Industry Trend Analysis - Pipeline Unlikely Before 2020 - FEB 2015

BMI View : Despite the Ugandan government sticking to first crude oil exports by 2017/2018, we maintain that a crude oil export pipeline will not be completed before 2020, making large-scale oil production and export s unlikely 2020.

Pipeline Construction Unlikely To Allow First Exports Before 2020
Uganda Oil Production, Consumption, Net Exports

Bid invitations from investors interested in the construction of the crude oil pipeline stretching from Ugandan to the Kenyan port of Lamu will start within the next five months, according a statement by the LAPSETT Corridor Development Authority Director General Silvester Kasuku.

The pipeline forms part of the wider Lamu Port Southern Sudan-Ethiopia Transport Corridor (LAPSETT), and is an essential project allowing for the development, production and export of crude oil from fields discovered in Kenya and Uganda. According to the Director General, bid invitations in Q115 will allow for the construction of the pipeline to begin before the end of 2015.

We maintain that this schedule is overly ambitious. A consultant for the pipeline design was only selected in mid-November 2014. Toyota Tsusho was awarded the contract to oversee the feasibility study and preliminary engineering design of the pipeline. According to various statements, the company will be required to finish the study within five months of the award, meaning a design, feasibility and environmental impact study will be completed by mid-April/May 2015 at the very earliest.

Should the company stick to the schedule, tender invitations for the engineering procurement and construction contract will materialise by mid-2015 at the earliest. Allowing for a six month period for companies to evaluate the design and create adapted proposals and submit bids, a contract award is unlikely before early 2016. Taking into account a three/four year construction time from commencement to completion, the pipeline could in theory be completed by 2019. This makes official government targets of pipeline completion and first crude exports by 2017/2018 overly optimistic.

However, we expect that there is downside risk to a 2019 pipeline completion date, with 2020 a more likely completion date. The project itself will be challenging and costly: it will be 1,300km long, will have to route through challenging swamplands and national parks/reserves, require constant heating due the waxy nature of Uganda's crude, and will need to be underground on the Kenyan side. It will be the longest such pipeline in the world, a challenging task for any country. The challenge will be particularly acute in the case of Uganda, given the country has some of the worst infrastructure in the world, insufficient electricity supply and general inaccessibility due to its land-locked nature, making imports of necessary material and machinery difficult.

In addition, its construction will depend on regional and international government cooperation and coordination for the pipeline, land acquisitions projects and the securing of an investor. While the entire pipeline will be developed as a single project supervised by the consultant, it will be split into lots, with each country to carry out implementation in the area within their jurisdiction. The international nature of the pipeline and requirements for regional cooperation will reinforce the propensity for delays.

Funding so far remains an unknown, which given initial cost estimates of USD3-4bn, is an important question. There is potential for the pipeline to be opened to the public for investment. Oil companies could also take up stakes, owing to their need for the pipeline. However, our infrastructure team expects that struggles in allocating funds to the project will delay its implementation - especially as investors will be cautious to invest in a project without an established oil export terminal in Lamu.

When taking into account other required infrastructure projects (such as the Lamu port construction) and other limitations such as the lack of skilled labour, nascent local protests and the overall unattractive above-ground and political environment, we maintain that large-scale oil production in Uganda will only realistically materialise by 2020 ( see, ' Infrastructure Delays To See First Oil By 2020,' October 24 2014).