All eyes on South Sudan as Kenya, Uganda push for Lapsset corridorproject

East Africa’s ambitious plan to boost its oil supply infrastructure

enters a critical phase this week as Kenya and Uganda float a

design tender, while South Sudan decides whether to build a

pipeline through Kenya or Djibouti. TEA Graphic

By JOINT REPORT 

By Machel Amos in Juba, Kennedy Senelwa and Peterson Thiong’o in Nairobi

The EastAfrican, October  2013 

IN SUMMARY

• Sources said President Uhuru Kenyatta and his Ugandan counterpart Yoweri Museveni are keen to see the project take off ‘‘in a matter of months.”
• The EastAfrican has learnt that a $3 million feasibility study commissioned by South Sudan, on both routes — to Lamu and Djibouti ports — has found both technically viable, but the government is due to consider the cost, terrain of each route and geopolitics of the region.
• The decision has presented a headache for Juba for while a pipeline to Djibouti makes a stronger economic case, its deep diplomatic connections with Uganda and Kenya make it hard for it to ignore these two states.

 East Africa’s ambitious plan to boost its oil supply infrastructure enters a critical phase this week as Kenya and Uganda float a design tender, while South Sudan decides whether to build a pipeline through Kenya or Djibouti. On Monday, the presidents of Kenya, Uganda and Rwanda — meeting under the auspices of the 3rd Infrastructure Summit in Kigali — are expected to receive a progress report on the planned crude oil pipeline under the Lamu Port South Sudan Ethiopia Transport (Lapsset) corridor project.

Sources said President Uhuru Kenyatta and his Ugandan counterpart Yoweri Museveni are keen to see the project take off ‘‘in a matter of months.” It has emerged that after the Kigali meeting, Kenya and Uganda are to jointly float a tender for the design of the pipeline.

“For Kenya and Uganda, the proposed pipeline is becoming an immediate necessity. Government officials have been given strict timelines. The two countries are under pressure to get quotations,” said a Kenya oil executive familiar with the matter.

“Uganda is desperate to get a route for its oil just as Kenya is. For South Sudan, it has already dealt with its most pressing problem by using the old Khartoum route to export its crude. What it is looking for now is a security option that would give it a bargaining alternative.”

The pipeline is expected to run 1,500 kilometres from Hoima near Lake Albert in western Uganda to Lamu port on Kenya’s Coast. The project is expected to be commissioned by 2017, when the two states are projected to officially join the league of oil producing countries.

Lapsset

However, it is unclear whether South Sudan will be part of the pipeline at the initial stage.

On August 28, in their second summit in Mombasa, the three presidents had directed government officials to ensure that the South Sudan-Lokichar-Hoima crude oil pipeline is integrated into the Lapsset corridor project by December 31. At the Mombasa meeting, South Sudan’s Minister for Foreign Affairs and International Co-operation Barnaba Marial Benjamin represented President Salva Kiir.

The EastAfrican has learnt that a $3 million feasibility study commissioned by South Sudan, on both routes — to Lamu and Djibouti ports — done by the German-based engineering firm ILF and the UK-based legal firm IDP, has found both technically viable, but the government is due to consider the cost, terrain of each route and geopolitics of the region.

“By the end of October, the result will be presented to the leadership for a decision,” said Gatwech K Thich, director of pipeline unit at the Ministry of Petroleum and Mining. “The leadership will make a decision on which route they want to take based on cost, the distance, and all other factors that influence the construction and the operation of a pipeline,” he said.

The decision has presented a headache for Juba for while a pipeline to Djibouti makes a stronger economic case, its deep diplomatic connections with Uganda and Kenya — both of which helped it in the fight for Independence as well as in the negotiations with Sudan — make it hard for it to ignore these two states. Further, the country is eying admission into the East African Community and a choice of Djibouti would not further this cause.

READ: East Africa’s future: The pull of the north
“The government is in a dilemma. It needs a short and less costly route on one hand, but on the other hand there are friends it does not want to leave abruptly,” said a senior government source who asked not to be named.

Kenya will be keenly watching the developments in South Sudan given the impact any decision would have on plans to develop a corridor connecting Kenya to that country.

The decision adopted by Juba could either complicate or make the case for Kenya’s planned $22 billion Lapsset project, as part of its economic feasibility was pegged on the existence of a pipeline from Lamu to South Sudan. The decisions, analysts and government officials said, could have a far-reaching impact on the shape the region’s energy infrastructure will take. “The cost and actual size of the Lapsset pipeline will be known after detailed design study. The first oil is expected to flow either in 2017 or 2018. The project is a critical success factor of Lapsset infrastructure,” said Silvester Kasuku, director general of the Lapsset Corridor Development Authority (LCDA), adding that the tender is expected to be floated before the end of 2013.

This week, Kenya and Rwanda are also expected to confirm their participation in the planned refinery in Uganda. Kenya and Rwanda had been given up to October 15 to confirm their participation.

In Kigali, the presidents are also expected to receive a report from a joint committee of their ministers on the construction of the Eldoret-Kampala pipeline as well as the feasibility study for the Kampala-Kigali segment.

