Uganda, Tanzania agree on $3bn crude oil pipeline tax plan

Uganda and Tanzania have finally agreed on a tax plan for the proposed $3.5bn (Shs12 trillion) crude oil export pipeline, a key milestone that paves way for an inter-government agreement spelling out the terms and conditions and operationalising the project.

The agreement of a 5% cap on depreciation of the pipeline throughout its span, and further review of branch tax before it is applied pending formation of the Special Purpose Vehicle (referred to as Pipe Co) that will construct, own and operate the pipeline, was signed on Sunday evening following a bilateral meeting between President Museveni and his Tanzanian counterpart John Pombe Magufuli at State House, Dar-es-Salaam.

Sunday’s meeting was preceded by the 18th ordinary East African Community (EAC) heads of state summit in Arusha, Tanzania, a day earlier, which discussed the contentious Economic Partnership Agreement (EPAs).

The date for when the two heads of states will lay a foundation stone for construction of the 1,445km pipeline – dubbed the East African Crude Oil Pipeline (EACOP) – will be communicated in the future. Even then, the two presidents directed their attorney generals to finalise the IGA.

The presidents directed that the is signed by the end of next week by the energy ministers of the two countries – Ms Irene Muloni for Uganda, and Professor Sospeter Muhungo for Tanzania.

The pipeline, running from Kabaale (Hoima district) down south to Tanga port at the Indian Ocean will be financed through debt financing. It is expected to cost $3.55bn (Shs12 trillion).

Discussions are ongoing to form a Special Purpose Vehicle (referred to as Pipe Co), to construct, own and operate the EACOP. The company will also negotiate the shareholder’s agreement, project financing agreements and transportation agreements between shippers of oil from Tanga port to the international market. Pipe Co will pay back the lenders from the project’s returns.

Pipe Co shareholders will fund EACOP through a mix of equity and project financing, seeking to achieve between 60% and 70% of external debt. The financing plan is, however, still subject to discussions pending getting on board a transaction adviser and completion of the FEED.

Early this year, Uganda and Tanzania awarded a $11m contract for the Front-End Engineering Design (Feed) for EACOP to the Houston-based Gulf Interstate Engineering. The design and report are expected by this November.

Danish consultancy, NIRAS Gruppen A/S as well as Ugandan and Tanzanian contractors are also helping with the FEED, which is being carried out alongside the Resettlement Action Plan (RAP) study and Environmental and Social Impact Assessments (ESIAs), with the view of fast-tracking the project to pave way for commercial production to start by 2020.

The FEED will focus on the technical requirements that will give a clear picture of the project and ensure that the Final Investment Decision (FID) is reached by end of 2017. It will also pave way for detailed engineering, procurement, and construction by early 2018 with minimal technical, cost, and schedule risks.