Officially, the construction phase of what could become the longest heated oil pipeline in the world is inching closer to commencement. The East African Crude Oil Pipeline (EACOP) already has backing worth US$2 billion from the oil companies behind it. However, another $3 billion of loans may be needed. The prospects for this 1,443 km megaproject have become clouded in financial uncertainty.
EACOP – also known as the Uganda–Tanzania Crude Oil Pipeline – aims to transport oil from Lake Albert in Uganda to the Port of Tanga on the Tanzanian coast, and on to international markets.
EACOP’s shareholders are French oil giant TotalEnergies (Total), the China National Offshore Oil Corporation (CNOOC), the Uganda National Oil Company, and the Tanzanian Petroleum Development Corporation. But with an additional US$3 billion required to foot the construction bill, and a growing list of international financiers walking away, questions are being asked about who will finance the project and whether it will ever be built.
Building work was slated to begin in 2022, but the EACOP website nows says it will start this year, even as wells are already being drilled upstream at the Kingfisher oil field.
Many remain optimistic about the fate of EACOP, believing that African and Asian banks will simply bankroll the project themselves. At the Petroleum Authority of Uganda (PAU), corporate affairs manager Gloria Sebikari insists that many banks in these regions continue to finance such projects. According to some, increasingly strong signals indicate that Chinese banks and insurers may be the ones to step in and support the project.
Financial obstacles
The list of commercial banks that have publicly opted out of working on EACOP is steadily growing. This includes most of the world’s largest banks, such as JPMorgan Chase and BNP Paribas. It is now up to the project’s financial advisors – the Industrial and Commercial Bank of China (ICBC) and Standard Bank’s Ugandan subsidiary, Stanbic – to secure financiers among the undeclared.
Meanwhile, insurance companies steering clear of the project include big names such as Aegis, Canopius and Britam. Uganda’s Insurance Consortium for Oil and Gas (ICOG) was created to pool resources among local and regional industry players to insure the country’s oil development, prompting news reports last year that this was enough to fully insure EACOP. However, the #StopEACOP campaign debunked this assertion. It cited a stipulation in Uganda’s EACOP Special Provisions Act that the majority of insurance and reinsurance for project risks must come from foreign insurers, with up to only 30% of risk coverage permitted from local insurers.
Even among ICOG members, uncertainty is brewing. Coleen Scott, legal and policy associate at Inclusive Development International, says Britam Holdings, a Nairobi-listed financial services provider and member of the ICOG, withdrew from the project because it does not comply with the required environmental and social standards.
A notorious reputation
A host of factors advanced by EACOP’s critics seems to be informing the decisions made by financiers. These include possible financial, legal and reputational risks, not to mention massive pollution, including a projected 379 million tonnes of CO2 equivalent emissions over the project’s lifetime, including from use of the oil by consumers. The project’s own environmental and social impact assessments have merely highlighted vague risks associated with its negative impacts upon biodiversity and livelihoods.
The pipeline has met with considerable opposition from local communities and civil society groups working on human rights and environmental issues in East Africa and abroad. A coalition of such groups has worked on a multi-year campaign – #StopEACOP – to underpin the withdrawal of the project’s would-be funders and insurers.
The anti-EACOP activism appears to be mounting, with several incidents of strong resistance occurring in June. The forcible removal of climate activists from Standard Bank’s annual general meeting in South Africa made headlines, while a coalition of French aid groups and Ugandan nationals sued Total on 27 June over alleged human rights violations. The case argues that EACOP seeks to deprive communities of their land. Also on 27 June, climate protesters sprayed orange and black paint on Total’s UK headquarters in Canary Wharf, London.
Angelo Izama, a consultant with the Kampala-based thinktank Fanaka Kwa Wote is nevertheless dismissive of the campaign: “#StopEACOP has made a statement, but it is drowned by the realities of the place of oil and gas in the global economy and its accepted significance in an energy transition”. He says the campaign does not have deep roots in Uganda or East Africa and does not enjoy the support of most Ugandans, who are conscious of oil’s importance to the economy.
