The route to Tanga: How big oil deal slipped from Kenya’s hands

President Uhuru Kenyatta is usually a very jolly man, but at the 13th Northern Corridor Infrastructure Summit held at the weekend in Kampala, Uganda, he appeared to be the opposite of his usual self.

Days to the summit it had been concluded, and perhaps he had even been briefed early enough, that Uganda had chosen the southern route through Tanzania for the proposed multi-billion-dollar crude oil export pipeline.

With an election not so far away, according to insider accounts, President Kenyatta had hoped for his country to snap up the deal via the Northern route to the Lamu port at the Indian Ocean. The project starting in a pre-election year meant investments, jobs and other associated benefits — which undoubtedly would go to his government’s credit.

Ugandan technocrats, however, knew clearly and very early enough, after several feasibility studies, that nothing worked in Kenya’s favour. President Museveni, a close ally of Mr Kenyatta, had been briefed several times on the odds between the Northern and Southern routes.

But how to eliminate Kenya cautiously, a long-standing bilateral partner, from the equation is why the final position had to be subjected to re-inspections of routes, feasibility studies and back-and-forth meetings. In the final technical report, a copy seen by this newspaper, Ugandan technocrats from the Petroleum Directorate in the Ministry of Energy maintained that the southern route to Tanga port at the Indian Ocean was the “least-cost option”.

According to the report, Lamu lost out on all grounds of comparisons, costing it the lucrative pipeline deal.

The Japanese engineering consultancy firm Toyota Tsusho Corporation (TTC) had recommended Lamu in a feasibility report submitted to the two governments in 2014. TTC had cited the need to tap into the already existing economies of scale between Uganda and Kenya, and further to tap into the benefits of the $25 billion (Sh2.5 trillion) Lapsett infrastructure corridor — the ambitious corridor conceived by Kenya, Ethiopia and South Sudan.

French oil giant Total SA, parent company of Uganda’s Total E&P and one of the three International Oil Companies (IOC) licensed to operate in Uganda, opposed this route from the start, not only for security concerns — Lamu port borders Somalia, where Al-Shabaab militias operate — but also the rough terrain, with slopes above 25 degrees.

Total contracted the US-based Gulf Interstate Engineering to undertake a feasibility study on the alternative Tanga route. The engineers found the new route more viable and less challenging to get oil from Uganda to the international market.

KENYA COMPLICATED MATTER BY WASTING TIME

Insiders also recounted that when, in August last year, Presidents Museveni and Kenyatta signed the first memorandum of understanding to build a pipeline from Hoima to Lamu, Kenya complicated the matter by wasting the already lost time in arguments over the preconditions Uganda had set — such as guaranteeing security, upfront financing, and tariffs not higher than offered by the alternative.

While this was a heads of state decision, the technocrats had already put their feet down for Tanga.

In October the same year, when Uganda signed another MoU with Tanzania, the Kenyans were awakened, quickly returning to the drawing board and expressing interest in revitalising discussions to court Uganda for the deal.

After months of deliberations, the Ugandan team met with both the Kenyan and Tanzanian teams, and later the Ugandan officials met with top authorities of Total, who in fact promised to source financing for the project. At this stage it became clear Kenya had lost out on the deal.

In March this year President Museveni met Tanzanian President John Magufuli at the 17th Ordinary East African Community (EAC) summit, and the two sealed the deal for the project. Two weeks later President Magufuli met the Total SA vice president for East Africa Javier Rielo, and the two agreed the company would start construction of the 1,410-kilometre pipeline “as soon as possible”.

A week later President Kenyatta called upon President Museveni to salvage the deal, and much as the two tasked technical teams from both countries, and Tanzania, to go back to the drawing board and even to consider the route to Mombasa, it was late.

As the regional heads of state convened in Kampala on Saturday, the final position on the matter had been concluded — that Uganda will construct its pipeline to Tanga.

“There is no more paralysis on that matter, we are now moving,” President Museveni remarked at the end of the meeting.

“I have agreed with President Kenyatta that we should let the two pipelines go ahead, one from Lokichar to Lamu and another from Hoima to Tanga,” he added. It was also agreed that Kenya would construct its own pipeline from its Lockicahr oil belt to Lamu.

Kenya recently announced discovery of 600 million barrels of oil but the reserves are yet to be appraised as economically viable. On the other hand Uganda’s current volume of oil stands at 6.5 billion barrels.

'MAJOR MILESTONE'

Reacting to the decision, the Total E&P Uganda corporate affairs director, Ahlem Friga-Noy, in a statement described the development as a “major milestone towards the development and the production of Ugandan resources”.

“We commend the thorough work conducted by the Government of Uganda in the process of analysing and selecting the best route to transport the Ugandan oil and to ensure the maximisation of its value,” he said.

A day before the Saturday summit, President Museveni met a delegation from Total led by the Africa director for exploration and production Guy Maurice and the Uganda business general manager Adewale Fayemi, where they discussed how to go forward with the Tanga pipeline.

Tullow Oil [Uganda] general manager Jimmy Mugerwa, said: “While we have always believed that a joint Uganda-Kenya export pipeline was the most cost-effective option, we are clear that both Uganda and Kenya’s oil resources can be developed separately. We will now work with both the government of Uganda and our joint ventures partners CNOOC and Total on further moving the Uganda project towards development.”

SEVEN POINTS THAT SPOILED THE PARTY

1. FIRST OIL CONSIDERATION: According to reports and insider accounts, even before the security aspect in Northern Kenya was made a factor, there was concern that construction of the port of Lamu — part of the Lapsett corridor — was almost two years behind schedule and thus was not the best option for the route. This delay would mean Uganda would only get to export crude oil in the second quarter of 2022, with only 80 per cent of the work complete.

