Feasibility Report P 073620 003

East African Community (EAC)
Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya)
Final Feasibility Report
June 2011
Table of Contents
1 2 3 3.1 3.2 3.3 3.4 3.5 4 4.1 4.2 5 5.1 5.2 6 6.1 6.2 7 7.1 7.2 7.3 8 8.1 8.2 8.3 8.4 8.5 8.6 Executive summary List of Abbreviations and Units Introduction Structure of the report Background Socio-economic context Project objectives and focus Least cost solution Market analysis Assumptions Demand projections Pipeline routing options Objective Proposed Routes Conceptual design and cost estimates Assumptions Conceptual Design Basis Environmental and social impact assessment Assumptions Environmental impacts Socio-economic impacts Financial analysis Assumptions Methodology Revenue Costs Financial calculations Financing plan
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3 5 8 8 8 9 10 10 13 13 13 20 20 20 22 22 23 25 25 25 26 28 28 28 29 30 32 35
2 41 41 41 41 42 45 46 46 47 50 50 52 54 56 58 58 58 58
9 9.1 9.2 9.3 9.4 9.5 10 10.1 10.2 11 11.1 11.2 12 13 14 14.1 14.2 14.3
Economic analysis Assumptions Methodology Costs Benefits Economic calculation Risk assessment Sensitivity analysis Risk analysis Logical Framework Logical framework assessment Monitoring of project benefits Conclusion Recommendations Appendices Binder 2 Binder 3 Binder 4
Executive summary
The East African Community has commissioned COWI to undertake a feasibility study of a pipeline to supply natural gas to Mombasa for power generation and other industrial applications both in Mombasa and Tanga and along the route. The feasibility study is prepared by COWI A/S in association with COWI Tanzania Ltd and Runji & Partners, Kenya. The study is based on information from existing studies supplemented by information received from stakeholders. It is an overall assumption for the study that the gas infrastructure in Tanzania is upgraded to be able to deliver the required volumes of gas at Ubungo for the proposed pipeline. The feasibility study comprises four on-shore routing options and one off-shore option. The investment cost of the on-shore options are in the range of 515-630 million USD. Analyses are made for three market scenarios (low, medium and high) and four options for requested return on the investment. The financial calculations include four (4) scenarios with different discount factors (WACC) to reflect different capital structures of the pipeline company. The analysis shows that an expansion of the gas pipeline system along the coast to reach Tanga and Mombasa is a feasible project both financialle and economically even with a conservative low growth demand scenario. Sensitivity analysis shows that the routing along the coast is robust to changes in market, investment costs and required return on invested capital. The off-shore option is very expensive and thus not feasible. A route in inland Tanzania to reach the potential markets in Arusha and Moshi will require an increased investment of more than 20% compared to the coastal routing. The direct benefits from the project will be distributed as follows: Tanzanian government will benefit from royalties and other benefit from the gas sale; The pipeline owner will benefit from the profit share of the transport tariff; Power consumers and industries in Kenya and Tanzania will benefit from cost reductions caused by improved efficiency and improved security of supply; Climate will benefit from reduced emissions from power plants and industries.
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Figure 1 Overview Map, showing alternative routes.
