12 December 2010
By Denis Gathanju, Kenya.
The oil pipeline linking Kenyan port city Mombasa to the capital, Nairobi, not only carries the fuel that drives the Kenyan economy, but the precious liquid that also fuels regional economies in Uganda, Rwanda, Burundi, Southern Sudan and the eastern Democratic Republic of the Congo. And while these economies have enjoyed a boom over the last few years, thanks to relative peace and renewed investor confidence, the demand for oil products is at an all time high.
Growing demand for oil products has necessitated a review of the existing Mombasa- Nairobi pipeline. The line continues onto the interior cities of Nakuru and Eldoret, where oil trucks and tankers from western Kenya and the region collect the oil. However, the Kenyan and Ugandan governments have been actively reviewing plans of extending the pipeline into Ugandan capital Kampala, as demand continues to grow.
Oil pipeline cheaper alternative
According to industry experts, the extension of the pipeline deep into the hinterland will have a ripple effect on regional economies. They suggest it will not only make it easier and more cost effective to deliver colossal amounts of oil within a shorter time frame, but will slash transport costs - thereby reducing the cost of production; and eventually, the cost of goods and services in the region.
According to Selest Kilinda, CEO of Kenya Pipeline Company (KPC), the Kenyan parastatal entity mandated to operate and maintain the Kenya-Uganda pipeline, it is much cheaper to transport oil via the pipeline. Currently, notes Kilinda, it costs between $38 and $42 per cubic meter to transport oil via the pipeline as opposed to road transport which costs between $80 and $100 per cubic meter.
Pipeline redesign
However, plans to extend the pipeline from Eldoret through the border town of Malaba and onto Kampala have been put on hold, three years since the awarding of the contract to Libya Oil Holding, as Uganda is demanding a review of the pipeline design. Uganda wants it to be expanded, and designed to carry oil both ways. Uganda's call for the pipeline re-design is occasioned by recent oil finds in western Uganda.
Calls for the pipeline redesign have raised questions of Uganda's commitment to the project, especially after oil has recently been struck in the west of the country. Moreover, the project redesign is set to push the pipeline construction bill from an estimated $75 million to more than $300 million. Uganda is currently demanding the pipeline diameter be increased from a planned eight inches to 14 inches. Once expanded, the pipeline will triple its carrying capacity to 1.2 million cubic meters from the current 440,000 cubic meters.
According to Kilinda, KPC is awaiting a final decision on the project from both the Kenyan and Ugandan governments. This comes not only after Uganda's demands to expand the pipeline, but after the Kenyan government reduced its stake in the project from 24.5 per cent to 13 per cent. Kenya and Uganda had entered into a joint venture scheme with Libya Oil Holding to construct the pipeline. The reduction of the Kenyan government's stake in the project increases the Libyan firm's stake in the project from 62.5 per cent to 76 per cent.
Delays notwithstanding, it is an indubitable fact that the extended pipeline could prove hugely beneficial not only to Uganda's petroleum security, but a shot in the arm to its progressively rising petroleum industry, by providing a faster route to export markets, via Mombasa.
New port at Lamu
Mombasa plays a critical role in the expansion of the Kenyan economy, and regional economies too, since the port is the main entry and exit point of imports and exports to and from the hinterland. And as Kenya's role in the regional economies continues to grow, the Kenyan government is seeking to open another deep water port north of Mombasa in the ancient Swahili town of Lamu. The new port, according to Ministry of Transport officials, will help serve the Kenyan economy, and the emerging economy of Southern Sudan, which is currently enjoying renewed investor confidence after signing a peace agreement with the northern Sudan government in 2005. The new port is also expected to serve the Ethiopian economy as part of the Lamu Port-Southern Sudan-Ethiopia Transport Corridor (LAPSSET).
LAPSSET - according to Peter Thuo, director of Shipping and Maritime Affairs at the Ministry of Transport - will involve constructing the new Lamu port, and a road and rail link connecting Juba, (the capital of Southern Sudan) to Lamu and Ethiopian capital city Addis Ababa, to Lamu.
But the Kenyan government also plans to construct an oil pipeline from the port to Juba. This is especially critical due to the discovery of oil and natural gas in parts of Southern Sudan.
With Southern Sudan having recently joined the family of peaceful nations and the league of oil producing nations in Africa, Kenya plans to construct an oil refinery at the proposed Lamu port, to process oil from Southern Sudan before shipment to regional and global markets. The new refinery is set to have a capacity of more than 120,000 barrels per day to help meet the growing demand of oil products in the regional economies.
Reprieve for Southern Sudan oil exports
Currently, the new oilfields of Southern Sudan are served by a 1,700 km pipeline to Port Sudan on the Red Sea coastline. The proposed Lamu refinery will be about 1,400km from these oil fields. While Southern Sudan is expected to vote in a referendum next year on whether to secede from a united Sudan, the proposed new pipeline offers Southern Sudan an alternative to the export markets through the port of Lamu.
About 75 per cent of Sudan's 6.5 billion barrels of oil are located in Southern Sudan. Southern Sudan needs the co-operation of Khartoum's northern Sudan government to enable it export the oil, as the pipeline runs north from the southern oilfields to Port Sudan.
The expected secession of Southern Sudan from a united Sudan will create hostility between the north and the south; leaving Southern Sudan facing hurdles in its bid to export its oil through the pipeline both regionally and internationally.
The new pipeline linking Juba to Lamu on the Indian Ocean will undoubtedly provide reprieve for Southern Sudan. It will not only guarantee oil exports from Southern Sudan, but will most certainly reduce or eliminate post-referendum economic and political conflict; encourage co-operation between the Muslim north and Christian south, and in essence, reduce tension between the two rival governments.
Global interest
The port programme is expected to cost millions of dollars and the Kenyan government has been courting domestic and foreign investors to take up the project under a build, operate and transfer (BOT) agreement. Led by President Mwai Kibaki, the government recently sent a ministerial delegation to China for discussions with Chinese government officials and business leaders, on the sidelines of the Shanghai Expo, to shore up financial and technical support for the Lamu Free Port programme.
According to Thuo, the project is estimated to cost about $1.6 billion, but the actual figure will be known once feasibility studies are complete. A number of investors and governments have expressed their interest in the project. The governments of China, Singapore, Qatar, the US, India and Italy have expressed their interest in developing the port, railway line and pipeline. The Kenyan government has set aside some Kenya Shillings (Kes) 2.7 billion (US$ 36 million) to conduct the feasibility studies and designs for the project.
Says Thuo: "We are currently reviewing local and international bids submitted at the expression-of-interest stage and shortlisted bidders will be required to make detailed submissions of financial and technical services for the project."
Among the companies interested in taking up the pipeline construction is Japanese business conglomerate Toyota Tsusho, a subsidiary of Toyota Motor Corporation.
Takashi Hattori, executive director of Toyota Tsusho, confirmed his corporation was interested in the pipeline, after a meeting in Nairobi with Kenyan government officials.
He said: "We are willing to partner with the two governments [the Kenyan government and the Government of Southern Sudan (GoSS)] on this project, but are yet to agree on the details."
While addressing media in Nairobi, Hattori noted the pipeline could handle more than 450,000 barrels per day. He said Toyota Tsusho was interested in constructing and operating the pipeline under the BOT scheme for 20 years. Hattori also indicated that Toyota Tsusho was willing to co-operate with other parties in putting up the pipeline. This comes after Kenya got solid bids from the state-owned China National Petroleum Corporation, on conclusion of a state visit by President Kibaki to China in May.