Hoima –Tanga oil Pipeline: was Tanzania short changed?

A Tullow Rig in Paipai- Kenya

DESPITE political talk to the contrary, it seems, Tanzania could end up with the short end of the stick in this project.  There is no clear, definable and quantifiable benefit for Tanzania, political rhetoric notwithstanding. The Tanzanian President was recently quoted as bragging that Tanzania will have three fuel pipelines including the Mtwara- Dar-es-salaam LNG pipeline, the Tanzania- Zambia white oils Pipeline and  now the Hoima- Tanga pipeline. 

 The cost-benefit analysis of the project does not support President Magufuli’s optimism.  However, Magufuli is ardent at jumping before looking. While the need and justification for the two pipelines is not hard to gauge, it is difficult to understand Tanzania’s stake in the third pipeline.

She has no oil so far and the possibility of finding oil looks dim so far. What is the Oil pipeline for? Will she invest or risk tax payers’ money in that project? Can it be justified in terms of economic gains? How will it contribute to Tanzania’s economic growth and welfare? How significant is that contribution? What are the Opportunity costs? Have they been quantified?

Uganda expects to make US$43 billion over the next 25 years. That is a cool US$1.72 billion a year which could be invested elsewhere in the country.  In fact, reports have it, Uganda is planning to mortgage the oil revenues to China for an SGR. 

Total SA has gained an extra 567 million barrels in Hoima fields. Assuming a fixed US$60 per barrel over the next 25 years, that is an additional US$34.02 billion. If you add the US$34.02 billion that was her share before she bought out Tullow oil, then Total SPA will generate some US$68 billion over the next 25 years other things being the same. And for this Total oil will sink any amount below US$10 billion.

Can Tanzania quantify her benefits in a similar fashion? Having waived VAT, what else is left for her?  Just being a landlord? How much rent will she get since she cannot charge for transport of crude per barrel. If Uganda, which owns the oil will earn only US$1.72 billion a year, how much will Tanzania earn as a Landlord? How significant is that to the economy?

In its previous life, the Hoima- Lamu pipeline was to be run by a SPV, Special Purpose Vehicle, which was to charge for transporting crude per barrel. That would have meant that the two countries were to invest in the pipeline which was expected to cost a pricey US$5 billion. This leads to the next question: was Total spa, “allowed” to build the pipeline or was it “contracted” to build it? Given that Tullow oil has surrendered the huge chunk of its price, "$700 million in deferred consideration which will be used by Tullow to fund the company's share of the costs of the upstream development project and the associated export pipeline project," it seems that the pipeline is purely owned by the private sector.

The structure of ownership of Hoima Oil Project changed in January 2017 when Tulllow oil Plc sold its 21.57 stake in the fields to Total SPA for $900 million. Now Total is the majority shareholder with a 54.87 Per cent stake. China National Offshore Oil Corp CNOC owns 33.3 per cent stake while Tullow, the minority stake holder holds 11.7 per cent.  If this will be the structure in the upstream operations including the pipeline, then Total will dictate terms. It cannot be “contracted” to build that which she owns.

 Reports indicate that the pipeline’s construction will be financed through equity and debt.  This means that the largest shareholder in the pipeline deal is still Total spa with 54.87 say in the matter of contracting the debt because they are expected to bear the greater burden. This is the expected structure in the downstream operations: Total 54.87; CNOOC 33.3; Tullow 10; Uganda 2 per cent; Tanzania? 

In the absence of any visible economic reasons, the view is gaining currency that the shift was a scheme to push Tullow out of Uganda by the French oil Major, Total. This is clear from Tullow’s stand on the shift of the export pipeline from Kenya to Tanzania. In March 2016, Tullow told Bloomberg that the shift to Tanzania “will have enormous opportunity cost.”  To them it was either “one joint pipeline through Kenya, or two separate lines,” Tim O’Hanlon, the London-based company’s vice president for African business told Bloomberg.

The hardline stand was not surprising for Kenya is the bedrock of Tullow oil’s business in east Africa. Her stock of recoverable crude is growing by the day. Some reports indicate that she could end up with 1.6 billion barrels in Kenya, making Kenya a more attractive proposition than Uganda where her share was slightly more than 500 million barrels. Her departure was therefore imminent.

 It is not clear whether Total SA, which was farmed into the Hoima-Oilfields by Tullow oil turned into a corporate raider. But there are fears it did, analysts say.

 After buying a third of the stake in Hoima oilfields, she went on to engineer a feasibility study of questionable competence which bad mouthed the Kenyan route causing Uganda to shift to the Tanzanian route.  That study apparently left the other partners out.  A part from irritating Kenya, Total Spa also gained by buying Tullow oil out, she increased here share of crude oil in Uganda to more than a billion barrels.

The buyout also saved her face for engineering the shift of the pipeline from Kenya to Tanzania which was becoming awkward as she had not found any oil in Tanzania where she has exploratory Licenses. Without oil in Tanzania, say industry analysts, raising the US$3.5 billion meant for the pipeline was tricky given that one of the partners opposed the new route.

This divergence of interests meant the time for divorce had come. That is how the deal to sale Tullows’ stake to Total was mooted and solemnized. Total will buy out Tullow stake for a whopping $900 million which is sweetened by the fact that it was staggered over time. Pay $100 million cash, another $50 million after the deal is approved and $50 million at the start of pumping.  In the meantime use $700 million to finance our stake in developing upstream infrastructure including the pipeline.

Analysts say that Tullow chose to protect its interests in Kenya where she has huge stock of recoverable crude – going to 800 million barrels than going the Tanzania route with its share of 567 million barrels. The Uganda oil stock is shared equally between, Tullow, Total SA and China National Offshore Oil Corp CNOC. The stake would fall further when the Uganda exercise its right to share in the Oil. 

That left the choices stark- she has to stand with Kenya where her interests are larger than Uganda, say analysts.  A week after the announcement of the sale of nearly 22 per cent stake in Uganda, Tullow hit the headlines with a find of another 50 Metre thick layer of recoverable oil at Erut-1 in Kenya raising her stock and prospects of a further increases.

  The apparent win-win situation is corporate myopia which left a bitter taste in some mouths. The diplomatic relations between Kenya and Tanzania were seriously hurt and could take a long time to heal.

 Further, by bad mouthing Kenya, Total SA has permanently locked itself out of the Kenyan Exploration scene. Analysts say, it will take a miracle, for Total to be allowed to explore for oil and gas in Kenya or even buy a stake in exploration companies in Kenya.

Kenya decided to go it alone and build a pipeline from Lokichar basin to Lamu port which will cost US$2.1 billion. The pipeline  will be financed by the joint Venture companies- Tullow, Maersk, and Africa oil and the Kenya government in equal share that 25% a piece.

 The firm is already preparing to pump about 2000bpd on experimental basis from July this year. Also to start about that time is the preliminary designs for the oil pipeline.