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AfDB CC CCS CIF CNG EAC ENPV ERC EWURA EIRR FIRR FNPV
List of Abbreviations and Units

African Development Bank Combined Cycle Carbon Capture Storage Cost, Insurance and Freight Compressed Natural Gas East African Community Economic Net Present Value Energy Regulatory Commission, Kenya Energy and Water Utilities Regulatory Authority, Tanzania Economic Internal Rate of Return Financial Internal Rate of Return Financial Net Present Value Gas Piping Technology Committee Guide for Gas Transmission and Distribution Piping Systems. Heavy Fuel Oil Kenya Electricity Generating Company Kenya Pipeline Company Local currency London Inter Bank Offered Rate Liquefied Natural Gas
Abbreviations
GPTC Guide
HFO KenGen KPC LCU LIBOR LNG
LCPDP NBV NGCC NPV Orca PAT ROE Songas TANESCO TPDC
Least Cost Power Development Plan, Kenya Netback Value Natural Gas Combined Cycle Net Present Value Orca Exploration Group Inc. PanAfrican Energy Tanzania Return on Equity Songas Limited Tanzania Electric Supply Company Tanzania Petroleum Development Corporation
Volumes Scf Scfd Mscf MMscf MMscfd Bcf Nm^3 1 scf 1 scf Standard Cubic Feet Standard Cubic Feet per day 10^3 Standard Cubic Feet 10^6 Standard Cubic Feet 106 Standard Cubic Feet per day 10^9 Standard Cubic Feet Normal Cubic Metre 0.0268 Nm^3 0.028 Sm^3
Energy kW MW 10^3 Watt 106 Watt
1 kJ 1 MJ 1 kWh 1 scf 1 Nm^3 1 Sm^3
1.055 BTU = 10^3 Joule 10^6 Joule 3.6 MJ 1,025 BTU 39.9 MJ 36.35 MJ
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3.1
Introduction
Structure of the report
The financial and economic analyses are based on estimates, projections and assumptions presented in the appendices: market study, pipeline routing options (survey report), conceptual design and cost estimates report, and reflects the comments received from counterparts to the reports and comments received from the Steering Committee at the EAC Phase 2 Workshop in Dar es Salaam on 20 January 2011 and at the EAC Phase 3 Workshop in Arusha on 18 March 2011 and at EAC Stakeholdres Workshop in Mombasa on 10 May 2011. The market study in appendix A is based on existing information available in paper or electronic form as well as from interviews with the counterparts. The pipeline routing options (survey report) in appendix B are made based on road surveys in Tanzania and in Kenya. The conceptual design and cost estimates in appendix C is based on the survey report and the market study. The ESIA Outline report in appendix D is based on existing information, route surveys and preliminary field surveys. The subject for the analysis is a potential pipeline that will transport gas from Dar es Salaam through Tanga to Mombasa. A gas pipeline is a natural monopoly with a transport tariff based on a cost recovery basis and regulated by a regulatory authority. In the present case decisions must be made about the responsibility to regulate the transport tariff for a trans-border pipeline.
3.2
Background
The 3rd East African Community (EAC) Development Strategy 2006-2010 identified the need for a natural gas pipeline from Dar es Salaam to Tanga and Mombasa. In March 2009, the EAC Sectoral Council on Energy approved the terms of reference for the feasibility of the pipeline to supply natural gas to Mombasa for power generation and other industrial applications both in Mombasa and Tanga and along the route. The 9th June 2010 the contract was signed with COWI A/S (Denmark) in association with COWI Tanzania Ltd, and Runji & Partners (Kenya). The study commenced on 5th July 2010.
3.3
Socio-economic context
The Treaty for the Establishment of the EAC was signed in Arusha on 30 November 1999 and inaugurated in January 2001. In 2005 a customs union was established, and in November 2009 the member states signed a common market protocol to create a larger market and more attractive single investment area with a view to provide the opportunity to the region to be more competitive and more amenable to effective participation in the global economy1. A monetary union is expected to be operational by 2012 and a free trade zone to be fully operational by 2015.2 All countries have allowed duty-free regional trade and all five countries have an identical tax applied to imports from outside the union. The EAC comprises a combined market of 126 million people and a total GDP of $73 billion. The East African countries are using over 50% of their foreign currency revenues on importation of oil products. The Songo Songo gas fields is now being developed and the pipelines and other infrastructure developments have been built to secure commercial utilisation of the gas discoveries in Tanzania. The EAC Member States have agreed to promote the use of gas and other natural resources so as to raise the standard of living and to improve the quality of life of the people3. The Tanzanian government will receive a considerable income in royalties and other benefits over the lifetime of the project. With its strategic location and well developed business infrastructure Mombasa is the major trading centre in Kenya with East Africa's largest seaport. Industries in Mombasa include cement factories. Also tourist related industries, textile and engineering attract a labour force from the entire region. This makes Mombasa an important growth centre of the EAC. Crude oil prices are expected to increase in the longer term as a result of increasing demand primarily in the transport sector combined with reduced supply globally. In addition the present situation in the Middle East shows that political instability results in increasing oil prices. The establishment of alternative energy sources becomes increasingly important to the African economies. In the longer perspective renewable energy will replace fossil fuels but until these technologies are competitive in the market natural gas is foreseen as a low cost and low emission alternative to fuel oil in power generation and industrial processing. The Dar es Salaam-Tanga-Mombasa pipeline project is designed to facilitate a supply of natural gas to Tanga and Mombasa from Tanzania (Songo Songo Island). These gas fields and the Mnazi Bay gas fields in southern Tanzania comprise proven gas reserves that exceed the expected domestic demand.
