18 March 2019

Uganda: Government Seeks Shs847b for Stake in Oil Pipeline

Kampala — Government through the Uganda National Oil Company (Unoc) will require between Shs578b and Shs847b to finance its equity stake in the proposed East African Crude Oil Pipeline (EACOP).

The exact financing structure is still being worked out but sources familiar with the matter told Daily Monitor that if the ongoing negotiations agree to-debt-to equity ratios of 60:40, Unoc will have to mobilise $230m (Shs847b) as its take; if the debt to equity ratios is 70:30, then Uganda's financing will be in the ranges of $157m (about Shs578b).

Unoc's equity stake in the pipeline, officials said is equivalent to 15 percent, which government similarly carries in each of the 10 production licences so far issued for the oil fields; one for the Kingfisher field operated by China's Cnooc, and nine licences for the Tilenga fields operated by French Total E&P.

Total E&P and Cnooc are each expected to part with a 37.5 per cent shareholding in the pipeline, and Anglo-Irish Tullow oil with 10 per cent. Tanzania is yet to officially confirm its stake in the project.

The capital expenditure for the project is about $3.55b (Shs13 trillion), 70 per cent of which will be raised from international lenders.

Sources further indicated that discussions between Unoc and the Ministry of Finance are already in early stages on the equity structure and to chart a plan on the possible source of the money.

Each of the shareholders already have financial transactional advisers--Stanbic Bank for Uganda and Tanzania, Japan's Sumitomo Mitsui Banking Corporation Europe Ltd, for Total E&P, and Industrial and Commercial Bank of China Limited (ICBC) for Cnooc--on board. Uganda and Tanzania are currently locked in discussions of two parallel Host Government Agreements (HGA), which after harmonisation will be signed separately with the oil companies.

Plan

The Total E&P Uganda general manager, Mr Pierre Jessua, said they have up to end of August to conclude all agreements and take final investment decision

Among the sticking issues that have decelerated discussions on the pipeline agreements is Tullow's farm down (sale) of its business in the upstream (oil fields) and the subsequent haggling over Capital Gains Taxes and the company's exit plan.

The National Pipeline Company general manager, Mr John Habumugisha, said before conclusion of the farm down deal, the composition of the pipeline company structure is problematic because the three oil companies have to sign a joint operating agreement--which details underlying contractual frameworks on task--for the upcoming development phase. "You cannot talk about pipeline without completing the farm down; to know who is investing or on their behalf. The farm down is critical in two ways: we now know who is developing the pipeline, and sets path for final investment decision for upstream (development of the oil field)," he said.

The HGA is a precursor to other key agreements such as shareholders agreement, and establishment of a pipeline company (PipeCo) which will in turn negotiate the Project Financing Agreement and Transportation Agreement.

Developers

PipeCo will ultimately develop the project, with Unoc through its subsidiary, the National Pipeline Company: the three oil companies--Total E&P, Cnooc and Tullow--and Tanzania through its national oil company-- Tanzania Petroleum Development Corporation as major shareholders. Currently, Total E&P, which was tapped to lead preparatory activities established Total East Africa Midstream B.V. as the interim developer.

Sources described the project as lucrative given its "guaranteed 10 per cent return on investment."

However, financing is hinged on several inputs such as the pending agreements, the pipeline business model, and PipeCo's commercial structure and where its headquarters are domiciled to give the financers a certain level of confidence in terms of legal regime.

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