While the debate around energy transitions in much of the world means moving away from all fossil fuels, many African governments consider oil and gas as justifiable and necessary parts of their energy transitions and quest for universal energy access. In a statement, the Uganda National Oil Company – alongside finger pointing at the developed world for continuing to burn coal – argues that export revenues, energy access and the reduction of reliance on wood and charcoal justify EACOP’s place in the country’s energy transition. Others argue, however, that projects such as EACOP risk becoming “stranded assets” as the world moves away from reliance on oil and gas.
Economic benefits
China Dialogue spoke to Fred Muhumuza, director of the thinktank Economic Forum at Makerere University Business School in Kampala, Uganda. A native of Bunyoro in western Uganada, where oil drilling is set to take place, Muhumuza says oil exploration has altered traditional ways of life in the region, bringing some people who received compensation to make way for the project into the money economy for the first time. “People have never known the value of their land”, he explains. For better or worse, this has disrupted clans and families, and altered the way people farm, defend themselves and solve conflicts. “Money has brought new ideas.”
Muhumuza is optimistic that some of the environmental concerns surrounding EACOP will be handled by the regulation that the oil companies must adhere to, supported by the use of modern oil exploration and processing technologies. He predicts that the Ugandan and Tanzanian oil sectors will only grow in the coming years. Izama anticipates a common market for petroleum-based energy in East and Central Africa.
Chinese involvement
Confirmed debt financing for the project includes loans from Saudi Arabia’s Islamic Development Bank and the African Export-Import Bank. But this is not enough. In May, Ugandan energy minister, Ruth Nankabirwa, stated that the Chinese Exim Bank, along with “several other Chinese banks”, will offer loans to support the project.
Ernest Rubondo, executive director of the Petroleum Authority of Uganda, says they cannot disclose the identity of all the banks, however. “Once we conclude the discussion, we shall go public,” he tells China Dialogue.
Chinese companies may also be more involved in EACOP than has so far been reported. Alongside involvement in the Ugandan oilfields, subsidiaries of the China National Petroleum Corporation are also involved in the construction of the pipeline. In May, a smaller Chinese company, Panyu Chu Kong Steel Pipe Company, signed a US$370 million contract to supply steel pipes for EACOP. The first batch of pipes, totalling 500 km, is expected to be delivered by January next year.
Interestingly, the second batch will be ordered only if conditions drawn up by Chinese state-owned insurance company, Sinosure, are met, indicating that the insurer is actively engaged in the project. Their underwriting of equipment supply contracts would fill a major gap in EACOP’s financing puzzle.
Does EACOP still make sense?
Fred Muhumuza argues that the current geopolitical and economic landscape works against oil exploration. For example, Europe and the US are striving to keep oil prices low to starve Russia of money, making fossil fuel expansion projects hard to justify. Meanwhile, high interest rates on international markets will make it difficult for Total and CNOOC to raise capital this way. Muhumuza says they might have to wait.
As for local politics, Muhumuza says environmental concerns, such as the impact on critical ecosystems, as well as issues surrounding the compensation of those displaced by the pipeline, are also working against EACOP.
The entire world is saying we are moving from fossil fuelsDickens Kamugisha, Africa Institute for Energy Governance
Philip Osano, an environmental policy expert and director of the Stockholm Environment Institute Africa in Nairobi, predicts that those African countries investing heavily in hydrocarbons risk “stranded infrastructure and assets” as renewable energy technology improves and becomes increasingly affordable.
Dickens Kamugisha, CEO at the Africa Institute for Energy Governance in Uganda, says the global economics of oil and gas is changing as more electric vehicles leave production lines than ever before. While Uganda, Tanzania and a handful of remaining financial backers pursue oil extraction in East Africa, Kamugisha points out, “The entire world is saying we are moving from fossil fuels.”
