Three EAC states factor oil, gas funds in their budgets

Kenya: Kenya, Uganda and Tanzania plan to allocate money in their annual budgets to spur investment in infrastructure to exploit oil and natural gas from deposits that companies, including Tullow Oil Plc (TLW), are developing.

Ugandan and Kenyan oil discoveries, made in 2006 and 2012 respectively, and new gas finds off the coast of Tanzania that have boosted reserves to as much as 46 trillion cubic feet, have seen East Africa become a frontier for petroleum exploration.

The three countries, along with Rwanda, which are all members of the East African Community (EAC), presented their budget statements for the financial year starting July 1, yesterday.

“If there is one thing most EAC partner states agree on, it’s infrastructural development,” Ahmed Salim, a senior associate based in Dubai for research consultancy Teneo Intelligence, said in an e-mailed response to questions.

State spending will go toward “development of their respective extractive industry sectors”.

Kenya is building a port in Lamu in the country’s south-east linked to a proposed pipeline to export crude, while Uganda expects to select a company by December to build and operate the country’s first oil refinery.

OIL PRODUCTION

The neighbours aim to start oil production within three years. Tanzania, which already produces natural gas for domestic consumption, wants to complete construction of a gas pipeline from its south to the commercial hub of Dar es Salaam on the coast this year.

Higher spending on infrastructure may require governments to boost borrowing. Kenya plans to sell an inaugural euro bond this month to raise as much as US $2 billion for infrastructure, while Tanzania may sell its first sovereign debt in 2014/15, according to the country’s President Jakaya Kikwete.

“East African budgets will be closely watched for attempts at fiscal consolidation amid hydrocarbon discoveries across the region,” said Razia Khan, head of African economic research at Standard Chartered Plc (STAN) in London, referring to the need for countries to control deficits and debt accumulation.

“Spending on infrastructure will be a key theme of the budgets, but close attention will also be paid to affordability,” she said in an e-mailed response to questions.

Kenya may become EAC’s first oil exporter by 2016 as Tullow and its partner, Canada-based Africa Oil Corp (AOI), explore the South Lokichar basin, where they have found an estimated 600 million barrels of crude.

Kenya’s Finance ministry said in its 2014 budget policy statement that the Government wants to “fast track” building a pipeline to export the crude.

Tullow said in February that Kenya considers the start of oil production and exports a “national priority”.

Construction of the first three berths at the planned port in Lamu, which will add to Kenya’s main harbour in Mombasa, is scheduled to be completed next year at a cost of US $664 million, according to the Kenya Ports Authority.

Kenya expects to increase its spending on infrastructure by 15 per cent to Sh250 billion (US $2.9 billion) in 2014/15 from a year earlier, according to the Treasury’s budget policy statement.

In Uganda, Tullow, France’s Total SA (FP) and China’s Cnooc Ltd (883) are developing oil fields and have agreed with the Government to help build a refinery and export pipeline.

The country holds an estimated 3.5 billion barrels of oil, the fourth-largest reserves in sub-Saharan Africa, from which commercial production may start in 2017.

Uganda is considering four bids to construct a 60,000 barrel-per-day refinery from companies including Marubeni Corp (8002) based in Japan and a group of investors led by China Petroleum Pipeline Bureau.

Negotiation of the contract may be concluded in the final quarter of 2014, according to Uganda’s Energy ministry. The refinery is a “major priority” in the 2014/15 budget, according to the nation’s Finance ministry.

Tanzania is building the US $1.23 billion Mtwara gas-pipeline project with a loan from the Export-Import Bank of China, while Norway-based Statoil ASA (STL) and BG Group Plc (BG/), based in London, are working on a project to build a liquefied natural gas export plant, Kikwete said in April.

The Government plans to present new natural gas rules to Parliament in November.