Kenya and Uganda agree on crude oil pipeline routes

Uganda and Kenya have made a final decision on the route for a crude oil pipeline that will connect Uganda’s oil fields in the Albertine basin and Kenya’s oil discovered fields through the northern part of Kenya to the proposed port in Lamu. The two countries have been assessing the two proposed routes for the pipeline, which is set to be completed by 2019. The alternative route which was dropped would have seen the pipeline run further south along existing petroleum products pipeline in Kenya to the port in Mombasa.

The proposed pipeline will be the first heated pipeline in Africa. The need for a heated pipeline was a response to the waxy quality of the oil at ambient temperature. Thus, the heating is critical to the oil flowing through the pipeline to the destination port. The 1,500km pipeline will run from Lake Albert through Hoima in western Uganda through Lockichar Basin in Kenya to the proposed port in Lamu. This route will see the pipeline pass through the northern part of Kenya that has been subjected to terrorist attack from militants in neighbouring Somalia. These insecurity issues have so far delayed the pace of construction at the Lamu ports also.

This development is quite important to landlocked Uganda, where operators, Tullow Oil, Total and China’s CNOOC are largely dependent on the construction of an export pipeline to monetize their oil reserves. Uganda is estimated to hold about 6.5bn barrels of oil reserves. Furthermore, the oil companies in Uganda are at a more advanced stage in their preparations for field development compared to Kenya. While Tullow Oil and partner Africa Oil Corporation are still appraising their finds and working to gain better understanding of the petroleum basins and systems in Kenya, operators in Uganda have conducted a test sale of Ugandan oil in February.

However, exports from Uganda are going to be entirely dependent on a pipeline passing through Kenya, where they were faced with two options. The pipeline would have to terminate in either the already over-stretched Mombasa ports or navigate through the mostly insecure northern region to terminate in the new Lamu ports. The choice of the Lamu ports is thus an indication that the two countries may have developed contingency plans to deal with the region’s insecurity issues. Thus, Total, Tullow and CNOOC, who have continued to delay Final Investment Decision (FID) on projects in Uganda can now plan their field development programs in line with the pipeline project completion timeframe.

Furthermore, the approval also boosts Uganda’s refinery plans. Uganda selected Russia’s Rosatom to build a 60,000b/d refinery close to Lake Albert earlier in 2015. The project is expected to utilise crude from Uganda’s local production as feedstock and provide an alternative outlet to the export pipeline for Uganda’s crude. The agreement on the pipeline is expected to accelerate field development programmes, which in turn impact on how soon crude oil will be available for the refinery.
The governments have also agreed to commence work on a proposed reverse flow pipeline that will see refined product transported from Kenya’s Mombasa port through Eldoret to Uganda’s capital Kampala. In the reverse direction the pipeline will transport refined products from Uganda’s proposed refinery to Mombasa for export. The pipeline will avail Uganda the opportunity of exporting excess product from the refinery when it commences operation and sell to Kenya, which is looking to convert the KPRL into a storage depot for imported petroleum products.
Analysts see the agreement as a positive development that will hasten operators’ FID. ‘We see the move as a positive one that will aid operators in making FID in the two countries. However, we remain concerned about the attractiveness of oil projects in both countries if oil prices continue to fall and stay below $50 per barrel. Further, the dependency of the projects in the two countries on the pipeline creates a key completion risk as any delays in completing the pipeline essentially delays output from the two countries,’ say analysts at Ecob

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