East African Crude Oil Pipeline: The Inside Story
East African Crude Oil Pipeline: The Inside Story Details emerge of how the crude oil pipeline will be financed, managed
New details have emerged in the East African Crude Oil Pipeline (EACOP) regarding how it will be financed, run and managed. For starters, Uganda plans to construct a pipeline that will transport its crude oil to the international market through the Tanzanian coastal port of Tanga.
The pipeline, is expected to be completed by the year 2020, when the country is scheduled to start oil production. In fact, Uganda’s President, Yoweri Museveni and his Tanzanian counterpart recently commissioned the construction of the East African Crude Oil Pipeline. The two leaders laid mark stones for the crude oil pipeline in Mutukula, Kyotera district and Kabaale in Hoima district. Total E&P Uganda, a subsidiary of French oil giant, Total S.A, is spearheading the construction of the crude oil pipeline on behalf of the joint venture partners. Adewale Fayemi, the general manager, Total E&P Uganda says discussions are ongoing to discuss on the formalities of how the pipeline will be run. Already, an agreement has been reached that the East African Crude Oil Pipeline (EACOP) will be run and managed by a Special Purpose Vehicle (SPV) – private pipeline company. This means that a private company will be incorporated with joint venture partners – Tullow Uganda, Cnooc Uganda Ltd and Total E&P Uganda, and the governments of Uganda and Tanzania as shareholders in the company.
Uganda’s minister of Energy and Mineral Development, Irene Muloni, says that the National Pipeline Company (U) Ltd – a subsidiary of the Uganda National Oil Company (UNOC) will own shares in the pipeline company (Special Purpose Vehicle), on behalf of the government of Uganda. As of now, the pipeline company (Special Purpose Vehicle) is yet to be incorporated.
“Negotiations are underway for the setup and corporate structure of the proposed company, that will run EACOP”, Samantha Muhwezi, the Legal Advisor EACOP at Total E&P Uganda explains. The pipeline company, will build, own and operate the crude oil pipeline project.
Eng. Muloni said that there is a possibility of bringing on board investors into EACOP in addition to the governments of Uganda, Tanzania and the Joint Venture partners. Once the pipeline company is incorporated, another sticky issue that will have to be ironed out is how the company will meet its tax obligations both in Uganda and Tanzania. However, at the moment there is already commitment to exempt it from tax.
“There will be no pay transit tax, no Value Added Tax, no corporate income tax. The government of Tanzania gave us 20 years depreciation tax holiday, granted us a free corridor where the pipe line passes and promised to buy shares in the pipe line,” President Museveni said, while laying a mark stone for EACOP at Mutukula, Kyotera district.
Another issue under consideration is the financing of the pipeline project. At least $ 3.5 billion dollars is needed to finance EACOP. Accordingly, to preliminary information, the funds will be raised through debt and equity from joint venture partners and national oil companies of Uganda and Tanzania. Already, Total E&P Uganda, Tanzania and Uganda have appointed three companies as financial advisors for the pipeline. A consortium of South African based Standard Bank, Imperial Bank of China (IBC) and Sumitomo Mitsui Banking Corporation Europe Ltd, were recently appointed as the financial transactional advisors for EACOP.
“They are advising us on how to structure the project to enable lenders to be able to finance the project,” Muhwezi said. Sources indicate that IBC is expected to advise CNOOC Uganda Ltd while SMBC will work with Total E&P Uganda, the lead joint venture partner on the crude oil export pipeline. The special purpose vehicle will also charge $12.2 dollars for every barrel of oil that will be transported in the pipeline, making Uganda’s crude oil profitable even at today’s rate of $50 per barrel.
Uganda’ crude oil has low Sulphur content and therefore, waxy and solidifies at room temperature. This requires heating of the pipeline to at least 50 degrees Celsius to make the crude flow. This means it will require a lot of electricity to heat the pipeline. It will have eight main pumping stations and five heating stations.
“We might use solar energy to reduce on the power to heat the pipeline,”. Muhwezi said. Once completed, at 1,445 kilometers, the East African Crude Oil Pipeline, will be the longest electrically – heated pipeline in the world. Uganda will host 296kms of the pipeline, while the remaining 1,149kms will be in Tanzania. In Uganda, the 24-inch diameter, heated pipeline, will go through the districts of Hoima, Kakumiro, Kyankwanzi, Mubende, Gomba, Ssembabule, Lwengo, Rakai. In Tanzania, it will go through eight regions and 24 districts. It will be a buried pipeline, with an estimated 1-2 meters buried underground and planned to have a daily flow rate of 216,000 barrels per day. It will be designed to add volumes of crude from other countries like Tanzania, South Sudan or Democratic Republic of Congo, incase, they want to use it. During construction, EACOP is expected to generate between 10,000 to 15,000 direct jobs and 30,000 temporary jobs at peak.
Tanzania’s President, John Pombe Magufuli recently pledged Tanzania would now buy crude oil from Uganda instead of incurring high expenses of importing from the Arab world. The Hoima-Tanga route was selected because it offered the least cost route for the transportation of crude oil from Uganda to the East African Coast. Muloni says the Front End Engineering Design report for EACOP and environmental social impact assessment (ESIA) studies, expected to be completed next February, will lead to FID in the first quarter of 2018.