Uganda and Kenya are developing two new basins and originally agreed to build one line to connect the landlocked discoveries to the coast. That changed last year, when Uganda chose a more southerly 1,400-kilometre route through Tanzania, citing lower transit prices. Kenya will go it alone with an 865-kilometre line to a port on the Indian Ocean.

 

Two pipelines will test the economics of the developments. Both projects probably need an oil price of $50 to $55 (Dh202) a barrel to break even, while lower costs or taxes may be required to justify a final investment decision in Uganda, according to BMO Capital Markets. The Tanzanian route will get some funding help from France’s Total SA, which owns a stake in the Uganda reserves, but it still hasn’t secured the financing it needs. Further north, Kenya’s explorers are under pressure to improve the project’s viability by finding more resources.

 

“The Kenyan pipeline seemed economically viable when Ugandan oil was going to flow through it,” said Jacques Nel, an economist at NKC African Economics. With separate lines each carrying less oil than planned and global prices remaining weak, the economics “will continue to cast a shadow over the development of the sector,” he said.

 

While Africa produces more than 8.4 million barrels of crude daily from major exporters like Libya and Algeria in the north and Nigeria and Angola in the west, eastern countries weren’t on the world oil map. That changed in 2006, when Tullow Oil Plc found what may be as much as 1.7 billion barrels of recoverable reserves in landlocked Uganda’s Lake Albert region.

 

Lokichar discovery
 

In 2012, Tullow made another find in Kenya’s South Lokichar basin that may contain 750 million barrels. Combined, Kenya and Uganda may be able to produce about 400,000 barrels a day once production begins.

 

That could catapult Uganda, which will account for about two-thirds of the output, to upper-middle income status by 2040 as economic growth rebounds to as much as 10 per cent from 4.6 per cent in the last fiscal year, according to the World Bank. Kenya’s government would generate revenue of $650 million a year in the late-2020s, even with crude at just $45 a barrel, said KCSPOG, a non-governmental organisation.

 

Brent oil traded at $50.63 a barrel at 12.14pm. Singapore time. The global benchmark has dropped about 11 per cent this year.

 

Originally, the two countries agreed to share a pipeline running through Kenya’s arid Lokichar basin to the coastal town of Lamu. But parts of the route have been prone to attacks by bandits and cattle rustlers. It also is close to Somalia, where Islamist al-Shabaab militants have waged an insurgency against the government for the past decade, as well as carrying out raids inside Kenya.

 

Safety was a concern for Paris-based Total, which in January increased its holding in the Lake Albert site. The French company agreed to help finance part of an alternative route through Tanzania that may cost about $4 billion.

 

Uganda decision

 

Uganda government officials said the switch was a business decision. The Kenyan route would have been “very costly,” with a tariff of $15.90 a barrel, compared with $12.20 for the Tanzanian pipeline, according to Energy Minister Irene Muloni.

 

“We took a decision which is good for our country,” Muloni said in an interview in Kampala, the capital.

Tullow’s CEO-designate Paul McDade said last week that Uganda’s resources could be developed at a total cost of about $20 a barrel, including capital expenditure on drilling and pipeline construction plus operating costs.

 

“Along with the offer of better tariffs, Uganda argued that the Tanga pipeline would mean easier land access, better security, and would open up another important trade route,” said Emma Gordon, an analyst for East Africa at Verisk Maplecroft. “Currently, the country is heavily reliant on Kenya for its trade.”

 

Uganda’s decision dented Kenya’s ambitions to develop a $26 billion regional transport corridor, leaving explorers in the country under pressure to improve the project’s viability by boosting resources.

 

Kenya “took a hit” from Uganda’s volte-face, said Ahmed Salim, Dubai-based vice president of Teneo Strategy. “And as much as Total has backed this plan, both the Ugandan and Tanzanian governments have to finance this project and I think that’s where things will run into some difficulty.”

 

Still, both the Ugandan and Kenyan projects have seen positive developments in recent months. Uganda awarded Gulf Interstate Engineering a contract to conduct the front-end engineering study on its pipeline, and Muloni said the project is on a fast-track to ensure first oil is produced in 2020.

 

The Kenyan government has shortlisted eight companies for a pipeline engineering study, with construction due to start in 2018, according to Andrew Kamau, principal secretary at the ministry of energy.

 

Tullow, which previously favoured the Kenyan export route, will “focus more physical effort” in that country, said George Cazenove, a spokesman for the UK-based explorer. “But both countries are critical to Tullow’s future.”

 

Vancouver-based Africa Oil — a partner of Tullow and Maersk Oil in Kenya — also announced a discovery in January that brings reserves closer to its 1 billion-barrel goal. The company wants to greenlight the project by the end of 2018 and start producing in 2021, he said.

 

“It’s probably viable now, but will be much more viable if we get up to that target,” said Keith Hill, CEO of Africa Oil.

Source : allafrica.com