Pipeline Project Shadows Domestic Refinery Plan

BMI View: Kenya and Uganda are looking for a private investor to build a refined fuel pipeline. This project could yield large cost reduction s for both countries and have consequent economic implications. However, we are cautious about the fact that increased pipeline capacity may act as a deterrent to the development of a downstream industry in Uganda and could therefore be a large opportunity cost.

Kenya and Uganda announced in late January their intention to find private investors to build a 352 kilometre (km) pipeline in order to transport refined products from Eldoret in Kenya to Kampala. Currently , Uganda is purchasing refined products that arrive by tanker at the Mombasa Port on the Kenyan coast ; this is then transported by road to its capital. Details on its capacity and planned start-up date are unavailable at the time of writing.

Creating this link from Eldoret to Kampala presents clear advantages for both countries as road transit is more costly than a pipeline , both in terms of direct transport cost and depreciation of transport infrastructures. The project could thus help Uganda reduce the cost of its petroleum consumption, which averaged about 15,000 barrels per day (b/d) in 2011, according to the US Energy Information Administration (EIA) .

Aiming For The Best Solution?

While we welcome the construction of midstream infrastructure in East Africa as a positive development , we nonetheless highlight the potential opportunity cost. Countries of the East African Community (namely Burundi, Kenya, Rwanda, Tanzania and Uganda ) have been hotbeds for large oil and gas discoveries in the recent years and have significant crude production prospects in the coming decade. Tullow Oil made an estimated 1.1bn barrels (bbl) discovery in Uganda ' s Lake Albertine Rift Basin which is now expected to start production in 2017 and could hit 350,000b/d (see our online service, June 12 2012, ' Hoima Refinery Threatened By Kenyan Discoveries ' ) .

Tullow, along with its partners Total and China National Offshore Oil Corporation (CNC), is opposed to the government's plan to build a massive 150,000b/d refinery in Kabale-Buseruka, Hoima district that would supply both domestic and regional markets. The companies prefer a strategy that will develop both local refining capacity and infrastructure to support an export market. Indeed, their plan involves building a 20,000b/d refinery and a US$5bn pipeline to transport crude oil to the Kenyan port of Mombasa for export (see 'Regulatory Roadblocks Could Delay Oil Industry Development', September 7 2012).

Foreign Refining Burden
East African Community* Total Refining Capacity & Total Petroleum Consumption, '000 b/d

The creation of a pipeline from Eldoret to Kampala would further support downstream growth in Kenya as it increases market availability to its refined products. It would also facilitate the flow of fuels imported via Kenya's port into Uganda. However, this would come at the expense of Uganda's own downstream ambitions. Tullow's discoveries in Kenya in July 2012 have already prompted doubts about the relevance of building a large capacity refinery in Hoima (see 'Hoima Refinery Threatened By Kenyan Discoveries', June 6 2012). Providing sufficient fuels for Uganda via a pipeline could therefore further deter investment into a large refinery in Uganda, which would deflate the latter's hopes for robust downstream industry supporting the regional economy..

This article is tagged to:
Sector: Oil & Gas
Geography: Uganda

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