EAC Development Strategy 2006-2010 http://www.eac.int/about-eac.html 3 Regional Integration in East Africa: Creating the framework for energy development and trade in Africa. Parliamentarian Forum on Energy Legislation and Sustainable Development, Cape Town, 5-7 October 2005
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3.4
Project objectives and focus
The key problem to be addressed is to secure the increasing demand for energy in the EAC in general and specific the demand for energy in Tanga (Tanzania) and Mombasa/Nairobi (Kenya). Kenya is strengthening its power transmission network with the construction of a double circuit line between Nairobi and Mombasa which will allow Nairobi to benefit from future power capacity expansion in Mombasa. The feasibility study shall analyse the technical, environmental, financial and economic feasibility of transporting gas from Dar es Salaam to Mombasa through a pipeline. Based on the Terms of Reference for the assignment, the main objective is summarised as: Improving economic opportunities by providing a reliable and clean fuel for power generation and industrial production in target areas. The financial analysis will focus on the financial viability of an investment project as a means to transport gas to Tanga and Mombasa and compete with alternative fuels in these markets. The economic analysis will focus on the benefits for the society. These benefits are economic growth as a result of improved energy efficiency in the power sector and industry in Mombasa, reduced CO2 emission as result of replacement of diesel and coal by natural gas, and improved security of supply in Mombasa. These benefits shall outweigh the investment cost in the transmission system and conversion to natural gas in Tanga and Mombasa.
3.5
Least cost solution
So far natural gas has not been an option for power plant and industries in Tanga and Mombasa. Transportation of natural gas from Dar es Salaam to Mombasa will be a least cost solution when gas is the least cost fuel for the end users and when the transport of energy as gas is a least cost option compared to transportation as electricity.
3.5.1 End-user least cost solution From an end-user point of view gas has to compete with the fuels presently used by power plants and industries in the area. Calculations of the price at which electricity is generated from a specific source to break even (levelized energy costs) show that natural gas combined cycle (NGCC) is a least cost solution depending on the cost of transporting the gas from wellhead to the power plant.
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Table 1
Levelized energy costs
According to the International Energy Agency (IEA)4 there are several reasons why natural gas combined cycle (NGCC) plants are now preferred over conventional coal-fired plants: Capital costs of NGCC plants amounts to USD 600-750 pr kW whereas investment in typical coal-fired plants costs USD 1,400-2,000 per kW; NGCC plants have a relative short construction time; NGCC plants emit less than half the CO2 emissions of similar rated coal-fired plants. An important barrier to introduction of high efficiency natural gas combustion technology is that the price of natural gas per energy unit is generally higher than the price of coal per energy unit.
