How Tanzania, Uganda plan to finance pipeline

Monday May 29 2017

The Minister of Constitutional and Legal

The Minister of Constitutional and Legal Affairs, Prof Palamagamba Kabudi, and Uganda’s Minister of Energy and Mineral Development, Ms Irene Muloni, sign the inter-governmental agreement between Tanzania and Uganda for the East African crude oil pipeline(EACOP) project in Kampala on Friday. PHOTO | ALEX ESAGALA 

By Frederic Musisi and Mark Muhumuza

Kampala. Uganda, Tanzania and joint venture (JV) partners Tullow Oil Uganda, Total E&P and Cnooc will be turning to international lenders to raise 70 per cent of $3.5 billion (Sh7.7 trillion) capital expenditure for construction of the proposed crude oil export pipeline from Hoima to Tanga.

The remaining 30 per cent capital, according to sources in Uganda’s Energy ministry, will be raised through equity by the JV partners and national oil companies of the two countries – Tanzania Petroleum Development Corporation (TPDC) and Uganda National Oil Company (Unoc).

Unoc was incorporated in 2015 as a private company wholly owned by government through Uganda’s Energy and Finance ministries, holding 51 and 49 per cent stakes, respectively.

This means that once the financing structure has been defined, the Ugandan government will have to commit a yet-to-be-specified amount of money pooled either from the budget or will turn to lenders, most likely China’s Exim Bank.

So far, only the Anglo-Irish Tullow Oil has committed a 10 per cent equity to the multi-billion dollar project. Tullow and Cnooc will then commit an equal share to the project.

Details of probable international lenders are still hazy but sources said both the Ugandan and Tanzanian governments are looking at French oil giant Total E&P, the “messiah” on the project christened the East African Crude Oil Pipeline (EACOP) to show them direction.

A thorough financing blueprint, sources said, is pending formation of a Special Purpose Vehicle (Pipe Co) under whose seal “clear-cut” financing negotiations will be held including securing funding. The company, incorporated in both countries, will construct and operate the pipeline and likewise 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 blueprint, is also still subject to completion of the Front-End Engineering Design (FEED) study, whose contract was awarded last December to Houston based Gulf Interstate Engineering, to look at the various technical aspects that will give clear picture of the project. The FEED cost is $11 million (Sh24.2 billion) footed by Total.

However given government’s history of frustrating large projects through fights for contracts and officials asking for kickback, government will be required to guarantee certain conditions to boost investor confidence.

Uganda’s (Brent) crude oil has low sulphur content, making it a heavy, waxy substance which solidifies at room temperature. This requires heating of the pipeline (above 50 degrees Celsius) for it to flow through. EACOP will hence be the longest electrically heated pipeline in the world.

Other proposed accompaniments include, eight stations and a marine export terminal at Chongoleani, near Tanga Port, a fiber optic cable to allow communication 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 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 US (Houston) based Gulf Interstate Engineering put the project cost at $3.5 billion.

Energy sources however revealed there is some “belief” the project cost could even be lower than envisaged earlier.

This was considered the “cheapest” option for Uganda to start commercial oil production by earliest 2020—a date various officials claim is very practical notwithstanding prevailing circumstances that indicate otherwise.

The pipeline will run 1,403 kilometres from Hoima in mid-western Uganda, through five districts en route to Indian Ocean port of Tanga om Tanzania. The Tanga route was selected on basis among other factors transit fees of $12.2 per barrel (Sh27,000), environmental considerations, flat terrain profile, limited infrastructure constraints, Tanzania’s convenient land tenure system, and Tanga port being conveniently available for use.

Detailing the workability of the ‘2020’ date, Ms Muloni on Friday, speaking after the signing conference attended by officials, businessmen and diplomats from Uganda and Tanzania, that they expect the FEED study to be completed by August and discussed throughout to December this year, Final Investment Decision (FID) reached in early-2017 and sourcing financing through end the year, and construction starting earliest 2018.

Her schedule, however, slightly differs 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 2017; FID reached at end of 2017, and detailed engineering, procurement and construction start towards end of 2018.

The IGA, signed five days after the heads of state agreement at State House Dar-es-Salaam, is a landmark agreement that shows commitment of the two governments to the project after nine months of protracted negotiations although there was limited disclosure on the exact details.

So far what is known is the IGA covers the fiscal regime, notably sharing of profits, shareholders’ interest of governments and taxation – branch tax and exemption of VAT during construction phase in the first three years.

“It provides the foundation for the project as well as other project agreements, including host government agreements, shareholders’ agreements and financing agreements, which now will be discussed,” reads a statement from the JV partners.

While the agreement also caters for all the current conditions including legal ambivalences, Attorney General William Byaruhanga told this newspaper that unforeseeable circumstances like for example, further drop in oil prices that may render the pipeline uneconomic 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 together,” Mr Byaruhanga. “What is key is that the parties fulfill all terms of the current agreement.”