Kenya: Pipeline Deal Rescues Lapsset

Kenya’s massive infrastructure project, Lapsset, appeared to be running out of steam due to indifference from investors, until a surprise deal with South Sudan came to the rescue. Africa’s newest state has agreed to foot the bill for a pipeline to the northern coast of Kenya.

Kenya and South Sudan have signed an agreement that will pave the way for the construction of an oil pipeline connecting the two countries. Once the construction of the pipeline, one of the key pillars of the Lamu Port-South Sudan-Ethiopia Transport corridors (Lapsset) begins (ahead of schedule), a big burden on Kenya’s shoulders will be lifted. The oil pipeline will also serve as a fibre-optic connection route to the newest oil rich landlocked nation.

South Sudan’s Information Minister, Barnaba Marial Benjamin, said the construction of the pipeline will begin “as soon as sources of funding are made available” and would take 10 months to complete.

By signing the pact, Juba has agreed to foot the $3.9bn pipeline construction. Initial projections of the oil pipeline construction had put 2016 as the completion date but with the firm entry of South Sudan, the pipeline may be operational by early next year.

The signing ceremony in Juba’s J-One Palace came four days after the South Sudan cabinet passed two resolutions to shut down all oil production using the pipeline, which passes through Port Sudan, and seek an alternative oil pipeline to another neighbouring country. South Sudan has all along accused Sudan of stealing its oil and overcharging transit fees. Sudan, on the other hand, has defended itself, saying it was confiscating the oil due to unpaid fees. It is this simmering row which accelerated the South Sudan-Kenya oil pipeline deal.

While South Sudan has had a discordant experience exporting her oil, the Kenyan government was finding it difficult to secure investors or even financing for the massive $24.7bn Lapsset undertaking. Ever since Lapsset was mooted three years ago, the Kenyan government has found it hard to sell the project to investors in the major Western capitals. Frustrated with the slow pace adopted by investors, thegovernment had sought to go it alone and adopted a model to realise the project in phases, owing to scarcity of funds.

Initially, Nairobi had approached the Qatari government for a partnership, which didn’t materialise. This was followed by approaches to China, Japan, India, the European Union and even the US but nothing concrete was achieved. The African Development Bank (AfDB) had expressed an interest but made no firm commitment.

Facing frustration, the Kenyan government decided to break down the entire project to facilitate easier financing and decided to go it alone.

The government came up with eight components that make the whole project. These were port, railway, highway, pipeline, resort cities, airport, oil refinery and associated infrastructure (water, ICT and electricity). To kick-start the project the government scrounged some $30m from the sale of a state-owned hotel and allocated a further $59.4m in its 2011/2012 budget. This was before South Sudan came calling. So when Juba found itself in conflict with Khartoum over transit fees for the usage of pipelines that run to the export terminals at Port Sudan on the Red Sea Coast, Nairobi’s prayer was answered as was Juba’s, given its perennial conflict with Khartoum.

Mediation turns to negotiation

A high-powered ministerial delegation led by Prime Minister Raila Odinga jetted out to Juba in what the press had been told was to be “Kenya’s mediating role”. In Odinga’s delegation were Ministers Kiraitu Murungi (Energy), Moses Wetangula (Foreign Affairs) and Dalmas Otieno (Public Service). As it panned out, there was no mediation role to be played but negotiation and eventual signing in the presence of President Salva Kiir and Odinga.

According to the agreement signed by Murungi and South Sudan’s Petroleum and Mines Minister Stephen Dhieu Dau, South Sudan will develop and build the 2,240-kilometre pipeline through Kenyan territory. For this, South Sudan will own the pipeline and will only negotiate and agree with Kenya the pipeline’s transit fees for the 350,000 barrels per day from South Sudan’s oil fields in Upper Nile state. A consortium of Chinese and Malaysian investors runs the oil production in South Sudan.

With the construction of the pipeline, Lapsset’s other components may well be realised in record time. According to figures provided by Lapsset project manager Peter Oremo, who is also a senior official at the Kenya Ports Authority (KPA), the 32-berth modern port at Lamu is pegged to cost $5.3bn while the oil refinery will cost $2.8bn.

The proposed 1,620km standard gauge railway line to Juba with a branch line to Ethiopia has been budgeted to take up $8.08bn. The 1,720km superhighway connecting to Ethiopia and South Sudan will cost $1.08bn. The construction of three international airports in Lamu, Isiolo and Lokichogio will consume $560m. The upgrading of Lamu’s backwater, but picturesque, towns to become resort cities has been priced at $680m. Other associated infrastructure, notably water, ICT and electricity power supply, is estimated to cost the remaining $2.5bn.

According to Elizabeth James Bol, South Sudan’s Deputy Petroleum and Mining Minister, the oil pipeline construction contract will be awarded soon. South Sudan is expected to make huge savings by using an alternative route from Port Sudan, where it is charged $32 per barrel as transit fees. Juba expects to pay less than a dollar per barrel.

Last November, a Chinese firm, JS Neoplant of Shanghai, had written to both the Kenyan and South Sudanese governments expressing interest in undertaking the project. South Sudan has also been in talks with Toyota Kenya regarding the deal. While analysts see this deal being a loss to Khartoum and offering Nairobi and Juba a win-win arrangement, issues of security and insurance premiums have sprung up.

“Insurance for the pipeline might well prove punitive,” East African financial analyst Aly-Khan Satchu says. Satchu sees Kenya benefiting more from the region courtesy of its strategic location.

“The point remains that we in Kenya have an embedded geopolitical advantage in this region, that being the route to the sea. It is like the jugular vein for many of our neighbours.”