In the midst of continued low oil prices and geopolitical instability, competition for a pipeline to transport Ugandan oil is hotting up as Kenya and Tanzania go head to head for the contract. Resolving the pipeline route is crucial in influencing the final investment decisions of the oil companies involved.
As presidents Museveni and Kenyatta meet today with oil executives to discuss the proposed Kenyan route to the coast, the Tanzanian option remains very much on the table. The talks in Kenya were accelerated after president Magufuli of Tanzania announced last week that the French company Total had set aside $4 billion for the pipeline through Tanzania. Total has a large stake in the Ugandan oil fields on Lake Albertine, along with the Irish company Tullow and China’s CNOOC (Chinese National Offshore Oil Company).
In August 2015, Kenya and Uganda supposedly reached a deal for the pipeline. This route was predicted to cost around $4.5 billion and would be part of the wider Lamu Port-South Sudan-Ethiopia Project (LAPSSET) to create Kenya’s second transport corridor. It also involves the construction of an extensive road network and a coal-fired power station. The proposed route would also connect the oil reserves in Kenya which has 6.5 billion barrels of its own that it wants to get to market. The Irish oil company Tullow has investments in the Kenyan and Ugandan oil fields, and has made clear its own preference for this particular route. However, the announcement last week by president Magufuli of Tanzania that Total has other intentions has caused particular concern in Kenya. Tullow and its local partner, Africa Oil, would have to foot the bill itself for the project if the Tanzanian route is decided upon.
Total has consistently voiced its security concerns about the Kenyan pipeline. Lamu, the suggested port, is not far from the Somali border and has experienced attacks from militants since Kenya entered into the conflict against the al-Shabaab. Lamu also borders Garissa county, where al-Shabaab was responsible for the brutal attack on Garissa University killing 147 students last April. Various commentators have referred to the resurgence of al-Shabaab in the region which, until recently, had been deemed to be on its last legs. The security risk, along with the sub $50 per barrel oil prices, is likely to make Tullow and Africa Oil think twice about the Kenya pipeline. Whilst these two risks continue, the pipeline is likely to be put on hold.
The other option is Tanzania. The proposed route would see Ugandan oil connected to the port of Tanga, and would employ 1,500 people directly. Magafuli hopes to get the construction started in August 2016 with the prospect of oil companies finding further oil in Lake Tanganyika that could be transported using the pipeline. If Tanzania does manage to snatch the pipeline away from the Kenyans, it would be a symbol of Tanzania’s rise to prominence as the regions largest economy. According to economists like David Ndii, Tanzania is scheduled by 2020 to have overtaken Kenya and to have an economy that is 20 per cent larger.
As discussions continue regarding the outcome of the pipeline, there are ongoing concerns over the stability of Uganda since the February elections. The largest political-regulatory risks still facing the oil industry is the development of a regional pipeline, but, since February, Museveni’s position has also been called into question. In a paper published by the Oxford Institute For Energy Studies, Museveni has been criticised for failing to counterbalance the negative consequences the industry can have on livelihoods. The oil infrastructure plans will displace thousands without the required countermeasures from the Ugandan government.