China steps in to save Uganda oil pipeline as Western lenders back out over environmental concerns

Chinese lenders will provide more than half of the US$3 billion debt that Uganda requires to build a crude oil pipeline after financiers from the West backed out following strong opposition from environmental groups.

According to Uganda’s Ministry of Energy and Mineral Development, the East African nation expects to finalise talks with the China Export & Credit Insurance Corporation (Sinosure) and the Export-Import Bank of China (Eximbank) by next month to finance the construction of the East African Crude Oil Pipeline (EACOP).

Irene Bateebe, the ministry’s permanent secretary, said Sinosure, the Chinese state-owned provider of export credit insurance, is working with Eximbank to provide funding for the pipeline, which “is the largest portion – above 50 per cent of the debt”.

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“We are at the tail-end of the discussions [with Chinese lenders] for financial close. We are confident that by the end of October of this year, we will close the debt component and we would have mobilised most of the funding for the project,” Bateebe said on Friday.

Uganda needs about US$5 billion for the pipeline running from Lake Albert’s oilfields to a storage and loading terminal in the Tanzanian port of Tanga. Financing is set at a 60:40 debt-to-equity ratio, meaning US$3 billion will be secured as debt with the remaining US$2 billion to be financed by shareholders through equity contributions.

TotalEnergies controls a 62 per cent interest in the pipeline; the Uganda National Oil Company holds 15 per cent; Tanzania Petroleum Development Corporation has 15 per cent; leaving 8 per cent for Chinese oil giant China National Offshore Oil Corporation (CNOOC).

The 1,443km (896-mile) pipeline would transport crude oil from Uganda’s Lake Albert oilfields in northwest Uganda to Tanga in Tanzania on the Indian Ocean where the oil would then be sold onwards to world markets.

Besides the Chinese lenders, Bateebe said Uganda expects to get some funding from Saudi Arabia’s Islamic Development Bank and some African banks, including the African Export-Import Bank.

Bateebe said initially many Western-backed lenders had expressed interest in financing the pipeline but pulled out due to strong opposition from environmental and human rights groups who have said the oilfields and pipeline threaten the region’s fragile ecosystem and the livelihoods of thousands of people. Further, environmentalists say Uganda is going against the global push for energy transition away from fossil fuels.

“We did see some Western banks withdrawing from supporting the project but we always say look at your other friend. We had other friends who were willing to come on board. We became East-looking,” Bateebe said. She added that, previously, a large portion of the debt was to come from Western lenders.

In 2006, British company Tullow Oil discovered commercially viable oil deposits on the shores of Lake Albert in western Uganda at the border with the Democratic Republic of the Congo. Uganda has an estimated 6.5 billion barrels of crude oil – the equivalent of 1.4 billion barrels of recoverable oil.

Police detain a Ugandan activist demonstrating against the EACOP oil pipeline. Photo: Reuters alt=Police detain a Ugandan activist demonstrating against the EACOP oil pipeline. Photo: Reuters>

But it was only last year that the partners announced a US$10 billion final investment decision for the project, which includes the oilfield development and the construction of the pipeline to carry crude oil harvested from Hoima in western Uganda.

CNOOC operates the Kingfisher oilfield, located on the eastern shores of Lake Albert in Uganda. It will invest an estimated US$2-3 billion to develop the oilfield that would produce 40,000 barrels per day at peak production.

The other, larger oilfield is the Tilenga, operated by French oil multinational TotalEnergies, which is estimated to cost between US$4 billion and US$6 billion to develop. It will produce 190,000 barrels per day.

Spudding (the start of drilling) of the development and production wells for Kingfisher and Tilenga started in January and June 2023 respectively, with the landlocked East African nation aiming to join oil exporting nations by 2025.

Environmental groups under the banner #StopEACOP have been piling pressure on key financiers from the West to drop investment plans and according to them, dozens of major banks including Barclays, Credit Suisse, Citi, HSBC, Deutsche Bank, Morgan Stanley and JP Morgan Chase have ruled out backing the pipeline.

South Africa’s Standard Bank and the Industrial and Commercial Bank of China (ICBC) are acting as financial advisers and lead debt arrangers for EACOP, according to BankTrack, a tracking, campaigning and NGO support organisation focused on banks and the activities they finance. ICBC owns a 20 per cent stake in Standard Bank, South Africa’s largest lender.

Japan’s Sumitomo Mitsui Banking Corporation also ruled out financing the project but it wasn’t clear if it remained one of the debt arrangers and advisers.

Last year, the issue found its way to the floor of the European Parliament, where legislators passed a resolution calling for a halt to the project over environmental and human rights concerns and warned TotalEnergies against backing the project.

Uganda has said the push by countries in the West for it to drop the oil plans do not take in the whole picture.

“That will be very unfair. It will no longer be a just energy transition, it will be an unjust energy transition,” Bateebe said, adding that Uganda believes the oil and gas sector can still coexist with its plans for renewable energy.

“The oil sector, which we are developing in a sustainable way environmentally, will support us in our energy transition by providing financing. Otherwise, it is not enough to come to countries like ours and say we must transit, and there’s no financing plan for the transition,” Bateebe said.

In support of Uganda’s projects, the Chinese embassy in Uganda last year criticised the European Union for trying to interfere with the development of Uganda’s oil ambitions. Chinese ambassador to Uganda Zhang Lizhong said the EU “should not use the excuse of environmental and human rights issues to block development” of the oilfields and the pipeline.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.

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