Kenya is competing with Tanzania to build the pipeline from oilfields in Hoima, western Uganda. It would either traverse northern Kenya’s desert to a proposed port at Lamu, near the border with Somalia, or south past Lake Victoria to Tanga on Tanzania’s coast. A third option would be through the southern Kenyan town of Nakuru.
Tanzanian President John Magufuli said earlier this month he’d agreed with Museveni to route the conduit via his country at a cost of about $4 billion, with funding from Total SA. The Kenyan option favored by Tullow, which has oil discoveries in Uganda and Kenya, may cost $5 billion, according to an estimate by Nagoya, Japan-based Toyota Tsusho Corp.
Uganda is in a rush to get its oil to market. It also wants to make sure that it does not tie its hands in an obsolescing bargain with Kenya. Being landlocked, the country already depends a great deal on Kenya as an overland route for its imports and exports. The pipeline would add to Nairobi’s bargaining power vis-a-vis Kampala.
In an open letter to President Yoweri Museveni, Angelo Izama, a Ugandan journalist (and a friend of yours truly) articulates these concerns and concludes that it is better for Uganda to build the pipeline through Tanzania in order to minimize its political risk exposure:
It is not rocket science that routing both commercial traffic and oil through Kenya would give Nairobi near total influence on economic matters and would, added to Kenya’s already considerable market penetration in Uganda, leave little wiggle-room for unforeseen and some predictable hazards. The Ugandan domestic commercial and industrial community as well as consumers remember well how helpless they were when disruptions followed the Kenyan election of 2007 (even when some of us had urged the government earlier to restock fuel in anticipation of political violence). Many also live with the challenges of a single port to our import-addicted economy and the cost to family fortunes whenever Nairobi pulls bureaucratic red tape. Obviously being landlocked is not a “non-issue” as you framed it in Kyankwanzi. It needs to be placed in a detailed context. I have some reservations over your optimistic take on political and market integration, and that said, clearly having one member, in this case Kenya, within this greater EAC community with more power and influence than the rest is not an advantage to the growth of the community and may in fact prove rather dangerous. This as I recall has been the common fear cited in our neighbourhood about Uganda’s aggressive military spending (to which the Kenyan government responded with its own expenditure in the decade ending 2018).
The official reason given by Uganda for considering the Tanzania option (see map) is that construction of the Kenyan pipeline would be delayed (due to corruption, expensive land [Kenyans and land!], security threats from al-Shabaab, and the fact that the Lamu Port is yet to be completed).
All these are reasonable concerns.
Plus, it would have been foolish for Uganda not to strengthen its bargaining position by CREDIBLY demonstrating that it is considering BOTH options.
But Uganda must also know that whatever the outcome, this is an obsolescing bargain. Once the pipeline is constructed, it will be at the mercy of the host country government.
It is for this reason that it should seriously consider the kinds of future governments that might be in office in Nairobi and Dodoma/Dar es Salaam.
To this end Ugandan policymakers need to ask themselves the question: Would you rather deal with a government that partially answers to private sector interests and operates in a context of weak parties; or do you want to be at the mercy of a party-state in which some politically-motivated party stalwarts can actually influence official policy?
Understood this way, Uganda’s concern should be about what happens after the deal has been sealed; rather than the operational concerns that have thus far been raised by Kampala.
Notice that Kenya has been able to protect its existing oil pipeline well enough. Rioters may have uprooted the railway in 2007, but that was because they felt that Museveni was supporting their political opponent (Museveni could be more discreet in the future). Also, it is a lot harder to uproot a pipeline buried in the ground. The construction delays due to land issues can also be solved (and in Kenyan fashion, at whatever cost) — notice how fast Kenya is building the new standard gauge (SGR) railway line from Mombasa to Nairobi despite the well documented shenanigans around land compensation (More on this in a World Bank report I co-authored in my grad school days here).
Perhaps more importantly, the Kenyan option is attractive because Kenya also has oil, and will have to protect the pipeline anyway. This scenario also guarantees a private sector overlap between the two countries — in the form of Tullow or whoever buys its stake — that will be in a position to iron out any future misunderstandings.
Tanzania is also an attractive option. The pipeline will be $1 billion cheaper. Because it passes through largely uninhabited land, construction will be speedy. And the port at Tanga is a lot further from the Somalia border than Lamu, and should be easier to protect.
All this to say that the operational concerns raised by Kampala are a mere bargaining tool. These issues can be ironed out regardless of the host country. The big question is what happens AFTER the pipeline is constructed.
And here, I don’t see why Tanzania is necessarily a slam dunk.
The history of the EAC (see here for example) tells us that Kenya tends to subject its foreign policy to concentrated private interests. Tanzania on the other hand has a record of having
a principled an ideologically driven (and sometimes nationalist) foreign policy with significant input from well-placed party officials. Put differently, the calculation of political risk in Kenya involves fewer structural veto players than in Tanzania. Ceteris paribus, it seems that it would be cheaper to manage the long-run political risk in Kenya than in Tanzania.
That said, the Tanzania option makes a lot of sense in a zero sum game. As Angelo puts it:
I have some reservations over your [Museveni’s] optimistic take on political and market integration, and that said, clearly having one member, in this case Kenya, within this greater EAC community with more power and influence than the rest is not an advantage to the growth of the community and may in fact prove rather dangerous.
But even this consideration only makes sense in the short run. Assuming all goes well for Tanzania, in the long run the country’s economy is on course to catch up to Kenya’s. Dodoma will then have sufficient political and economic muscle to push around land-locked Uganda if it ever so wishes.
To reiterate, the simple question Museveni should ask himself is: who would you rather negotiate with once the pipeline is built?
