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Why local firms might lose out on crude oil pipeline

By Macharia Kamau | February 26th 2019
Despite availability of opportunities for private firms to invest, no local company has expressed interest or made enquiries about the Sh100 billion project.

The ownership structure of the company that will own the crude oil pipeline to transport oil from Lokichar to Lamu is starting to take shape.

The Ministry of Petroleum said despite the availability of opportunities for private firms to invest in the project, no local company has expressed interest or made enquiries on modalities of investment in the Sh100 billion project.

The State and the joint venture partners in the Project Oil Kenya are expected to commit funds for building the pipeline towards the end of this year.

Tullow Oil Kenya Managing Director Martin Mbogo said the partners are looking at a mix of debt and equity, which presents opportunities for local banks and pension funds to invest in the pipeline.

“There are two distinct aspects to the project we have the upstream in Turkana and the midstream, which is the evacuation of the oil to Lamu. Based on our design, workings and experience, we think that this is going to be a $3 billion (Sh300 billion) project. Two-thirds of this is going to be in the upstream and about a third or about $1 billion (Sh100 billion on the midstream (pipeline),” he said.

“To access $3 billion (Sh300 billion), we think that we will work on a portion of the equity of about 30 per cent and 70 per cent of this is going to be debt.”

Petroleum Principal Secretary Andrew Kamau said about five foreign pension funds had expressed unsolicited interest in investing in the pipeline.

“They understand that this gives them a known return on investment for about 20 years,” he said, noting that as of now, no local institution had approached the State or the Joint Venture partners asking on the modalities of investing in the oil project.

The State plans to invest in the pipeline through the Kenya Pipeline Company, which is expected to have a stake of up to 20 per cent. PS Kamau said concrete decisions on the State’s stake will be made towards the end of this year when the final investment decision on the Project Oil Kenya will be made.

Mr Kamau said the project will be undertaken by the joint venture partners and owned by a company where all have a shareholding, with the Government chipping in as an investor.

“It is a private project. Total, Africa Oil, Tullow and the Government will invest in the pipeline. But the State is not the lead,” he said.

A Front End Engineering and Design (FEED) for the pipeline, which will inform how the pipeline will look like as well as the capital investments needed is being undertaken by UK firm Wood Group and scheduled for completion in April.

Earlier estimates, however, put the cost at Sh100 billion.

Construction works on the pipeline are expected to commence later this year and will take two years.

The completion of the pipeline is expected to be in time for the first phase of commercial oil production, which Tullow Oil has said will start by 2022.

The National Land Commission (NLC) is expected to start acquiring land for the pipeline.

The land along the pipeline route is owned by communities as well as individuals.

NLC said early February that it has started the process of acquiring some 6,348 hectares (15,600 acres) of land held by the community and individuals in the Lokichar region for the development of oilfields.

The land will be handed to Tullow Oil for the construction of 65 well pads that will be used for the production of oil from 435 wells that it has drilled in the area over the last nine years.

The wells are located within the Ngamia, Amosing and Twiga fields and will feed into the central processing facility that will produce oil for movement on the pipeline to Lamu.

Mr Kamau said land for the pipeline will be spearheaded by Lamu Port South Sudan Ethiopia Transport (Lapsset) Corridor, as it will be hosted on the transport corridor.

“Land acquisition will be led by Lapsset. As the pipeline, we will be a tenant on the larger Lapsset as one of the projects on the corridor. Our section requires 821kms and Lapsset will go all the way to the border with South Sudan. Our section ends in Lokichar and we are not going all the way to South Sudan at this point,” he said.

Other than local institutions that have not expressed interest in investing in the pipeline, also missing out on the billions in profits that the crude oil pipeline company will present in transporting oil are communities in counties where the crude oil pipeline will traverse.

The PS said the revenue share issue had not cropped up when it was doing social and environmental impact studies, noting that the residents of different counties are instead looking at tapping into opportunities that will be brought about by the larger Lapsset Corridor.

The crude oil pipeline is one of the components on the transport corridor, which has been hailed as a game changer by opening up the Northern frontier region.

“There were discussions about revenue share with communities along where the pipeline is going to pass, we have finished ESIA and in our discussions with the communities, that point has not come up because the benefits that are going to come with the Lapsset corridor are much more than what the pipeline would give,” he said.

The issue might, however, crop up when the pipeline starts taking shape and the reality of the billions that the crude oil pipeline firm will make over its life starts sinking in.

A report by the Kenya Civil Society Platform on Oil and Gas (KCSPOG) estimated that the State stood to make Sh100 billion in corporate tax over 20 years from the pipeline.

Assuming the company pays a 30 per cent corporate tax, it would mean that the total revenues would be upwards of Sh300 billion over 20 years.

“The Government stands to generate as much as $1 billion (Sh100 billion) in corporate tax over the lifespan of the crude oil exports through the Lokichar-Lamu pipeline,” said the report by KCSPOG. Projections by the lobby were based on an assumption that the pipeline will charge $12.50 (Sh1,250) to transport a barrel of oil from Lokichar to Lamu Port.

Tax holidays

This was based on requirements of the pipeline as well as borrowing from other countries that have put up similar infrastructure as well as tax holidays that may be given to the company putting up the pipeline.

Crude oil discovered in Turkana is waxy and needs to be heated to flow in a pipeline.

Incorporating heating equipment will increase construction costs. It is because of the heating components that the tariff, at $12.50 per barrel, will be double what normal pipeline charges to move crude oil over the same distance at about $6.50.

The high costs might see Kenya’s oil become uncompetitive in the global market.

Other factors including tax holidays that might be offered to the crude oil pipeline company might see the estimated $12.50 per barrel tariff come down. KCSPOG had proposed giving the communities along the pipeline route a share of the revenues from the pipeline at Sh5 ($0.50) per barrel.

“This would encourage buy-in from the people… the Lokichar oil project has already experienced three major stoppages since 2013 and the cost of each has been in the millions of dollars,” said Wanguhu.

“Giving the community a share of the tariff will minimise the cost overruns brought about by delays because of confrontations with the people.”

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