READ: EAC countries agree on shares in Uganda refinery

At the same time, Kenya is expected to convene a shareholder meeting with Essar group — the Indian company that owns half of Kenya Petroleum Refineries Limited (KPRL) — mid next month.

Kenya refinery

The meeting is expected to discuss the way forward for the refinery following Essar’s announcement that it intends to exit from the company. It is understood that a decision is to be made on whether the Mombasa-based refinery will be shut down, upgraded on converted into a storage terminal.

READ: Frustrations pushed Essar out of refinery

In the Lapsset master plan, Kenya had factored in the existence of a pipeline capable of transporting 500,000 barrels per day from South Sudan to Lamu, projected to cost $3.5 billion.

A shared petroleum infrastructure is vital for Kenya and Uganda as Tullow Oil Plc has confirmed the presence of commercial oil near the shores of Lake Albert in Uganda and also discovered crude oil in Turkana County in northwestern Kenya.

Tullow, with joint venture partners China National Offshore Oil Corporation (CNOOC) and Total of France, is expected to start commercial oil production in the Albertine basin of western Uganda by 2017.

According to officials in South Sudan, the planned pipeline will be built on the model of cost recovery and asset transfer, where the ownership of the pipeline would be transferred to the government after the investor has recovered its money.

“When we build the pipeline, we have to be sure the cost will be recovered. You have to make sure that the pipeline will be operational for several years in which the investor will recover their funds,” Dr Gatwech said.

South Sudan is a partner in the $22 billion Lapsset project, which includes road and railway networks and an oil pipeline from South Sudan to Lamu, as well as airports at Lamu, Isiolo and Lokichogio. The railway network will run from Lamu to Isiolo, from where one line will branch to Ethiopia and another to South Sudan.

READ: South Sudan pushes for completion of the Juba-Lamu pipeline

But in terms of distance, the Djibouti port has a big advantage that analysts say could see it carry the day. The route to Djibuoti is shorter at 1,600km than the one to Lamu at 2,100 km. A longer distance would require more pumping for the oil to reach the export terminal and also more line-fill. The pipeline to Sudan takes more than four million barrels as line-fill.

On the terrain, it is uphill on the way to Ethiopia, where the topography gradually levels and then slopes down to the Djibuoti port, officials at the ministry said. This means that a lot of pumping will only be required for the oil to flow uphill, then a moderate pumping when the ground levels and the oil flows by gravity down to the Djibuoti port.

But a detailed comparison of the two routes from the feasibility study is still being kept under wraps.

“Sometimes, when the leadership makes a decision, they have to factor in all the factors, including the politics of the region,” said Dr Gatwech, adding, “I can say technically both routes are viable but it is up to the leadership to take a decision on which route to take.”

The ILF and IDP firms have also made a throughput analysis, for instance, the effect of having a refinery of more than 100 barrels of crude per day when the pipeline flow capacity is at least 200 or 300 bpd.

There were reports that Japanese firm Toyota Tsusho would build a 2,000 km pipeline to export oil from South Sudan and Uganda via Kenya.

Government officials could not confirm this development, saying that Toyota had only proposed to take a pipeline from oil fields in Unity State and Upper Nile and merge them in Juba, and then to Lamu.

The feasibility study, officials said, compared merging the pipelines in Juba or somewhere else, and taking the oil in one pipeline to Lamu or Djibuoti.

“That’s why we are doing the feasibility study, to make sure that when we make a decision, it is to our advantage and it is economically viable,” said Dr Gatwech.

Meanwhile, the Hoima-Lamu crude oil pipeline is expected be completed either in 2017 or 2018 as the facility has been integrated into the Lapsset infrastructure projects. Lapsset, at inception, required a pipeline to be constructed from Lamu to the oilfields of South Sudan and a new refinery put up at Isiolo in northern Kenya with the capacity to process 120,000 barrels per day of crude oil.

The proposed crude oil pipeline from Hoima will avoid swampy areas in Uganda. It will pass through Lokichar basin in northwestern Kenya where Tullow has discovered oil, and extend to Isiolo before reaching Lamu port.

For Kenya, the fact that the line passes through Lokichar basin is advantageous as it lowers the threshold needed for its oil find to be commercially viable.

African Oil and Tullow have estimated that they need to find between 300 and 500 million barrels of oil in Lokichar basin to justify a standalone development of the basin, a figure that could come down considerably with the construction of a pipeline that cuts through the basin.

“The commercial threshold would be greatly reduced towards 100 million barrels (according to Africa Oil) if a Kenyan oil project were developed in conjunction with Tullow’s Ugandan development (which requires an export pipeline) or as part of a regional pipeline infrastructure project (for example, Lapsset),” said Citigroup in a report.

But even as Kenya considers investing in the planned refinery in Uganda, critics say the decision is ill-informed as it was better for it to upgrade the existing facility in Mombasa. Further, the country is already planning to build a new refinery — under the Lapsset project— at either Isiolo or Lamu.  

By Machel Amos in Juba, Kennedy Senelwa and Peterson Thiong’o in Nairobi