I don’t envy the Ugandan negotiators. And they have not helped themselves by publicly stating their eagerness to get their oil to market ASAP.
Still on my ongoing project on commodities in Africa, I came across an interesting piece on prospecting for oil in East Africa in which an industry expert had this to say:
The success rate in this region is outstanding. To provide some context, oil and gas exploration typically has a success rate just 10-20%. That’s terrible when you think about. It can cost $50 million to sink an offshore well, and the chance of making a financial return could be as low as one in ten.
But East Coast African energy exploration stands out from the crowd because in all but a few cases they hit oil or gas. To be exact — the success rate has been 87%. A strike rate of close to 9 out of 10 is almost unheard of.
Kenya, South Sudan and Uganda have commercially viable oil reserves. Tanzania has gas and, together with Kenya, has stepped up offshore prospecting in the Indian ocean.
And it is not just foreign MNCs that are in on the game. Locals, in collaboration with foreign investors, are also getting a piece of the energy bonanza in East Africa. Business Daily, a Kenyan paper, recently profiled one George Kariithi, a businessman who started off as a marketing executive and has since built multiple companies in the wider region. His latest investment is in Kenya’s emerging coal sector.
Jesus! Good intentions are not enough. (Properly regulated) Markets rule.
Kenya and Eritrea appear to be on a collision course. The Horn might get a little bit hotter in the next few months.
Some insights into politics and development in Nigeria. I hold the minority opinion that Nigeria might yet surprise those short selling it at the moment. The political situation is almost good enough. Remember, all you need (at least for the initial stages of growth) is predictability, not Sweden’s institutions.
AFRICOM has a blog. The posts are sporadic but it’s worth checking out once in a while.
UPDATE: The office of the president in Uganda is saying that the oil around Lake Albert may be double what was initially thought. According to Bloomberg:
” Uganda may hold deposits of as many as 6 billion barrels of oil, more than double the current estimate, according to the office of the nation’s presidency.
“Some analysts estimate that Uganda’s Albertine Graben may hold more than 6 billion barrels of oil,” the presidential office said in an e-mail statement yesterday. The estimate is well above the discovered deposits with a potential of 2.5 billion barrels, it said.”
Namibia has joined Ghana and Uganda as the latest winners of the oil lottery in Africa.
According to the Independent Online:
An estimated 11 billion barrels in oil reserves have been found off Namibia’s coast, with the first production planned within four years, mines and energy minister Isak Katali announced Wednesday.
The finding could put Namibia on par with neighbouring Angola, whose reserves are estimated at around 13 billion barrels and whose production rivals Africa’s top producer Nigeria.
With just over 2.1 million people and already rich in Uranium, Namibia stands to gain immensely from the new discovery – if it is managed sanely, that is.
Between the other new African petro-states, Ghana (with its fledgling democracy) hopes to rival Botswana as the poster child of exemplary mineral management on the continent. Uganda, however, appears poised to be yet another data point in support of the oil curse theory (see earlier post below).
NPR has this cool graphic on China’s global investments [click on image to enlarge].
Notice that Nigeria is among the top destinations of Chinese investments.
In my alternate universe Abuja (the undisputed regional hegemon) is stable and uses this, and the fact that it is also among the most important sources of US-bound crude oil, as leverage to nudge the two biggest global powers in the direction of a more stable and coherent Africa policy.
If Omar al-Bashir goes to war with Southern Sudan over oil it will be because the
genocidal tyrant from Khartoum is benefiting big from Sudan’s oil sector. The New York Times reports that Mr. Bashir may be worth up to $ 9 billion. Yes, nine billion.
Despite the country’s oil wealth 40% of Sudanese live on less than a dollar a day. Someone born in Sudan can expect to live to 55.
Mr. Bashir has been indicted by the ICC over crimes against humanity committed in Darfur.
Southern Sudan will conduct a secession referendum on January 9th. Fears abound of a potential flare up between the north and Southern Sudan over oil-rich borderlands.
The Christian Science Monitor reports on the robbery that most African governments (in this case in the DRC) continue to visit upon their people, unabated. Some of the deals they make sound so bad they’d embarrass a two year old.
Gertler was just 27 when he first became involved in the Congo in 2000, obtaining a monopoly of diamond exports (worth around $600 million) in return for $20 million. He had previously been involved in diamonds in Angola and he is the grandson of Moshe Schnitzer, the founder of the Israel Diamond Bourse. He is now one of the richest Israelis.
Industry insiders, however, suggest that the last big round of mining concession acquisitions happened just before the last elections and helped the president raise funds for his expensive campaign. The next elections are in 2011.
Also, Tech crunch has a nice piece on how the future belongs to the global south
The BBC reports that the Nigerian state owned oil company (NNPC) is insolvent, with a US $ 5 billion debt. Most of the money ($ 3b) is owed to the Federation Account a lootable cash cow that distributes money to different levels of government within the Nigerian state. The country is divided into 36 states (and one federal capital territory, Abuja) and 774 local governments, all of which have legally guaranteed claims to oil revenues.
The report also notes that: Despite Nigeria being a major crude oil producer, it must buy almost all the oil it uses on the international market because its own refineries are insufficient and dilapidated.
Recently the Nigerian government signed a deal with the Chinese that hopefully will result in the construction of an $ 8 billion refinery in Lagos to ease the country’s dependence on imported petroleum products. 80% of the cash will come from the Chinese and 20% from the Nigerians.
No prizes for guessing why on earth A LEADING INTERNATIONAL OIL EXPORTER should import almost all of its petroleum products or why it took so long for the Nigerian leadership to start thinking of expanding Nigeria’s refinery capacity…
Achebe’s assessment of the Nigerian condition in the early 1980s still rings true: “The trouble with Nigeria is simply and squarely a failure of leadership.”