Uganda, Tanzania and their partners in the East African Crude Oil Pipeline are yet to agree on provisions of the host government agreement, shareholder agreements and transportation tariffs.
This has given room for speculation that the parties are under pressure to reach a final investment decision (FID).
Just this January, Total E & P chief executive and chairman Patrick Pouyanne visited Kampala and held a meeting with President Yoweri Museveni in what insiders say was both a sign of the oil giant’s commitment to the project and impatience with the slow pace towards production.
The two are understood to have set June for the FID, but several issues remain unresolved.
East African Crude Oil Pipeline is a 1,445km export pipeline that will transport crude oil from Kabaale, northwest of Kampala, to Chongoleani peninsula, near Tanga port in Tanzania. The 24-inch diameter pipeline will export 216,000 barrels of crude per day.
The EastAfrican has learnt that arbitration, one of the issues deferred during a technocrats’ meeting in Kampala in January, is still on the table. The parties are yet to agree on where to hold the meeting even after Tanzania offered to act as the host.
“Provided it is not Tanzania’s national court that is going to hear the case, there should be no problem, because the parties can appoint neutral arbiters,” said lawyer and former member of the East African Legislative Assembly, Wandera Ogalo.
Arbitration seeks to avoid tedious and costly litigation. In this case, choice of jurisdiction and what laws to apply in the arbitration are in contention.
“All the parties need to be comfortable with the venue and the choice of arbiters,” said Ellison Karuhanga, a Kampala lawyer.
Shareholding is also yet to be decided. Uganda, through the National Oil Company has confirmed taking 15 per cent shares in EACOP, while Tanzania said it will take five per cent. Tullow shares is 10 per cent while the remaining shares will be shared between CNOOC and Total equally.
As for tariffs, a source told The EastAfrican that Uganda will charge a fixed rate of $12.77 per barrel of crude oil.
Last year, Uganda rejected a tariff model that was based on formulas that would make the tariffs shoot up to about $16 per barrel, forcing the government to abandon Kenya’s Lamu port in favour of Tanzania’s Tanga port.
Fixed rate means that whether there is more crude volumes to be exported or low volumes, the tariffs remain the same. Estimates show that at current price of $80 per barrel Uganda will earn $3 billion per year.
The variable tariff system means that tariffs are dependent on circumstances, say, the the higher the crude oil production volumes, the lower the tariffs and vice versa. Other parameters are cost of the project, fiscal regimes, and rate of return on physical infrastructure.
“These were agreed upon as a necessity to move fast and reach FID,” said a source familiar with the discussions.
“We are negotiating on all the issues so that we reach a FID in June,” said Robert Kassande, Permanent Secretary, Ministry of Energy Uganda.
In May 2017, Tanzania and Uganda signed the inter-governmental agreement that provides the legal basis for the oil project. The parties are also required to sign a host government agreement.
Once all agreements are reached, the oil companies will embark on building a coating plant in Tanzania to protect the pipeline from corrosion.