South Sudan-kenya Pipeline Set to Transform Structure of Oil Industry in East Africa

The proposed pipeline route

When South Sudan became independent in July last year, there was no apparent urgency for Juba to immediately embark on development of an alternative oil export pipeline to the Eastern African coast.

It was expected at that time that mutual economic interests between it and Khartoum would drive the two countries to cooperate and continue production of oil and transit it through Port Sudan for exports.

This of course pre-supposed political goodwill between the two states which has evidently not been the case.

When Khartoum asked for a commercially unrealistic US$32 per barrel export transit fee to be paid by Juba for crude oil exports, it was initially seen as a “temporary joke”.

But when stories recently emerged that Khartoum may be diverting and selling oil belonging to the South, the gravity of the matter made Juba to suspend oil production, and to initiate plans for development of an alternative export route through Kenya.

The signing of a Memorandum of Understanding (MOU) last week by the governments of South Sudan and Kenya to develop a pipeline from South Sudan to Lamu marks a milestone that may transform the structure of oil and gas industry in the region.

This is happening at a time when Uganda has oil sitting in the ground with no confirmed development plans for an export pipeline, and also at a time when exploratory drilling for oil has just started in the northwestern corner of Kenya near South Sudan and Uganda.

There is every possibility that the proposed Juba/Lamu pipeline will provide a convergence for the three countries (South Sudan, Uganda, Kenya) to use the same export route, potentially catapulting Lamu to an international crude oil export hub.

The MOU points to South Sudan owning and financing the proposed pipeline, with Kenya playing the role of a “right of way” facilitator.

But the way transnational projects of this magnitude are developed points to the possibility of a joint venture involving oil companies already with oil producing interests in the region; venture capital companies; and governments of oil producing and transit countries.

A pipeline of this magnitude and importance will not be short of ready capital including funding from multilateral development fund agencies. However, the overriding caveat will be guarantee of peace and security by South Sudan and the transit countries.

The LAPSSET (Lamu Port/South Sudan/Ethiopia) corridor feasibility study project recently undertaken by the government of Kenya shows the Juba-Lamu pipeline as one of the corridor infrastructure components.

The consultants who undertook the preliminary design had a 1,260 kilometre- long, 48 inch diameter pipeline, conveying 500,000 barrels per day of light (for example Nile Blend) crude oil.

The line originates with a major oil dispatch terminal at Juba; passes through Isiolo in Kenya; and terminates with a major crude oil receiving/export terminal on mainland Lamu. The export terminal is connected to a deep sea “single point buoy mooring” like SBM, that will anchor tankers of maximum 200,000 metric tonnes. Initial total cost estimate is put at about 3 billion dollars.

The export pipeline layout at Lamu by-passes the actual port area since the tankers would anchor in the open sea.

As such the pipeline can be constructed independently of the port development.

On Lamu mainland, and adjacent to the crude oil terminal, there is also an option for an oil refinery which is another stand alone LAPSSET corridor project.

The refinery can process Sudanese crude oil, indigenous crude or imports from offshore sources.

By coincidence the power requirements for the crude pipeline project may be tapped from the newly negotiated electricity inter-connection from the Ethiopian hydro generation plants which was signed a few weeks ago between Kenya and Ethiopia.

The pipeline route in Kenya being in fairly empty semi-arid areas will be without much right- of- way obstacles, but security must be improved and assured.

Assuming that “detailed” pipeline designs will need to be done; pipeline ownership consortium negotiated and formed ; financing modalities concluded ; international contractors selected ; actual construction of the pipeline and dispatch/export terminals undertaken ,it is unlikely that an infrastructure ready to export oil can be achieved in less than three years .

This then implies that both Juba and Khartoum and in deed the current investors in Sudanese oil production ( Chinese, Malaysians, Indians ) have, in the meantime, no option but to fully dialogue to ensure that production is resumed and exports maintained at terms that are commercially fair to all parties .

I do not believe that South Sudan can sustain its socioeconomic development agenda without an inflow of oil dollars. It is also not realistic to expect the current investors to have the oil production and export facilities immobilised for long, as they need a return on their investments, plus meeting existing oil supply commitments.

Diplomacy, which has previously failed to yield results, must be given another chance, because diplomatic failure is not currently a feasible option.

Globally, with the un-quantified potential impacts of Iranian oil boycotts by USA and EU, it is certainly the wrong time for the world oil supply systems to supplies from the region.

Mr Wachira is the Director, Petroleum Focus Consultants. Email: [email protected]