3.5.2 Energy transport least cost solution Natural gas from Tanzania could be transported to Tanga and Mombasa as natural gas in pipe, as Liquefied Natural Gas (LNG) by ship or transformed into electricity and transported by high voltage transmission lines. More electricity generating facilities world wide is being fuelled by natural gas. If an electricity generating facility is built far away from the location where it is
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Energy Technology Perspectives 2008, IEA 2008

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needed a new transmission line must be built in order to transmit the electricity to the location of consumption. A joint study by the Bonneville Power Administration and the North West Gas Association5 has analysed the cost efficiency of transporting energy as gas in pipes or electricity in power lines. The study concludes that natural gas pipelines are significantly less costly to build than electric wires (50-60% of the cost of electric power transmission per unit of energy delivered). Even though the annual cost to operate and maintain the electric transmission line is nearly half the cost to operate and maintain the gas pipeline, this however does not change the overall cost differences between the two options. The cost differences between a gas pipeline solution and a Compressed Natural Gas (CNG) or LNG solution is analysed in several studies concluding that for transport distances below 2,000 km the pipeline solution is economically more advantageous.6
Comparing Pipes & Wires, Bonneville Power Administration and Northwest Gas Association, 2004 6 The Growing Competition between Pipelines and LNG for Gas Markets, Houston 2000 and Comparative Economy of LNG and Pipelines in Gas Transmission, Osaka Gas Company, Japan 2004
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Market analysis
The market study in appendix A is made to determine the demand of gas in Mombasa and Tanga. The market study is based on existing information and gathered information.
4.1
Assumptions
The scope is the pipeline from Ubungo to Mombasa. It is assumed that gas will be available at Ubungo for transport to Tanga and Mombasa in 2015. It is further assumed that the gas sales price will be equivalent to the present gas sales price of (average) $3.6 /Mscf in 2009 adjusted to 2015 prices. The gas sales price at Ubungo includes the transportation tariff from Songo-Songo to Ubungo. The industrial customers in Tanga and Mombasa will convert to gas in 2015 by receiving a discount in the gas price to cover the conversion costs. The power plants will convert to gas when the existing power plant retires and a new one replaces the existing power plant and the improved efficiency is a sufficient incentive for the power sector to convert to gas. It is assumed that there will be a sufficient supply of gas to accommodate the demand from Tanga and Mombasa. As pointed out in the market study (appendix A) report there may be limitations on the reserves at Songo Songo, but it is outside the scope of this study to investigate other sources of natural gas in Tanzania. It is further assumed that processing and transportation costs from Songo Songo are reflected in the present transport tariff from Songo Songo to Ubungo. The customers in Tanga and Mombasa will keep and maintain alternative fuels storage in case of cut in the gas supply.
4.2
Demand projections
The demand projections are based on the present consumption in Mombasa and Tanga.
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Peak demand in Kenya was around 1100 MW in 2009 and is expected to grow with 10% per year until 20157. To meet projected demand new capacity of 400 MW geothermal, 475 MW of wind, 619 MW of coal, 360 MW of diesel and 60 MW of hydro will be established in Kenya up till 2015. In addition to domestic generation imports from Ethiopia is expected. So far natural gas is not included in the expansion plans. The Least Cost Power Development Plan (LCPDP) states that "Preliminary analyses predict that use of coal and natural gas would result in comparatively lower generation costs"8. The LCPDP mentions that "natural gas is likely to be imported from Tanzania which has discovered substantial deposits".9 In Tanga a major cement factory will benefit from improved energy efficiency in the increasing competition from imported cement and there are also plans of a new power plant with a total of 100MW. Due to the timing of this information the 100 MW are not included in the calculations.
