analysis: Uganda-Kenya oil pipeline decision to boost region

London (Platts)--14 Aug 2015 914 am EDT/1314 GMT

* International oil companies welcome decision
* First oil in Uganda still more than two years away
* Kenya pins hopes on becoming regional oil hub 

East Africa's fledgling oil sector has taken a significant step forward after the governments of oil-rich Uganda and Kenya this week finally agreed on the route of an export pipeline that will enable crude from the region to reach international markets for the first time.

The long-awaited decision, which will see the pipeline pass through northern Kenya so that it can also serve Kenya's prospective oil blocks as well as Uganda's own vast reserves, is expected to provide a much-needed boost for both countries and could transform the region into a major oil hub. 

The agreement was welcomed by the main players in the region, including the UK's Tullow Oil, which is developing oil resources in both Uganda and Kenya, and its partner in Kenya, Africa Oil Corp. 

Tullow said it was a "major milestone" and it was looking forward to the development of the significant discovered oil resources in Uganda and Kenya. 

Ugandan President Yoweri Museveni and Kenyan President Uhuru Kenyatta issued a joint communique earlier this week saying they had agreed on a 1,500 kilometers (930 miles) pipeline that will take the northern route from Hoima in Uganda to Lokichar in Turkana County in Kenya and on to the Kenyan port of Lamu. 

The presidents said the pipeline needed to be "implemented expeditiously, without further delay in commercializing the petroleum resources" as this provides both countries with much needed oil revenues. 

An export pipeline from Uganda to Kenya was one of the region's priorities as the international partners developing Uganda's oil and Kenya's fields said the pipeline was a prerequisite for work to continue. 

France's Total has often suggested that no development work on Uganda's vast resources could begin until the export pipeline agreement was reached. 

Total had no immediate comment on the pipeline route agreement when contacted by Platts. 

Analysts at Morgan Stanley said this decision would provide a necessary boost to oil projects in this region. 

In a note it said the agreed route would "run far closer to Tullow/Africa Oil's South Lokichar licenses" and had significantly less land access issues. 

"The formal project go ahead is being targeted for late-2016/early-2017," the analysts said.

Independent oil operator Africa Oil, which is currently carrying out appraisal work in the South Lokichar basin, welcomed news of the pipeline route and was hoping this could move the project forward.

Keith Hill, President and CEO of Africa Oil, said he was "pleased" that an agreement had been reached on the routing of the export pipeline.

He also said there were encouraging signs from appraisal drilling and extended well testing program in Kenya.

"We believe that there is still significant upside in not only the Lokichar Basin but in new basins yet to be opened and are working with our partner Tullow on a program to unlock this potential," Hill said in a statement.

Landlocked Uganda has found 6.5 billion barrels of oil in the Albertine basin near the border with the Democratic Republic of Congo, but due to constraints relating to infrastructure, logistics and politics, commercial crude production continues to be pushed back due to delays by the government in offering licenses.

Of the three companies involved in Ugandan oil, only China's CNOOC has been given a production license, for the Kingfisher field. Tullow and Total are still waiting.

First oil in Uganda is only expected to start between late 2017 and early 2018, Uganda's energy and minerals minister Irene Muloni told Platts in early June.

Besides the pipeline, Uganda is also developing plans to build a refinery to meet the growing needs of the region, another critical infrastructural project for East Africa.

Uganda awarded the contract to build and operate the refinery to a consortium led by Russia's RT Global Resources earlier this year.

The refinery will be developed in two phases, with initial capacity of 30,000 b/d and then an upgrade to 60,000 b/d in the second phase. The first phase is expected to be completed by early-2018, added Muloni.

Regional oil hub

In Kenya, Tullow and Africa Oil have found 600 million barrels of crude in the onshore South Lokichar basin, with the first discovery made in March 2012.

But first commercial oil in Kenya is still more than five years away.

Security problems from Islamist militancy in the region have also cast a shadow over the developments.

Opponents of the planned pipeline route had cited security concerns in the north, where bandits and Islamist militants carry out attacks periodically.

The two governments also took another important decision this week by agreeing to develop a reverse flow petroleum product pipeline from Mombasa via Eldoret to Kampala capable of transporting imported petroleum products to Uganda and also from the refinery in Uganda to Kenya.

The aim is to limit the use of road tankers to transport fuel.

Kenya also has high hopes of becoming a regional oil hub as it is a key transit point for oil product supply to Uganda, Rwanda, Burundi, South Sudan and the Democratic Republic of Congo.

As a result, the Kenyan government is planning to build a new terminal in Mombasa to keep up with rising East African oil products demand.

--Eklavya Gupte, eklavya.gupte@platts.com
--Edited by Jeremy Lovell, jeremy.lovell@platts.com