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 870-mile route through Tanzania, citing lower transit prices.
Kenya will go it alone with an 865-kilometer 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 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 , 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. 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 percent from 4.6 percent 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 nongovernmental organization.
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's 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 government of ficials 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.
SOURCE: DAILY NEWS
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