Power sector The Market Study in appendix A comprises all existing power plants located in the Mombasa area as well as new power plant expected according to the Least Cost Power Development Plan for Kenya. Existing Plants. Kipevu I: Consists of 6*12.5 MW heavy fuel oil (HFO) fuelled engines started operation in 1999. Kipevu I is expected to retire in 2019 and then assumed replaced by a NGCC plant of same generating capacity with a load factor of 90% and an efficiency of 50% equivalent to a consumption of 4.136 MMscf per year based on a conversion factor of 3,497 Mscf/MWh. Kipevu II: The contract for developing the Kipevu II project was awarded to Wrtsil Development & Financial Services, Inc. (WDFS) in 1997. The Kipevu II project is owned by the special-purpose company Tsavo Power Company Limited of Kenya, and the power plant is operated by Wrtsil Operations as a contractor for Tsavo Power Company LTD. Kipevu II is a HFO fuelled power plant with a total installed electrical output of 74.5 MW and an electrical efficiency of 42.5%. Kipevu II started operation in 2001 and is expected to retire in 2021 and assumed replaced by a NGCC plant of same generating capacity with a load factor of 90% and an efficiency of 50% equivalent to a consumption of 4.080 MMscf per year based on a conversion factor of 3,497 Mscf/MWh. Kipevu GT: A gas turbine (LNG) with unit I a 30 MW turbine started operation in 1987 and was re-commissioned in 1997, and unit II a 30 MW turbine started operation in 1999. It is assumed that Kipevu GT can be converted to NG from 2015 with a load factor of 90% and an efficiency of 50% equivalent to a consumption of 3.308 MMscf per year based on a conversion factor of 3,497 Mscf/MWh.
Report of the 17th Meeting of the Energy Committee, EAC Secretariat, June 2010 Least Cost Power Development Plan, Study Period 2010-2030, Ministry of Energy, 31 March 2010, p.66 9 Ibid p. 67
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Rabai: The 90MW Rabai power plant is owned by Rabai Power Limited and consist of five 17.5 MW 18V46 Wrtsil 4-stroke medium speed diesel engines each coupled to a generator. Rabai power plant started operation late 2009 and it is assumed that it will be converted to NG from year 2015 with a load factor of 90% and an efficiency of 50% equivalent to a consumption of 4.963 MMscf per year based on a conversion factor of 3,497 Mscf/MWh.
New Plants Kipevu III: KenGen is constructing Kipevu III as a 110-120 MW using HFO; medium speed diesel engines which will initially operate on heavy fuel oil (HFO) and which will be converted to dual fuel in the future which means that there will be adequate space for future gas system. According to the technical specifications10the gas system shall be considered complete with all necessary plant, equipment, valves and pipe work to provide fuel to the engines with a load factor of 90% and an efficiency of 50% equivalent to a consumption of 6.617 MMscf per year based on a conversion factor of 3,497 Mscf/MWh. According to the Least Cost Power Development Plan for Kenya, a feasibility study undertaken for installation of coal plants in Kenya recommended 2*300 MW. It is assumed that the expected 2* 300 MW will be constructed as natural gas combined cycle in stead of coal fired generation. It is assumed that these plants will commence in 2015 and 2017 with a load factor of 90% and an efficiency of 50%. Industry Existing industries is expected to convert to natural gas assuming that the discount on the gas price will cover conversion costs and include an incentive. It is further assumed that the industries will be ready for natural gas consumption from year 2015. The industrial market is estimated in the Market Study (appendix A). The incentive for coal fired industries to convert from coal to gas will depend on the age of their equipment and the environmental requirements regarding emissions from cement factories. In Dar es Salaam the Wazo Hill cement plant is a major gas consumer with a consumption in 2009 of around 500 MMscf or 25% of total industrial consumption. The average gas price for industrial consumers for 2009 is informed to be 8.36 USD/Mscf which indicates that the relevant replacement cost of coal is higher than the fuel replacement cost of around 3 USD/Mscf.
4.2.1 Demand scenarios The financial calculations are made using 3 demand scenarios: low, medium and high. Low scenario
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KenGen Kipevu III Power Project, Volume II Technical Specifications, 18 June 2009.
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In the low scenario it is assumed that existing power plants are replaced by Natural Gas Combined Cycle (NGCC) plants when the existing plants retire. New power plants like Kipevu III and the power plants serving the Nairobi market will be established as NGCC plants. When the power plants are in operation the demand will be constant, i.e. increases in national demand for electricity will be provided by plants using other sources than natural gas. It is assumed that the industrial consumers are converting to natural gas when the gas arrives in Tanga and Mombasa by 2015 against a negotiable discount in the natural gas price compared to the price of the replaced fuel. In the low scenario there is not expected any annual increases in gas demand from industry.
