Tullow Oil’s Kenya problems mirror wider regional hiccup

Tullow Oil’s suspension of operations in northern Kenya, after locals protested against being denied job opportunities might seem like a small rough patch on the glossy oil story that Kenya has tried to sell to investors.

But underneath it is a bigger regional problem, one that Uganda’s oil industry will very likely meet when construction of the crude export pipeline begins.

While Uganda continues to place much attention on its oil refinery project, the country finds itself in a tough situation where it is expected to chip in and support the crude export pipeline – the one scheme it remains reluctant to even talk about. Both the construction of the refinery and export pipeline are to take place concurrently, starting some time in 2015.

An email to the Petroleum Exploration and Production department, the technical arm of the government on oil, on Uganda’s plan on the pipeline went unanswered. However, in April this year, Fred Kabagambe-Kaliisa, the permanent secretary in the ministry of Energy, told a team of editors that government would have nothing to do with the pipeline.

“We shall only be regulators,” he said.

That position appears to have changed. Earlier in the year, Toyota Tsusho, a company that has won the bid to build a crude pipeline between Lamu and South Sudan, proposed to Uganda’s government to design a feasibility study showing the route that the pipeline would take from Hoima in the oil-rich region of western Uganda to Lamu.

The pipeline from Uganda was to feed into the pipeline from Sudan. Toyota reportedly said it would do this report free of charge. The company was supposed to deliver that report by May. It is not clear whether Toyota has delivered that report.

As early as June, Uganda was said to have signed a memorandum of understanding with Kenya to support the pipeline. Among the issues to discuss intensely is the route the pipeline will take. In the same month of June, Uganda is said to have opened the second round of talks with South Sudan over connecting export pipelines between the two countries, which would thereafter connect to Lamu.

And just last week, East African heads of state met in Kigali, Rwanda, for the regional infrastructure summit, where discussions to speed up the regional pipeline project came up. An export pipeline from the oil fields in Hoima to the Kenyan port of Lamu appears to be more popular and easier.

The much more difficult question is where to find the land, appeasing the interests of local residents, and ultimately finding the funds to build the pipeline – issues that Uganda remains very unclear about.

In a press statement announcing the suspension of its activities in northern Kenya, Tullow Oil said it “takes its relationships with the local communities extremely seriously and the decision to suspend exploration and appraisal operations was taken to prevent further escalation of the demonstrations while discussions to resolve this issue for the long term are ongoing.”

Such occurrences are likely to take place, and oil companies operating in the region will look to the countries to deal with any public uprisings that could delay East Africa’s oil prospects.

“We shall need land. And we do not have land,” Serge Matesco, the Vice President for Total E&P in sub-Saharan Africa, said at Total’s head offices in Paris, France, in reference to the crude export pipeline. He said there was a need for the countries to work together for East Africa to realise its potential of being an oil frontier.

It is still not clear whether the Ugandan and Kenyan governments will convert their offers of land into some sort of equity in the pipeline project. On top of that, government might also pick up the bills for compensating and resettling people to be displaced by the pipeline project – an amount that is higher than the Shs 12bn it has set aside for the more than 7,000 persons living along the 29sq km landscape that the refinery will occupy.

Questions over land are quite sticky, especially if you consider the kind of pressure Uganda faces to compensate the people living around the refinery.

Elly Karuhanga, the Chairman of the Uganda Chamber of Mines and Petroleum, in an earlier interview with The Observer said: “You have seen the pressure where the country wants to construct the refinery? Kabaale [the refinery host] is sparsely populated but even the few people there have become many.

So, it is not easy. Because of compensation, a cassava tuber in the Albertine graben is now very expensive. The government valuer is in trouble. A mud house in Kabaale has become more expensive than in Kampala or equivalent.”

Uganda’s oil prospects could be beset by the trouble that comes with collective bargaining. With the pipeline project sucking in three countries – South Sudan, Kenya and Uganda – all of which are looking at writing their own oil scripts and how they transform their economies, the conflicting interests look huge.

Finding a common position that works for all three parties is likely to be a tall order. A joint report titled Delivery of the Uganda Lake Albert Basin Development by the three upstream companies, Total, Tullow, and Cnooc, discussing the risks they face, notes that “intergovernmental agreements [are] a critical pre-requisite for [the] financing and development” of the crude export pipeline.

Construction of the pipeline, which is expected to start in 2015 and probably take three to five years to complete, will cost anywhere between $2.5bn and $5bn depending on whether it stops at the port of Mombasa or Lamu, according to Tullow Oil.

Companies are already looking for capital for their East African programmes. Africa Oil, which shares a stake in northern Kenya’s oil finds, last week announced it was carrying out a $450m private placement, where the “Net proceeds of the private placement will be used to fund the company’s future exploration, appraisal and development programme in East Africa.”

Tullow Oil also said it was offering new senior notes worth $650m to deal with some of its debt obligations, the money which had been used earlier to partly fund its East African programme.

It is still not certain where Uganda intends to get money to meet its part of the deal in the whole pipeline setup.

jeff@observer.ug