The Tanga port, on the other hand, is already operational, with 98 per cent availability, and means if Uganda opted for it, Kampala would start exporting crude by 2020. “The Kabaale [Hoima]-Tanga route is the only option to secure first oil export,” the final report reads in part. Kabaale, in Buseruka sub-county in Hoima, is poised to be the center of activity.

It is here that government earmarked 29 square kilometres of land [about 13 villages] for the construction of a Greenfield oil refinery. This will be the collection point for crude oil from all oil fields, both from northern Uganda and the western districts of Buliisa and Hoima.

2. THE TERRAIN: The route to Lamu (1,038km) via north-east Uganda to Kenya’a Lokichar, where the country discovered oil, to the port posed serious terrain challenges, with hilly and steep slopes above 25 degrees.

The Tanga route (1,239km), on the other hand, was deemed flat with slopes, if any, below 15 degrees. On the Ugandan side, the terrain around Mt Moroto was noted to be having considerable challenges in the construction of the pipeline. The terrain around the area would increase the cost by at least five times, compared to a flat terrain..

3. INFRASTRUCTURE CONSTRAINTS: Even if the Lamu route were to be concerned, the existing infrastructure in Kenya caused more headache. There are no existing roads and railway network along the route, for instance. Only a network of 183 kilometres of tarmac roads and 250 kilometres of usable murram roads are close by the project right of way. This road network was described as “not suitable for heavy trucks”.

The Tanga route has existing roads, with 1,101 kilometres of tarmac roads and 582 kilometres of usable murram roads, and a railway along the project right of way. The Lamu option was also considered expensive because of the cost of construction of the port itself.

Construction was contracted to China Communications Construction Company (CCCC) in 2013 but no significant work has been undertaken since. The plan presented by Lapsett is to have the first berth standing by 2018, and second and third berths erected by 2018 for general, bulk and containarised cargo, which further made it complicated. This update, according to one official, was presented during a meeting in Tanzania on March 30.

Besides, the officials noted, the contractor had to undertake dredging of the port, estimated at a cost of Sh11 billion, which in their view was underestimated. More hiccups came with land reclamation at the port likely to cost between Sh80 billion and Sh100 billion. The concern, insiders noted, is that all these costs could have an effect on the resultant tariff that Uganda will have to pay to use the export pipeline.

“On the other hand, the Tanga port is fully functional,” a report dated April 11 reads in part. This means the port did not require additional infrastructure to cater for the pipeline. In fact, officials noted, the Tanga port enables the pipeline operations to start immediately.

4. ENVIRONMENTAL CONCERNS: The route through Kenya presented a challenge, in that it would result in moving through ecologically sensitive areas. This posed a considerable threat to the environment and would result into increased campaigns against the project from environmentalists.

The Hoima–Lockichar–Lamu route specifically has to go through four forest reserves, national parks, the Lake Kyoga in Uganda area that is considered ecologically fragile, and would have to cross the Nile at a width stretching about 1.2 kilometres, which is considered a project risk.

Lamu alone is also considered a Unesco World Heritage site because of its coral reef, mangrove trees, fish breeding, and also there was a campaign titled “Save Lamu” that could result in endless litigation, which would in turn delay the project. On the other hand the Kabaale–Tanga route does not move through any national park and protected areas, with the exception of the Biharamulo Game Reserve for a stretch of about 33 kilometres.

In Uganda, the major environmental crossings will be wetlands, the rivers Pangani and Kagera. The Tanzania option, therefore, presented less environmental risks.

5. LAND ACQUISITION: Land is an important factor in the construction of a pipeline, and in Uganda the acquisition process would be obvious, considering that there is freehold, customary, and mailo land tenure systems.

That means there will be compensation to the various landowners in the area. Uganda often struggles to complete compulsory land acquisition and it would not want to have that same experience delay a project. However, once the pipeline crosses into Kenya or Tanzania, it presents a different ball game. “Land acquisition process is estimated to be at least one year longer in Kenya than in Tanzania,” the Ugandan government notes in one of the technical reports.

In Tanzania, the example given was the land acquisition process for the construction of the Mtwara–Dar es Salaam pipeline (542km). It took nine months to acquire a way-leave for the pipeline. In Kenya, on the other hand, acquisition of land for the Standard Gauge Railway project lasted at least more than two years because of land disputes. The Uganda government was concerned about, Kenya noting that they had larger land related risks.

In Kenya there is also need for increased consultations with county governments, the communities, and the National Land Commission, but that is not necessary in Tanzania.

“All land is vested in the President as a trustee and no freehold system exists. The president has the power to revoke private land titles to give way to the project of public or national interest,” the report by the Uganda government reads: In summary, it would take 10 months in Tanzania and two years in Kenya to acquire land for the pipeline.

 6. PROJECT COSTS: “This was the last nail in the coffin,” said a senior official who declined to speak on the record. The Tanga pipeline, according to another report presented to the heads of state, including catering for all costs from Hoima, was estimated to cost Sh350 billion.

The Lamu pipeline, going through some swampy areas and hilly terrain (which are very cold in the night) on the other hand was tagged to a cost of Sh420 billion.

This capital expenditure excluded heating costs for the pipeline (the oil from Uganda being very waxy), dredging and land reclamation and other required work at the Lamu port. In the report submitted by Toyota Tsusho, the “realistic” project cost for the pipeline was put at Sh510 billion.

7. WEATHER CHALLENGES: The Tanga port is shielded from the periodical strong ocean winds by Pemba Island, which forms part of the Zanzibar archipelago in the Indian Ocean. Lamu port, on the other hand, is not shielded from the Monsoon winds (seasonal winds blowing from Asia) by the surrounding

islands of Pate and Manda — which make up the archipelago.