Kenya, Uganda strike deal on oil route to export market

Saturday August 15 2015

Kenya and Uganda are betting on more oil discoveries in the region to increase earnings from a crude oil pipeline that will connect the oilfields in Uganda through northern Kenya to the international market. PHOTO | FILE

Kenya and Uganda are betting on more oil discoveries in the region to increase earnings from a crude oil pipeline that will connect the oilfields in Uganda through northern Kenya to the international market.

The pipeline is expected to connect to export markets via the proposed port at Lamu.

Estimated to cost $4.7 billion, the pipeline will have an initial capacity of 300,000 barrels per day, earning the joint pipeline company about $1.66 billion a year.

The two countries will share the money depending on the volume of cargo passing through each.

The route the pipeline will follow has been contested by Uganda and oil companies, which preferred an option through Nairobi for fear of insecurity in northern Kenya. Northern Kenya is prone to cattle rustling.

The Kenyan government favoured the consensus route for its potential to open up the underdeveloped Turkana region, where Tullow Oil has discovered vast quantities of oil and its linkage to the Lamu Port South Sudan Transport (Lapsset) Corridor, which will link up to Juba and Addis Ababa.


Studies also favoured the northern route for two key reasons: The route through Nairobi would, at $5.4 billion, have been more expensive because of passing through hilly terrain that requires more pumping.

By passing through densely populated areas it would have required more funding for compensation of displaced people and their investments. It would also have been slightly longer, by 44 kilometres.

The northern route, which will pass through gentle terrain and involve less disruption of settlements and livelihoods, is estimated to cost $4.7 billion, meaning companies will pay less to have crude oil delivered to export markets by the pipeline.

Deal struck

In the end, the two countries agreed that companies will pay $15.2 per barrel to move the commodity through the 1,500km pipeline. The capacity of the pipeline will be expanded to 600,000 barrels if ongoing exploration in DRC, Ethiopia, Kenya, South Sudan and Uganda yields more crude oil.

“The three countries are eagerly awaiting the completion of the pipeline so that they can link to it by a trunk to transit their crude oil to the Kenyan Coast,” said Daniel Kiptoo, a  legal advisor on petroleum matters at Kenya’s Ministry of Energy and Petroleum.

Although the fee for transporting crude ranges between $9 and $15 per barrel, Mr Kiptoo said the rate was subject to review, depending on the actual construction costs.

The pipeline will be launched in a month’s time by Presidents Uhuru Kenyatta and Yoweri Museveni.

“The agreed upon transit fees are the equivalent or cheaper than what would be charged for alternative routes, and co-operation hinges on the project being developed without further delay,” said the two presidents in a joint communique.

South Sudan pays $11 per barrel for oil moved through the facilities of the Greater Nile Petroleum Operating Company, a Chinese-Malaysian consortium operating in Sudan.

The two countries in 2012 disagreed over the transit fee. South Sudan voluntarily shut down oil production because of the dispute.

Following South Sudan’s secession, Sudan requested a transit fee of $32-$36 per barrel in an attempt to make up for the oil revenue loss occasioned to loss of oil fields to South Sudan. The feasibility studies for the project were conducted by Toyota Tsusho, a Japanese consulting firm and reports were submitted to both governments.

“The new route is also expected to open up northern Kenya for development,” said Mr Kiptoo.

The routing of the pipeline through northern Kenya, he said, would give impetus to the development of Lapsset, a seven-pronged undertaking involving a port, a railway, a pipeline, a road, a refinery, airports at Lamu and Isiolo; and a tourism city at Isiolo.  

Kenya committed to guarantee security along the route by taking up insurance cover for the section, a middle ground seeing that Uganda wanted Kenya to guarantee the financing of the pipeline through the section susceptible to Al Shabaab attacks.

“This means that Kenya will have to take up a larger part of the insurance costs to mitigate against the already perceived security threats. If the government shares the insurance costs with local and foreign insurance and reinsurance companies, the cost would not be as much,” said Mr Kiptoo.