Building of Eldoret-Kampala Oil Pipeline could cost $ 90 mm

Jan 09, 2007 01:00 AM

The cost of building the Eldoret-Kampala Oil Pipeline extension could soar to as much as $ 90 mm, according to financial documents submitted to the two governments by Tamoil, the Libyan firm selected to do the job. This would represent an increase of about $ 12 mm over the capital expenditure cost of $ 78.2 mm earlier quoted by Tamoil, and the second increase in the firm's costs for the project.
These financial details emerged only a week after Uganda's Energy Minister Daudi Migereko and his Kenyan counterpart, Kiraitu Murungi, met in Nairobi and announced that they were giving the project to Tamoil.

In reality, Tamoil has had a grip on the deal for months after being named the most responsive bidder mid last year by the Joint Co-ordinating Committee (JCC) co-chaired by the permanent secretaries in Kenya's and Uganda's Energy ministries, which represents the interests of both countries in the pipeline venture. But negotiations between the JCC and the company went on for months to establish Tamoil's bona fides and secure guarantees for the project.
An official in Uganda's Energy Ministry told that the agreement signed by the two ministers in Nairobi paved the way for Tamoil to make detailed plans for the pipeline, including recalculating the cost of building, owning and operating the pipeline for 20 years before transferring it back to the two governments.

"Right now, nobody knows where the pipeline is going to pass, or what other costs there will be," said the official, speaking anonymously because he is not cleared to speak on the matter officially. "Based on the detailed designs, they are going to come up with a detailed financial plan and costs [which could be higher]."
Details of the financial proposal indicate that the capital cost of the pipeline could rise to at least $ 90 mm once Tamoil concludes its detailed calculations. Although this is still lower than the rival bids received for the pipeline -- second-placed China Petroleum Pipeline Engineering offered to build it for $ 125 mm while the Shell/Madhvani International consortium stipulated $ 135 mm -- it would still be a whopping $ 19 mm higher than the first bid received from the firm.

Tamoil, through its local subsidiary Tamoil East Africa, initially offered $ 71.2, but this went up to $ 78.2 mm after a key component of the project, which had been excluded, was added. Following the increment in the costs, an official from Nexant, the project consultants, offered to recalculate the financials of the deal and establish whether Tamoil still had the most economically advantageous offer.
However, it has now emerged that the consultant was slowly sidelined from the process with a JCC official telling: "The consultant offers advice that can be taken or ignored. We chose to ignore some of it."

The sidelining of the consultant means that there is now no third party offering advice to establish whether the Tamoil offer -- or any other offer -- represents the best value for taxpayer's money in both countries. One key componentof the deal that appears to have been settled in favour of Tamoil is the tariff that will be charged on transporting oil products through the pipeline. Tamoil initially offered to charge $ 20 per cm with a three % increment every three years.
In the last round of technical discussions in Kampala, the JCC recommended that, following its own calculations, the tariff should be fixed at $ 17 per cm, while Tamoil offered to hold it at $ 20 per cm for the lifetime of the project.

Another meeting was scheduled to discuss the matter and, although there has been no official communication on the outcome, sources close to the project say the nominal average weighted tariff is likely to be $ 27.37 while the real weighted average tariff will be $ 17.80.
Meanwhile, a team of Kenyan and Ugandan officials are expected to fly to the Libyan capital, Tripoli, to carry out due diligence on Tamoil Africa Holdings, the parent firm of Tamoil East Africa Ltd, before the firm is handed the deal to build the pipeline. The team will travel to Libya and have a report ready, when the agreement officially handing the project to Tamoil is expected to be signed in Kampala.

Diplomatic sources say that the plan is to sign the deal while Libyan leader, Col. Muammar Gaddafi, who is expected to be visiting Uganda's President Yoweri Museveni at the same time, is in town, to give the tender much-needed political weight.
The Eldoret-Kampala oil pipeline project has been dogged by allegations of corruption and influence peddling. None of those allegations have been presented before a court of law; an attempt by Petronet, one of the bidders, to get legal redress was still born after it became clear that the JCC, by representing the interests of two sovereign states, was, in effect, above the procurement laws of either country. This has meant that published reports of inducements offered and illegal meetings between JCC officials and officials from some of the bidding firms have not been addressed by either government.

If, as expected, the agreement is signed later this month, Tamoil will have six months within which to carry out its detailed preparations for the pipeline with commercial operations expected to start in at least 18 months.
Getting the pipeline off the ground will be the culmination of a dream, conceived in 1995 to reduce the cost of transporting petroleum products to Uganda and other landlocked countries in the region, as well as one of the dodgiest and most controversy-ridden tenders in the region.

Source: The East African
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