East Africa's Crude oil Pipelines in Jeopardy

The fate of the two proposed crude oil pipelines in East Africa hangs in the balance. The odds are

An Oil rig: Black gold no more
leaning towards abandoning the entire Oil industry’s development.  The two, the East Africa crude oil Pipeline (EACOP), and the Lokichar-Lamu crude oil Pipeline, LLCOP, will cost a whopping US$8.6 billion. EACOP is to evacuate Crude oil from Uganda’s Albertine Basin to Tanzania’s Port of Tanga, some 1443 KM away. LLCOP on the other hand will also evacuate crude oil from Kenya’s Lokichar Basin to Lamu port, some 892 kilometers away.

The two pipelines are part of the proposal for a three-pronged development of the oil industry in Kenya and Uganda comprised of; the upstream assets; the midstream assets; and the downstream assets. All will cost an estimated US$23.6 billion. In normal times, this amount is minuscule for oil majors such as Total SPA, which owns a large stake in Uganda’s oil Fields at Hoima. However, the times are not normal and the entire project faces headwinds.  Cost is not the risk neither is the potential dangers of oil spills along the lines a major risk. These are secondary risks. The major risk is the commodity they will be built to evacuate- crude oil.

The crude oil industry is facing significant headwinds that could turn it into a dinosaur in the near future:  Consumer taste is shifting, Supply is increasing due to fracking, Price is declining and so is demand. This combination of negative trends poses the greatest risk to fossil fuels- Crude oil and Coal.  A recent report on the Ugandan Oil industry points out two major shifts that could deter investment in new oil.

The shift in consumer tastes towards cheap clean energy tops the threats to the industry.  In the last five years, crude oil prices in the world market have declined 70 percent, lowering the return on investment in the industry. It has also lowered the economic, financial, and fiscal benefits of investing in the crude oil industry for the host economies.

 The decline in prices has brewed discord within OPEC as they have undermined its ability to control output and thus prices. Each Member country in OPEC is striving to retain its market share resulting in competition among the Oil producing countries that has pushed oil prices down.  Market watchers expect prices to remain depressed in the future.

The shift in consumer taste in China, Europe, and now the USA, adds to the troubles facing fossil fuels.  The three largest polluters in the world have shifted to low carbon emission policies. China has pledged to be Carbon neutral in 2050 and is already directing investments toward green energy - Solar, wind, and Hydro sources - with the goal of significantly diminishing demand for coal and oil in the next ten years.  And so is the European Union. The inauguration of Joe Biden, as the US president, could hasten the industry's woes as the new President is pro-green energy. If the largest consumers of fossil fuels turn green in the next 10-20 years, demand for oil and coal will collapse, pushing prices down further.

An oil Pipeline: No longer a cause for
national Pride
This is why the wisdom of investing in the crude oil industry especially the Greenfields, is under intense scrutiny. Kenya and Uganda are in this category. The two countries hope to develop their oil industry through Public-private partnerships.  The prospect looks bleak because of the large decline in demand for crude oil, low prices and the bleak price outlook put off financiers from the industry.  Capital follows profit and for now, the clean energy sector looks far profitable.

All decision-making tools discourage investment in fossil fuels. Financial and Economic analysis shows that the project’s Internal Rate of Return (IRR) range from 4 percent to 10 percent in different scenarios. On the other hand, big oil has 15 percent as the cutoff point. This means that the return on investment is way below the cutoff point. The decision looks obvious.

The critical variable in the oil industry is  the price of crude oil and the price is on a downward spiral with very little prospect of rising, the Final Investment Decision, FID,  therefore, appears remote.

Although the governments and the Oil industry players sound upbeat about projects, there are doubts. The cost of investing in the industry will be at an enormous cost to the host governments, say experts Kenya is still shopping for partners to invest US$5 billion in the industry while Tanzania, Uganda, and the oil industry are seeking to raise US$2.5 billion for EACOP.

Experts advise all stakeholders in the industry in East Africa to take a hard look at the proposal and the future of the industry before they take the plunge. It is better, experts say, to delay than invest in a dinosaur

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