EAC cooperation vital for success of oil sector

A recent report by African Alliance, a research and securities firm, said the outlook for the region’s oil and gas sector is bright, but the ability to deliver on large scale projects will be key to realising this potential.

Below is David Mugabe’s analysis of East Africa’s strength and challenges in developing the sector.

Building critical infrastructure and cooperating in exploring and exploiting the region’s new found wealth will be critical to the success and getting optimum value from the discovered oil and gas, a new report has said. 

The oil and gas sector report by research and securities firm African Alliance titled “Unraveling hidden potential,” among other things, captures some of the underlying factors that may influence the industry going forward.

“The outlook for the region’s oil and gas sector is bright, but the ability to deliver on large scale projects will be key to realising this potential,” the report sums up the prospects.

The East African region has varying oil and gas discoveries and cooperation amongst the member states will be vital to ensure that investment within the nascent oil and gas sector remains viable.

It warns that member states could pursue unilateral sovereign interests in building local capacities, especially in refining, but this would create a risk of the region being flooded with overcapacity and making projects financially unviable, deterring future investment.

EAC, which currently includes Burundi, Kenya, Rwanda, Tanzania and Uganda, carries out feasibility studies on behalf of member nations to evaluate options across domains, including energy.

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An aerial view of an oil exploration facility in Bulisa district

Kenneth Kitariko, the chief executive officer of African Alliance Uganda, says many challenges must be faced before market forces can truly be aligned with sustainable development of the sector.

“As we look ahead and recognise the scale of the challenges that we face, we recognise that we must build the necessary foundations of a new era of sustainability,” Kitariko said.

Uganda is pursuing energy self-sufficiency following a confirmed discovery of 3.5 billion barrels of oil, with a planned 30,000 barrels per day (bpd) refinery and crude oil pipeline to export through Kenya’s sea port of Lamu.

Uganda’s oil and gas sector benefits from robust demand fundamentals. Factors such as low per capita energy consumption, rising income levels and a fast growing population imply that demand for energy will rise in the coming years.

Demand for petroleum products is already rising in the country due to growing consumer demand, rising industrial activity, an expanding transportation sector and development of thermal power.

The report quotes an energy ministry report that suggests that consumption of petroleum products will rise to around two million cubic metres by 2019 and most of this demand is likely to be satisfied internally once domestic hydrocarbon resources become available.

On the other hand, Uganda’s strategic location in the heart of Africa and its proximity to oil importing East African nations also suggest that it could emerge as a regional exporter of oil and gas.

Uganda has the potential to serve as a transit hub and feeder of petroleum products for neighbouring countries. Estimates indicate that by 2017, the combined demand for petroleum products from Uganda, Rwanda, Burundi, and eastern DR Congo will stand at 60,000 bpd, which would be the Ugandan refinery’s capacity.

“With sufficient oil reserves, refining capacity, and pipeline infrastructure, Uganda could become the regional supplier hub for these landlocked countries,” the report states.

Regional progress

Kenya has existing petroleum infrastructure with the region’s only refinery in Mombasa and internal pipeline network on which Uganda, Rwanda and South Sudan are reliant for petroleum supplies.

Kenya has also made oil discoveries in Turkana Basin and plans are underway to develop petroleum infrastructure that includes an oil pipeline and refinery at Lamu port with a railway network linking the interior.

The report is, however, silent on the chaos surrounding the Mombasa refinery from which the investor would like to pull out. The long-term investor is asking the Kenyan government to take up a major stake in the refinery which they no longer consider viable.

Additionally, the oil-rich South Sudan is set to become a partner in the Lamu Port and South Sudan Ethiopia Transport (LAPSSET) Corridor project following tensions with Khartoum over transit fees for using its oil export infrastructure. The Juba-government is also considering setting up mini-refineries to meet the internal demand.

Rwanda is in early stages of oil exploration in the promising East Kivu Graben, which is an extension of the oil-rich Albertine Graben of Uganda. Rwanda is also planning to extend the product pipeline from Kenya and Uganda, as well as build additional storage depots.

Waiting opportunities

• Business opportunity

Recent oil discoveries, growing domestic demand, absence of adequate oil infrastructure and investor friendly regulatory changes offer better investment prospects for the East African oil and gas
sector.

Opportunities exist in bidding for new licenses and for farm-ins (buying portion of working interest in an oil & gas lease) in existing licenses in the upstream segment.

The downstream opportunities include setting up oil refineries, oil pipeline network and storage depots. Furthermore, increased construction of petroleum infrastructure would boost demand for support services.

• Constraints

Early this week, Tullow Oil suspended its drilling in Kenya after weekend protests by locals. In Uganda, a wrangle between
oil firms and government over whether to process crude or export has pushed back production until 2016, a decade after oil was discovered.

Uganda has now agreed with France’s Total and China’s CNOOC on building a smaller refinery than it had earlier wanted Tullow, which has a market capitalisation of over $14b, estimates Uganda and Kenya could together export 500,000 barrels per day, which is a vast opportunity for both Tullow and the two states.

In Tanzania, where gas deposits have attracted firms like Britain’s BG Group and Norway’s Statoil, residents of the Mtwara region protested in May over construction of a pipeline there, demanding more benefits.