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Ethiopia enters Sh160b pipeline deal that could challenge Lapsset

BUSINESS
By Paul Wafula | October 2nd 2015

Ethiopia has entered into a parallel oil pipeline deal with Djibouti in a development that is set to take the shine away from Kenya’s Lamu Port Southern Sudan-Ethiopia Transport (Lapsset) project.

The country, which is a main determinant of the viability of the Lapsset project, on Tuesday entered into a rival deal with Djibouti to construct a 550km line to transport diesel, gasoline and jet fuel from Djibouti to central Ethiopia.

Energy infrastructure companies Black Rhino and MOGS Oil & Gas Services (BRM) will construct the pipeline at a cost of $1.55 billion (Sh160 billion at current exchange rates).

The deal could become the second significant threat to the infrastructure corridor coming days after Kenya and Uganda shrugged off another challenge to the project after they rejected a push by Total France to have a proposed crude oil pipeline, being developed by the two countries, pass through Tanzania.

Total wanted the route changed — from Hoima in Uganda via northern Kenya to Lamu on the Indian Ocean — in favour of another from Hoima via Dar es Salaam to the port of Tanga on the Indian Ocean.

The development could split Ethiopia’s loyalties into two, giving it access to both ports in what may reduce the lustre on the Kenyan project. Lapsset is estimated to cost Sh2.5 trillion ($24.5 billion) and it will entail the development of seven components, including Lamu Port, railway, highway, oil pipeline, oil refinery at Lamu, resort cities at Lamu, Isiolo and Lake Turkana and airports at Lamu, Isiolo and Lokichogio.

A feasibility study of Kenya’s project was premised on Ethiopia being fully on board and in case Ethiopia develops cold feet on Lapsset after this new deal, Kenya will only be left in a tricky situation, having to rely on South Sudan, which has suffered political instability.

The project is scheduled for completion in 2018 and it is being marketed as the Horn of Africa pipeline is ‘expected to increase the efficiency and safety of Ethiopia’s fuel import supply chain by aiding in the reduction of fuel transportation costs, increasing scalability of fuel imports and significantly decreasing the carbon output from importing fuel’.

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The deal is setting up Djibouti as a new rival to Lamu and Dar es Salaam in the ongoing battle to the regional shipping hub title.

 

“The project will also reinforce Djibouti as a regional shipping hub by expanding the port’s capacity,” Black Rhino said in a statement.

But it is still too early to tell the actual impact of the new project on the Lapsset project given that the two projects are being financed separately. But the fact that Ethiopia is walking on both sides of the line will raise questions whether it would make an economic sense to be part of the two projects at the same time.

The Lapsset envisions having an oil pipeline alongside the road and railway line for sending crude oil from Southern Sudan to Lamu via Isiolo.

According to the feasibility study, the existence value of the Lapsset Corridor depends heavily on users in Southern Sudan, especially cargoes including crude oil.

“In view of start of operations of the Corridor, cooperation with the Southern Sudanese government and the Kenyan Government is very essential in creating sustained demand and supply as well as constructing and completing the transport corridor in the both countries,” the feasibility study report on the Lapsset authority’s website says.

The study also notes that the co-ordination with the Ethiopian government is also indispensable, for example, to connect the railway and successful management of its operation.

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