Just days after signing with the Tanzanian government a landmark agreement for construction of the Hoima-to-Tanga oil pipeline, Ugandan officials are scratching their heads on how to raise the country’s chunk to the $3.5b (approx.Shs12trillion) kitty required for the capital development.
Industry sources say that with no special allocation in the 2017/18 budget, Kampala has its eyes on international lenders as it works with Tanzania and the Joint Venture (JV) partners; Tullow Oil Uganda, Total E&P and China National Offshore Oil Company (Cnooc) to raise 70 per cent of construction costs.
The remaining 30 per cent capital, according to an Energy ministry official, will be raised through equity by the JV partners and national oil companies of the two countries; Tanzania Petroleum Development Corporation and Uganda National Oil Company (Unoc).
Uganda’s matters in these will be handled through the yet-to-be-formed Uganda National Pipeline Company, a subsidiary of Unoc which was incorporated in 2015 as a private company wholly owned by government.
This means that once the financing structure has been defined, the government will have to commit a counter-part funding.
The Anglo-Irish firm, Tullow Oil Company, which is currently finalising farm down of its stake to Total and Cnooc, has committed 10 per cent equity to the multi-billion dollar project. Total and Cnooc are expected to offer equal amounts to the project.
Details of the probable international lenders are still hazy, but highly placed sources said both the Ugandan and Tanzanian governments are looking at French oil giant, Total E&P, the “messiah” for funding of the project christened the East African Crude Oil Pipeline (EACOP).
A final blueprint awaits formation of a Special Purpose Vehicle (Pipe Co) under whose seal “clear-cut” financing negotiations will be held including securing funding, an official who asked not to be named to freely discuss the sensitive deal noted.
The special purpose vehicle will be incorporated in both Uganda and Tanzania and it will construct and operate the pipeline and, additionally, negotiate the Shareholder’s Agreement, Project Financing Agreements and Transportation Agreement between Shippers of oil from Tanga port to the international market. Pipe Co will also pay back the (international) lenders from the project returns.
The financing plan is still subject to completion of the Front-End Engineering Design (FEED) study, whose contract was awarded last December to Gulf Interstate Engineering based in Houston, Texas.
The $11m consultancy financed exclusively by Total E&P is to examine the various technical aspects to help give the project a clear picture.
Uganda’s (Brent) crude oil has low sulphur content—making it heavy, waxy and quick to solidify at room temperature. This, therefore, will require the heating of the pipeline to keep at above 50 degrees Celsius for the crude to flow from Hoima in mid-western Uganda to Tanga port.
The pipeline will include eight stations, a marine export terminal at Chongoleani, near Tanga Port, a fibre optic cable layout between Hoima and Tanga and a high-voltage line to supply power to the various trace heating stations.
Energy minister Irene Muloni said last Friday at the signing of the Intergovernmental Agreement (IGA) that binds the two governments on the project that “discussions are ongoing with the relevant stakeholders.”
An earlier feasibility study for the southern route crude oil export pipeline conducted by Gulf Interstate Engineering put the project cost at $3.5b (Shs12tillion).
Energy ministry sources, however, revealed that they are optimistic the infrastructure may after all cost less than earlier envisaged.
The southern route was, after protracted negotiations on the alternative route to Kenya’s Lamu port, considered the “cheapest” and feasible option if Uganda is to start commercial oil production by 2020 as planned.
The pipeline will run 1,445 kilometres from Hoima in mid-western Uganda, through five districts en route to Tanga port at the Indian Ocean in Tanzania.
The Tanga route was selected on the basis, among other factors, of lower transit fees at $12.2 per barrel (Shs40,321), environmental considerations, relatively flat terrain, limited infrastructure constraints and Tanzania’s convenient land tenure system.
Energy minister Irene Muloni, speaking after the signing ceremony last Friday, that they expect the FEED study to be completed by August and discussed throughout to December this year with a Final Investment Decision (FID) made by early 2017. This will enable sourcing of financing to begin in earnest with construction expected to start in 2018.
Ms Muloni’s schedule, however, differs slightly from that of Total, the JV partner leading the project.
According to Total, the FEED study will be completed by December, this year, and discussed throughout next year with detailed engineering, procurement and construction starting toward end of 2018.
The additional agreement signed in Kampala, a week after the heads of state agreement in Dar-es-Salaam, specifies commitment of the two governments to the project after nine months of protracted negotiations. So far what is known is that it covers the fiscal regime (notably sharing of profits), shareholders’ interests and taxation, including the deal sweetener of VAT exemption during construction phase in the first three years.
Attorney General William Byaruhanga told this newspaper that unforeseeable circumstances, for example, further drop in oil prices that may render the pipeline uneconomical or advent of a new government in either country that may seek to amend some of the clauses, “will be dealt with as they arise.”
“We try to cater for what we see but in the circumstance of what we did not see, we shall address them together,” he said, “What is key is that the parties fulfill all terms of the current agreement.”