Crude Ambitions: The Financing Hurdles Facing East Africa’s Crude Oil Pipeline

In 2006, Uganda found significant natural reserves near the country’s border with the Democratic Republic of Congo in the form of expansive crude oil deposits. From the combined Tilenga oil field operated by France’s TotalEnergies and the Kingfisher oil field operated by the China National Offshore Oil Corporation (CNOOC), the pipeline has a projected capacity of 246,000 barrels of oil per day.

In a bid to achieve the government’s aim of first oil output in 2025, TotalEnergies, CNOOC, along with the Ugandan and Tanzanian governments, are collaborating on a significant infrastructure project - the East African Crude Oil Pipeline (EACOP). This is a 1,443km pipeline originating in the Hoima District through to Tanga port in Tanzania, where crude oil can then be traded globally. The discovery of oil has raised hopes of a boost in economic growth, but the $5 billion project has experienced several delays due to issues concerning the withdrawal of investment, litigation and activist pressure. 

This article informs on the latest stages of the EACOP project and discusses the benefits and controversies of a crude oil pipeline project in an age prioritising sustainability. It also explains the financing of the EACOP deal, highlights gaps in funding and finishes by suggesting innovative financing methods which could help in bringing the deal to a financial close.

Figure 1: EACOP’s route through East Africa.

The EACOP Deal and Financial Risk Update 

EACOP will be designed, constructed, financed and operated by a pipeline company under the same name. Shareholders are affiliates of the joint venture partners: the Uganda National Oil Company (UNOC) (15%), TotalEnergies (62%), CNOOC (8%), and the Tanzania Petroleum Development Corporation (15%).

The infrastructure project is financed via debt through a project finance loan and equity financing at 60% and 40% respectively. Although the project has not reached financial close, civil works have already begun using shareholders’ equity and $200m from Afreximbank and $100m from the Islamic Development Bank. $2 billion has been raised between all shareholders collectively, largely going to land acquisition and pump station construction. However, the source of the $3 billion to be financed by debt looks increasingly unclear as financiers and reinsurers abandon the project due to environmental activism pressure.

Japanese bank Sumitomo Mitsui Banking Corporation (SMBC), a top financier for TotalEnergies, has withdrawn its role as financial advisor for the project finance loan. In the same month, Standard Chartered announced that it would withdraw from the EACOP. In total, 27 banks have publicly distanced themselves from the EACOP, and 28 reinsurers have refused to get involved due to backlash from activist groups.

Consequently, project sponsors are turning their attention to Chinese and African financiers as lenders of last resort, as Chinese development aid usually does not come with the strict economic conditions that western aid and multilateral organisations often require. Following years of delay, financial close, which was initially expected as early as June 2019, is still yet to be achieved on the $3b loan, meaning the project has begun without an understanding of where 60% of its funding is coming from. Export-Import Bank of China and China Export and Credit Insurance Corporation (Sinosure) are two likely sources of finance. However, delays have persisted as Sinosure’s internal procedures have slowed down approval of the loan. 

While EACOP has economic benefits for the two countries involved and the wider East African region, the project has serious social and environmental implications that explain investors' apprehension. The pipeline allows Uganda to unlock value from its natural resources while also providing an opportunity for economic collaboration between East African countries through new trade opportunities. The oil tributary will bring benefits, including the development of infrastructure and refined oil within the region, making the scarce resource crucial for economic growth cheaper. This has the potential to improve Uganda and Tanzania’s negative trade balance while simultaneously supplying other East African regions with crude oil, facilitating economic development as an energy source and tradable commodity. Additionally, during the construction phase, TotalEnergies claims that the pipeline will create 80,000 jobs, over 3 million hours of training for the local labour force and over $2 billion worth of work for local companies.  

However, the project has been met with intense opposition, claiming a violation of human rights and improper environmental due diligence. The French Association for Geographic Information (AFIEGO) found in 2023 that out of individuals from ‘237 EACOP affected households, 96.6% did not receive replacement land equivalent to that impacted by the project, while 78.1% received delayed, unfair or inadequate compensation.’ Additionally, a Global Witness report published December 2023 implicates TotalEnergies in intimidating communities affected by the EACOP, leading them to accept inadequate compensation for their land. Environmentally, the project is estimated to produce 34.3 million metric tons of CO2 equivalent per year at peak production – more than the combined CO2 emissions from Uganda and Tanzania. The project also threatens ecosystems along its path and threatens the integrity of freshwater sources, affecting the livelihoods of the people and animals dependent on them. 

Protests and controversy have been some of what has lead to the public withdrawal of banks, highlighting just how risky of an investment the EACOP is. With fewer financiers to spread the risk across and ethical barriers preventing further investment. As long as the financial close is yet to be reached, the likelihood of more banks distancing themselves from the EACOP will likely grow. Increased delays threaten the financial viability of the project as it becomes riskier and more expensive. This would be detrimental as the EACOP has already begun the displacement of over 100,000 people by the completion of the project.

