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Kenya to Tender for Own Oil Pipeline After Uganda Rejection

26 April 2016, 18:03

Nairobi - Kenya will tender for the design of a pipeline linking oil fields in its northern region to a port being built at Lamu, after neighboring Uganda decided against building a joint conduit, the head of the Lamu Port Southern Sudan-Ethiopia Transport corridor said.

A contractor for the front-end engineering design will be chosen through a competitive bidding process “as soon as possible,” Sylvester Kasuku said in a phone interview Monday from the capital, Nairobi.

A joint pipeline proposed by Kenya to tap oil in Uganda’s western Hoima region and link it to Lamu had been estimated by Nagoya, Japan-based Toyota Tsusho Corp. to cost as much as $5 billion. The capacity of the pipeline now being considered by Kenya may be smaller, Kasuku said.

Uganda’s decision “is not going to stop Kenya building an oil pipeline,” Kasuku said. “There is no stopping the process.”

The Ugandan government announced after a summit of regional leaders on April 23 it would prefer to export its oil through a pipeline to the Tanzanian port of Tanga, without saying why. Total SA, which is developing crude finds in Hoima, backed the Tanzanian route, saying it was safer than Kenya and cost less. Tullow Oil Plc, which is exploring for oil in both Kenya and Uganda, had favored the Kenyan line. Routing the pipeline through Tanzania will cost about $4 billion, according to state-owned Tanzania Petroleum Development Corp.

A number of financial institutions are interested in funding the Kenyan pipeline, Kasuku said, without identifying them. Financing for the pipeline projects in both Kenya and Uganda will be done through public private partnerships, according to a statement issued after the weekend summit.

Separate Development

Tullow said it plans to work with both Kenya and Uganda’s government and its joint venture partners to move the pipelines toward development.

“While we have always believed that a joint Uganda-Kenya export pipeline was the most cost-effective option, we are clear that both Uganda and Kenya’s oil resources can be developed separately,” spokesman George Cazenove said by e-mail.

Total is fully committed to investing in the Ugandan pipeline and said the Hoima-Tanga option is “the best route to transport the Ugandan oil and to ensure the maximization of this value,” according to an e-mailed statement.

Uganda holds an estimated 1.7 billion barrels of recoverable oil resources, while Kenya has about 600 million barrels, according to Tullow. Kenya’s deposits in the South Lokichar Basin in the north of the country could rise to 1 billion barrels with further exploration, Cazenove said.

‘Upside Potential’

“We believe there is significant upside in the South Lokichar Basin and an upside volume of 1 billion barrels is considered very achievable,” he said.

Successes at Tullow’s Etom-2 well underpinned the company’s confidence, Cazenove said. In addition, the company’s confirmation of a working hydrocarbon field at Cheptuket, in the Kerio Basin in western Kenya, made the company more optimistic about northern Kenya.

While the increased costs of constructing separate pipelines are a negative, reaching an agreement reduces the respective projects’ risk, UBS AG said in an e-mailed note. Investors, particularly in Uganda, had been growing frustrated at the slow pace of agreeing on the pipeline route, it said.

“For Tullow, closure on this issue could prove to be a catalyst for a farm-out of Uganda, currently 33 percent and Kenya 50 percent, which is a strategic priority for the company in its quest to improve the balance sheet,” UBS said.

Kenya, East Africa’s biggest economy, plans to produce its first oil as early as June 2017 and expects to ship 2,000 barrels per day when exports commence, according to Energy Secretary Charles Keter. The oil will initially be moved by both road and rail to the coastline.

“First oil at a low production rate from the pilot scheme is possible in mid-2017, but this is subject to upgrading of the road between Lokichar and Eldoret by the government,” Cazenove said. “Critically, the pilot scheme will provide both very valuable reservoir information for the planning of the full field development and oil production ahead of a pipeline.”

- Bloomberg

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