How Tanzania could emerge as the unlikely dealmaker for Kenya, Uganda's oil ambitions

The proposed joint investment in a Tanzanian refinery by Kenya and Uganda, for many, is one that is against a background of historical irony but also shaped by a major departure from neighbourhood rivalry that has in the past resulted in collapse of joint mega infrastructure.

 The partnership, which appears to stem from a camaraderie of sorts between President Wiliam Ruto and his Ugandan counterpart Yoweri Museveni, will inevitably stir memories of the 2014 falling out over the Hoima-Lokichar-Lamu pipeline that was supposed to be the crown jewel of East African infrastructure.

 At the time, the two countries had inked an agreement to build a pipeline, stretching from the oil-rich Hoima region in western Uganda through Kenya’s Lokichar basin and terminating at Lamu Port.

 That was until Tanzania offered Uganda a series of sweetheart deals, including lower transit tariffs while pointing out Kenya’s costly and lengthy land acquisition process that complicates and leads to major delays in infrastructure projects.

 This saw Uganda pull out the Uganda-Kenya Crude Oil Pipeline (UKCOP) and get into a deal with Tanzania to build East African Crude Oil Pipeline (EACOP) from Hoima to Tanga. EACOP is currently 80 per cent complete and is expected to transport the initial barrels from Uganda’s oilfields for export by end of this year.

 On Thursday at an infrastructure conference in Nairobi, when Ruto and Museveni spoke of building a refinery in Tanzania, they also appeared to point out that past rivalries should not deter EAC from partnering in mega projects.

 Ruto noted that fragmentation has been part of the EAC enemy “that is why some people broke up the EAC because they did not see the benefit of the bigger market and were just looking at individual countries”.

 Museveni noted that "ideological intoxication" was among the factors that led to break up of the EAC but added that “mistake makers have failed” and that the current crop of leaders is more focused on practical solutions.

 Ruto and Museveni have in recent past appeared to set aside the hostilities of the past when they jointly broke ground for the Naivasha-Kisumu-Malaba Standard Gauge Railway that is also expected to go to Kampala. The Uganda National Oil Corporation (Unoc) also acquired a 20.15 per cent stake in the  Kenya Pipeline Company (KPC) when the government offloaded a 65 per cent stake through an Initial Public Offer (IPO).

 Oil industry experts have over the years pointed out the oil resources that Kenya and Uganda only made more sense economically if the countries exploited them jointly. They have floated the idea of a joint refinery or even a crude oil export pipeline, which could be more efficient if South Sudan and other oil producers in the region tagged along.

 Patrick Obath last week said the quantities that the countries have would only bring marginal returns if exported as crude as the region would still incur costs in importing refined petroleum products for domestic use. He instead noted that going further and instead of building a refinery, the region should partner to set up a petrochemical complex, which in addition to producing fuel, it would also produce raw materials for industries and fertiliser. 

 “If you look at the difference between the product that we would take out crude and the product that we bring in, we still have a deficit – the difference between the price of crude going out and the cost of the product we bring in – we still have to pay for that,” he said, speaking at Standard Group’s Spice FM.

 “The opportunity in Turkana, if we are to be serious as a country, is to convert it into higher value products. That would mean investing in – not a refinery – but a petrochemical complex.”

 “A refinery will only bring you to gasoline level and that is not value addition. Value addition is when you go from crude oil to things like propylene, ethylene (used as inputs in manufacturing), fertiliser, textiles and pharmaceuticals. That is where you really get value out of the hydrocarbon.”

 He also explained that such a complex needed to have a huge refining capacity, which would mean cooperation among the oil producers in the region.

 “To do that, we need a capacity of about 400,000 barrels per day, that is the minimum economic size globally. At that level is when you really begin to become a petrochemical complex,” said Obath, further noting that to reach a viable production level, Kenya, Uganda and South Sudan should collaborate on a shared facility, though he acknowledges the political difficulty of such an agreement.

 “We will probably, at best, produce between 150,000 and 200,000 barrels a day from Turkana. So to make that work, we would have to talk about Kenya, Uganda and South Sudan… we would get to about 500,000 barrels a day and set up a facility that when you look at the bigger region, would actually begin to add value and impact on the economies of those countries.”

 He also noted that “a political discussion on that is not easy”.

 President Ruto explained that the countries will build another pipeline from Tanga to Mombasa, which would see Kenya and Uganda access fuel products from the refinery through the KPC systems.

 “The joint refinery in Tanga will benefit all of us because it will take on board the oil from Kenya, South Sudan, Uganda, DR Congo. We will just need to build a short pipeline from Tanga to Mombasa and the finished product will use the (KPC) pipeline that we jointly own with Uganda. So all our assets become profitable,” he said

 Ruto further noted that the chances of success for a regional refinery were high, citing the availability of raw materials, the existing market for petroleum products, the necessary capital and “an industrialist to help us run it”, in reference to Nigeria’s Aliko Dangote, who committed to support its development.

 Dangote, also speaking at the infrastructure conference, committed to help build the refinery on condition he got support from the regional governments.

 “If we agree with three, four governments about the refinery, we will lead and ensure that the refinery will be built within the next four, five years… we will build one identical to the one we have in Nigeria of 650,000 barrels per day,” he said.

 Uganda has been planning to build a refinery and its UNOC has recently signed a $4 billion agreement with Dubai-based investment firm Alpha MBM Investments LLC to build the project  which is now advancing towards a Final Investment Decision, expected by July this year after more than a decade of delays.

 The refinery is expected to have a capacity to process 60,000 barrels of crude oil per day as Uganda eyes cutting its petroleum import bill but also sell fuel to its neighbours, all of whom import petroleum products and are susceptible to shocks in international markets.

 Museveni explained that Uganda will still push ahead with the refinery in Hoima but also with the bigger one in Tanga.

 “We shall build the small refinery that we had planned of… this was for the internal market of Uganda and parts of Tanzania and Kenya that are near Uganda

 But the surplus oil we shall contribute to the East African refinery in Tanga,” said Museveni.

 Following the collapse of the Uganda Kenya Crude Oil Pipeline project, Kenya decided to push ahead with an 890 kilometre oil export pipeline from Lokichar to Lamu.

 Recent developments have however seen changes in these plans. Gulf Energy – which took over the project fromTullow Oil last year – has indicated that it will use road tankers to transport the oil to Mombasa and then load it to vessels for export. The firm also plans to use trains, with expectations that Kenya Railways will build a railway line to Lokichar that connects to the metre gauge railway at Eldoret that will then allow Gulf to rail oil to Mombasa.