Table 2 Demand in Mombasa and Tanga, low growth.
MMscf Power sector Industry Total
2015 31,430 9,817 41,248
2035 56,188 9,817 66,006
Medium scenario The medium scenario is build up as the low scenario but the demand is expected to increase with 1% per year from 2010. This increase represents an increase in the demand from the power sector and an increase in production by existing industries and connection of new customers. An annual increase of 1% is equivalent to an increase in the demand of 22% after a 20 year period because of the annual compounded growth rate.
Table 3 Demand in Mombasa and Tanga, medium (1%) growth.
2015 33,364 10,421 43,785
2035 72,778 12,716 85,494
High scenario The high scenario is build up as the low and medium scenario but the demand is expected to increase with 2% per year from 2010. This increase represents an increase in the demand from the power sector and an increase in production by existing industries and connection of new customers. An annual increase of 2% is equivalent to a 49% increase in 20 years due to the annual compounded growth rate. The high scenario assumes that further power generation capacity is established in Mombasa in accordance with the LCPDP.
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Table 4 Demand in Mombasa and Tanga, high growth (2%).
2015 35,396 11,056 46,451
2035 94,027 16,429 110,455
The demand is composed by the power sector that account for 76-85% (year 2015 and 2035) of the total demand and industrial customers that accounts for the residual; 24-15% of the total gas demand.
Figure 2
50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 -
The demand in Tanga, the 3 demand scenarios, MMscf.
Tanga Market, MMscf
Tanga, 2 % growth
Tanga, 1% growth
Tanga, low growth
The market in Mombasa has a significantly larger potential demand of gas than Tanga. The potential demand in Tanga amounts at 5-6 % of the demand in Mombasa not including the proposed new power plant of around 100 MW.
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Figure 3 The demand in Mombasa, the 3 demand scenarios, MMscf.

140,000 120,000 100,000 80,000 60,000 40,000 20,000 -
Mombasa Market, MMscf
Mombasa, 2% growth
Mombasa, 1% growth
Mombasa, low growth
The demand scenarios are summarized in the table below divided into power sector; existing consumers and future consumers, and industry; existing consumers and future consumers.
Table 5 Demand in Tanga and Mombasa, 2015-2035
Bcf Power sector Existing consumers Future consumers Industry Existing consumers Future consumers Total
Low 1,085 285 801 206 206 1,291
Medium (1%) High (2%) 1,283 339 944 242 242 1,525 1,519 404 1,115 285 285 1,805
The table below illustrates the split in the demand between Tanga and Mombasa in the period 2015-2035 for the three (3) scenarios. The Market in Tanga account for less than 10% of the total demand from Tanga and Mombasa. The market in Tanga is in this analysis only represented by the cement factory.
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Table 6 Demand split between Tanga and Mombasa 2015-2035.
Bcf Tanga 77
Low
Medium (1%) High (2%) 90 1,435 1,525 106 1,699 1,805
Mombasa 1,215 Total 1,291
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Pipeline routing options
The pipeline routing options (survey report) in appendix B is made to analyse various options for the routing see the map in section 1 Executive summary. The pipeline routing options is based on map and road surveys in Tanzania and in Kenya.
5.1
Objective
The primary objective is to locate different routes and evaluate on their suitability based on right of way, geotechnical issues and general construction constraints.
