Kenya port plan faces headwinds despite oil finds amid financing woes

Region aims to capitalise on resource bonanza with project expected to cost US$25.5 billion

PUBLISHED : Tuesday, 03 September, 2013, 12:00am
UPDATED : Tuesday, 03 September, 2013, 4:15am

A mega port project on the north Kenyan coast conceived in the 1970s may finally be gaining traction based on commercial oil finds in Uganda and Kenya, but it needs more financing to compete with a China-backed port in Tanzania and other rivals.

Initial work has started on a mangrove coast near the ancient Arab trading post of Lamu that could in a few years be a bustling container port and crude terminal, creating an export hub for fast-growing east African states and their oil.

But Kenya must shore up regional commitment for the US$25.5 billion Lamu Port-South Sudan-Ethiopia Transport (Lapsset) plan that by 2030 envisages a port, new roads, a railway and a pipeline.

It must also overcome environmental worries and make a clearer economic case to avoid creating one more African white elephant.

The prize will be to bolster Kenya's primacy as east Africa's trade gateway and capitalise on a bonanza from one of the world's hottest undeveloped oil provinces, where exports from Uganda and Kenya alone could reach 500,000 barrels a day.

Experts say the Lamu port and transport links are viable, if not on such a huge scale. Some South African banks are watching closely. But emerging markets now face tougher times raising cash and no big donors, such as China, have thrown their full weight behind the plan. Other pitfalls also lurk.

"The big obstacle is really a political one and making sure all the discussions that need to happen, happen," said Clare Allenson, analyst at the Eurasia Group consultancy, referring to a region where rivalries can run deep, even within the east African trade bloc.

"This is a very grandiose scheme and there are ample examples of this type of thing never coming off the ground (in Africa)."

Initially predicated on convincing South Sudan to switch its oil exports to Lamu from the regularly disrupted pipeline it uses via Sudan, the Kenyan scheme has found a new raison d'etre.

First, Uganda agreed to ship its future oil output through a pipeline to Lamu. Then, last month, British explorer Tullow Oil increased Kenya's oil reserve estimates and said east Africa's biggest economy could start oil exports by 2016.

"We are now talking about three oil sources, up from one oil source when the studies were previously done," Lapsset chief executive Silvester Kasuku said.

Kenya's virtual monopoly on regional trade through its now-congested Mombasa port, however, has often rankled with its neighbours.

South Sudan has suggested that a new pipeline, probably warranted only if it finds more oil to replace mature fields, could run through Ethiopia to a port in Djibouti. Uganda recently backed a Kenyan route, after mulling one via Tanzania.

But Kenya and Uganda may be enough to get the oil terminal going. Nairobi is confident it can make an economic case for a Uganda-Kenya pipeline costing an estimated US$2.5 billion to US$5 billion, made costlier because Uganda's waxy oil means it must be heated to enable flow.

"We are talking about economies of scale here … which gives greater investment credence to the project, raises the project's profitability and de-risks a lot of other factors which were associated with one single oil source," Kasuku said.

A dirt road cut through the mangroves is the first work at the site, where a Chinese firm has a US$470 million contract for Lamu port's first three berths. Those are the first of 32 berths at a port estimated to cost US$5.5 billion. More funds will be needed for the roads and railway to link South Sudan and Ethiopia.

But finance is scarce. Kenya allocated only about US$48 million to the project this fiscal year, and China's involvement with Lamu pales against its backing for Tanzania's US$10 billion Bagamoyo port plan.