Cnooc questions investment in oil pipeline
- May 26, 2020
- Written by Jeff Mbanga
Cnooc workers in the field
Cnooc Uganda Limited has up to the end of May to decide whether it will buy half of the stake from Tullow Oil Uganda, nearly three months after the Chinese company wrote to Uganda’s energy officials casting doubt about the business viability of the East African Crude Oil pipeline.
On April 23, Tullow Oil announced that it had agreed to sell its entire stake in Uganda’s Albertine graben and interest in the East African Crude pipeline to Total E&P Uganda for $575 million, and that it had received government’s approval after more than three years of negotiating for it.
The agreement, however, allows Cnooc Uganda to preempt its right to buy half of what Tullow is selling in its fields in Hoima, 200km from the capital Kampala.
Now attention turns to the haggling over the project economics informing any financial decision to be taken towards building the crude oil pipeline from Hoima to southern Tanzania in the Chongoleani peninsula.
As their next move, Total and Cnooc are to embark on scraping through a couple of agreements before signing an integrated Financial Investment Decision (FID) for the oil industry, quite possibly in the second quarter of 2021.
The projects for which the FID will be signed include: the crude oil pipeline, Cnooc’s Kingfisher field and Total’s Tilenga oil development project. Combined, the three projects require between $10 billion and $15 billion, the biggest investment in the country’s history.
However, Cnooc appears to be growing cold feet.
“With regard to the crude oil pipeline project, which has been led by Total, Cnooc is concerned that the project is not yet investable or bankable and the participation percentage will largely depend on the economic return and the bankability,” Zhao Shunqiang, the president of Cnooc Uganda Limited, wrote to Goretti Kitutu, Uganda’s minister of Energy and Mineral Development, in February.
There is no information pointing to Total feeling the same way, although this would not be the first time that the two companies have not been on the same page in how Uganda’s oil project should progress. The two companies, together with the Uganda National Oil Company, remain partners in Uganda’s oil project.
Shunqiang asked for a meeting with Kitutu to resolve some of the issues that would facilitate movement towards FID. It is not clear whether any meeting has taken place or if Cnooc’s concerns have been resolved, considering the country has been under lockdown since late March as a result of the fight against the spread of coronavirus disease (Covid-19).
Cnooc gave the impression that it is hard to buy Tullow Oil’s stake if the numbers surrounding the crude oil pipeline do not make economic sense. Just what informs Cnooc’s line of thought is hard to tell.
Cnooc listed a dozen of issues that need to be resolved before it could take part in any financial decision for the pipeline. Some of these issues touch on agreements on contracts sur-rounding the recovery of costs, stable legal regimes and the issue of grand-fathering, the return on investments, and taxation.
In the past, however, both Total and Cnooc have questioned the amount of crude that needs to be pumped through the pipeline every day, and the tariff they will charge to move the product.
While government insists on a proposed 30,000 barrels of oil refinery to have the first call on crude oil resources, the oil companies wish to have more than the agreed 212,000 barrels of oil to be pumped through the pipeline. The less oil shipped out, the higher the tariff, which will largely be borne by the final consumer.
Uganda has so far discovered six billion barrels of oil, with anywhere between one billion and 1.4 billion of that said to be recoverable.
If Cnooc does not buy Tullow Oil’s stake, it would weaken the Chinese firm’s influence in the geopolitics of the region. It is not just the pumping of crude that is at stake but also the money and political influence that comes with the engineering, procurement and construction contracts.