Cost of Eldoret-Kampala East pipeline triples to $ 250 mm

A fresh twist in the never-ending drama of the Eldoret-Kampala oil pipeline has emerged. The Energy Ministry and the project contractor are at loggerheads over the total cost of the project, whose design has been changed several times.
The latest changes in design have apparently pushed the project cost up by more than three times, to $ 250 mm -- which experts say will impact on the user tariff.

The contractor -- Tamoil East Africa, a subsidiary of Libya oil giant Tamoil -- wants to give the pipeline the capacity to route refined oil products both ways. This is because it is becoming increasingly likely that an oil refinery will be built in western Uganda, signalling yet another arena of competing interests in Uganda's oil find.
Tamoil-EA chairman Habib Kagimu says the pipeline's design needs "reverse engineering" to pump oil products from the interior, and vice versa.

But other costs that have come into the picture include the refurbishing of the Jinja oil reserves depot and the changing of the pipeline's diameter from 6 to 10 inches. Because of this, the project's total cost has more than tripled, from $ 80 mm at the time of awarding the tender in January 2007 to $ 250 mm. That is an escalation of 213 % from the original cost. But sources in the Ministry of Energy said this figure is being disputed.
"We have not agreed on the cost for this design. The cost is still being negotiated and it must come down. We are changing a lot of things, including the pipe diameter and reverse pumping. But still, there is no way this project can jump from $ 80 mm to this," a source said.

State Minister for Energy Simon D'ujang adopted a diplomatic tone when contacted on phone, saying he was aware of these design changes but that no figure was agreed on between the ministry and Tamoil.
"There have been changes. We now have a bigger pipeline and it is reversible. So we are aware that the final cost will change. But we are still discussing the cost. I cannot speculate on the figure and it's not wise to do so when you are still discussing," he said.

Procurement rules provide for revision of project costs, as long as the revised figure does not exceed 115 % of the original, after which there is an immediate re-tendering of the project. Should one party amend the cost more than once, the cumulative amendments must not exceed 25 % of the original cost.
A senior official at the Public Procurement and Disposal of Public Assets Authority says the procurement watchdog has no jurisdiction over the contract because it was handled "at international level" between Tamoil and the two countries. The delays imply a possible spike in the pipeline's tariff that was originally projected at $ 20 per 1,000 litres, representing a 40-50 % reduction from the cost of transporting oil products by rail.

In February this year, the government acquired a 1 square mile piece of land 20 km west of Kampala, where the pipeline's inland terminal will be built. Since acquiring land along the pipeline's 224 km route within Uganda was proving a huge hurdle, the Ministry of Energy was keen on fast-tracking this part of the project. The contractor was to start construction in May this year.
So far, the government has secured land only for the inland terminal, and has completed the evaluation of some 130 km for the pipeline access land between Jinja and Tororo.

Aware that acquiring land between Jinja and Kampala is more costly than in the rest of the route, the contractor is reportedly waiting for the government to get all the necessary access before any work starts.
"The cost of land will determine the tariff. The contractor wants to know whether the project is viable," a source said.

The Eldoret-Kampala pipeline is a joint venture between the governments of Kenya, Uganda and private investor Tamoil. The contract was awarded to the Libyan state subsidiary in 2007 -- 20-year build, own operate and transfer (BOOT) tender for the 352 km pipeline.
From the outset, the project split was 51 % for Tamoil and 24.5% each for the two governments. Along the way, Uganda cited lack of funds to meet its equity, thus diluting its ownership in the pipeline, but maintaining a "carried interest."

Last year, Kampala ceded 12 % of its stake in the pipeline to Tamoil and other private interests. This means that its equity contribution also significantly came down from $ 5.8 mm as the government concentrated on mainly providing land as its contribution. Reports indicate that only about 10 % of land acquisition remains.
In several meetings between the contractor, representatives of the two governments and the Kenya Pipeline Company, Tamoil officials have made it clear that the company wants to recover its investment faster. This alone spells a high tariff ahead for the multiproduct pipeline.