Financing Mechanisms to Resolve the Prevailing Challenges

The first potential financing mechanism that could be used to mitigate the prevailing challenges is export credit agencies (ECA). These are financial institutions, often sponsored by national governments, that offer financial products (loans) and guarantees to domestic companies that want to export to foreign markets and are often significant in infrastructure projects. They can be used to provide support, especially where risk-averse private lenders pull back from export finance - as recognised in EACOP.  ECAs can provide political risk insurance to protect foreign investors and contractors against risks like civil unrest, changes in regulatory prices or any disputes which may occur between Uganda and Tanzania. This would mitigate some of the political risks worrying investors. The Chad-Cameroon Oil Pipeline was backed by ECAs to protect international investors from political instability in the Sahel.

Additionally, ECAs can provide long-term financing with low interest rates to ensure that the project is adequately financed without overburdening private investors or governments. This is useful given the high upfront costs, extended construction periods and delays; favourable loan conditions increase the probability of project completion and the payback of the loan. The Baku-Tbilisi-Ceyhan Pipeline, which runs through Turkey, Georgia and Azerbaijan, benefits from ECAs like UK Export Finance and the European Bank for Reconstruction and Development providing long-term low-interest loans to cover financing, ensuring that the 1,768km pipeline could proceed with investment despite its long payback period. 

However, several ECAs have turned down funding for the EACOP due to environmental and social concerns. SACE, the Italian ECA, along with the ECAs from Germany and the UK, have turned down applications to support the project. French President Emmanuel Macron also stopped public funding to the EACOP. The ECA financing option is not lost though. Sinosure and The Export-Import Bank of China (EXIM Bank) are still potential ECAs that are not governed by the stricter economic policies of western ECAs. Getting another eastern financier on the project who can provide low-interest loans with political insurance will be beneficial to the EACOP’s prospects of reaching a financial close. 

In addition to ECAs, sovereign-backed infrastructure bonds sold to local and international investors can be an interesting financing mechanism as long-term bonds paid out at a fixed interest rate/coupon payment may attract institutional investors like pension funds and insurance companies, especially since the coupon payment ascertains a consistent flow of income. This allows the project to receive funding from capital markets, spreading the financial burden over a long period to increase security while securing long-term low-interest financing.

An example of infrastructure bonds in action would be M-Akiba – a bond issued by the Kenyan government administered through the central bank, Nairobi Securities Exchange, Kenya Association of Stock Brokers and Investment Banks and others for economic development. The money raised from the bonds has financed infrastructure projects such as roads, energy production, sanitation and housing. Through this, the Kenyan Electricity Transmission Company has been able to develop transmission infrastructure to increase electrification in the country. This example highlights the potential of the use of infrastructure bonds to supplement the financing of the EACOP. 

A final financing method would be build-operate-transfer (BOT), which is commonly used in infrastructure projects in emerging markets. Under this model, a private entity (or consortium of private firms, in this case, TotalEnergies and CNOOC) is granted the right to finance, build and operate a project over a specified period, after which ownership is transferred to a public authority. This is significant in projects with high initial costs and revenue generation occurs over the long term. The BOT model will help reduce the public sector burden incurred by allowing ECAs and private companies to fund the construction of the pipeline. Additionally, by agreeing to a long-term concessionary period, private financiers are given a long enough period to recoup their initial investment and generate profits from revenue gained from selling crude oil. The expertise transferred from TotalEnergies promises to maintain success of EACOP when returned into the hands of the public sector. BOT has been implemented in infrastructure projects within the region in the past, most recently with the Mombasa-Nairobi Standard Gauge Railway (SGR). The project was built by the China Road and Bridge Corporation (CRBC) with financing from EXIM Bank China under a 10-year concession recovering its investment through passenger and cargo revenues. Applied to the EACOP case, this would ease the burden of financing from the public sectors, ensuring the construction and management of the pipeline during its concessional period and then handing over to the governments of Uganda and Tanzania.

Conclusion

Ultimately, a mix of these three financing solutions would work best together to ensure EACOP reaches a financial close and harnesses the economic benefits that a crude oil pipeline promises. Having ECAs finance the EACOP provides revenue and the political insurance necessary for the construction of the controversial project, protecting foreign investors. Working in conjunction with the BOT model, private firms engaged in financing will have ownership of the asset and access to cash flow enabling recovery of the initial investment and profits from the sale of crude oil. On the other hand, using infrastructure bonds to finance the project would allow the governments to inject low-interest, long-term funding into EACOP, allowing them to raise funding without putting much pressure on the existing budgets. Collectively, these models would enable the pipeline to take significant strides towards securing their $3 billion debt funding gap.

The EACOP is an example of the global resistance towards fossil fuel exploitation, signifying a shift towards renewable energy sources as opposed to extracting crude oil. This poses a significant global paradox. Why should Uganda and Tanzania be prevented from utilising their natural resources to create economic wealth; a route that has spurred development in other regions of the world? The significant opposition faced both locally and abroad reaffirms the need for creative solutions to overcome the project’s hurdles in its race to harvest the spoils of black gold.