have played safe, transferring the project to the EAC as they sought out the legality of Tamoil’s position. The two countries have engaged their Attorney Generals who are yet to give an interpretation on the issue.

Early this month, the two governments’ Joint Coordination Committee (the organ charged with negotiating the project’s procurement and supervision of its progress) held a meeting to chart the way forward in regard to the project.

“The position of the governments is that we need to understand how the issues of the sanctions will affect Tamoil. We want them to respond to us and demonstrate that they can financially carry on with the project,” Fred Kabagambe Kaliisa, Permanent Secretary in the Energy Ministry told the East African.

Tamoil contends that the sanctions do not affect its operation because it is not controlled by the Libyan government. “All we want is for the Kenya and Uganda government to meet their obligations.

“The governments are yet to sign the agreements that allow us to operate. They have not given us land upon which to work. How do we start work without land?” askedd Mr Kagimu.