5.2
Proposed Routes
The routes from Dar es Salaam to Mombasa have been verified by a road survey in car. The following rotes have been selected to be relevant as possible routes. Reference is made to Appendix B for further explanation. Route T1 follows the existing tarmac road from Dar es Salaam to Tanga and from Tanga to Lunga Lunga at the Kenyan border it follows the gravel road which is right now under construction to be tarmaced. The total length of route T1 is 385 km. The geotechnical conditions are fine for a buried pipeline. The main crossings are Ruvu, Wami and Pangani rivers. Route T2 follows the coastal road from Dar es Salaam to Tanga, which is today a gravel road. There is a feasibility study for upgrading the road to tarmac. From Tanga route T2 follows the same route as for route T1 to Lunga Lunga at the Kenyan border. The total length of route T2 is 298 km. The geotechnical conditions are fine for a buried pipeline with the exception that for a length of around 80 km at Saadani area the pipeline must be secured for buoyancy. Route T2 needs to cross the same rivers as Route T1, but the rivers are wider and heavier at the coast, therefore the crossings are more difficult (and costly) for Route T2 than for Route T1. Especially crossing of Pangani river is a challenge. Route K1 (from Lunga Lunga to Mombasa) follows the existing tarmac road A14 Lunga Lunga-Mombasa road, up to a place near Ngomeni. It takes a right turn to follow a power line way leave up to Mazeras. It continues to Vipingo where by most parts it follows the power line way leave. The total length of route K1 is 144 km. The geotechnical conditions are fine for a buried pipeline. Route K2 follows a gravel road (C106 Lunga Lunga-Kinango-Mazeras) up to Kinango. The pipe then passes through shrubs before connecting route no K1.
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The total length of route K2 is 124 km. The geotechnical conditions are fine for a buried pipeline. Route OS1 is the offshore route which has only been studied on maps. The total length of Route OS1 is 360 km. The offshore solution still needs to pass the congested areas of Dar es Salaam, Tanga and Mombasa and as it is not more than 10% shorter than the onshore routes. Therefore Route OS1 should only be chosen if the onshore routes have high costs on Right of Way or river crossings. Maintenance of route OS1 can be very costly in case of any damages during operation as well as during construction. Route T3 is the railway route which has only been studied on maps. The total length of route T3 is 430 km. The railway solution is very dependable on utilizing the rail track for transport of construction materials. The solution therefore depends more or less on whether the normal rail traffic can be put on hold during the construction period of 6-12 months. In Tanzania there are two (2) main alternative routes. One along the Chalinze road (T1) and one along the coastal road (T2). Further to this an option where the route is following the existing rail road is described (T3). In Kenya there are also two (2) main alternative routes. One along the tourist and industrial area along the coast (K1) and one along the hilly, less populated, inland road (K2). In addition to these five (5) onshore routes an offshore route is described (OS1). At the survey the vegetation and soil conditions were noted and all possible obstacles were observed. Especially rivers were noted and possible crossings of these were considered. After the survey the proposed routes have been marked on maps, where also the main findings are marked. These maps/drawings and photos can be seen in Appendix B. All 5 onshore routes have been found suitable for a buried pipeline, and the offshore route is considered suitable for an offshore gravity or dredged pipeline. The routes are shown at the overview map, in section 1 Executive summary.
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Conceptual design and cost estimates
Five different pipeline routes have been proposed in this report and estimated costs have been summarized. 1. Route no. 1 (Local market option in Tanzania and Kenya, T1+K1); This route is going along the main road which makes it more accessible, and there would be a possibility of providing gas for Arusha/Moshi and Morogoro in the future. In Kenya the route follows the coast and will serve hotels along the south beaches and any industries that may come up along the coast. 2. Route no. 2 (Local market option Tanzania and least cost option Kenya, T1+K2); This route is going along the main road which makes it more accessible, and there would be a possibility of providing gas for Arusha/Moshi and Morogoro in the future. In Kenya the route avoids the high populated coastal area. 3. Route no. 3 (Least cost option Tanzania and local market option Kenya, T2+K1); Basically, this route is going along the coast up to Tanga which makes it shorter in comparison with the first routes. However, there are two (2 ) wide rivers in between which adds the time and cost of construction. In Kenya the route follows the coast and will serve hotels along the south beaches and any industries that may come up along the coast. 4. Route no. 4 (Least cost option in Tanzania and Kenya, T2+K2); Basically, this route is going along the coast up to Tanga which makes it shorter in comparison with the first routes. However, there are two (2) wide rivers in between which adds the time and cost of construction. In Kenya the route avoids the high populated coastal area. Route no. 5 (Offshore); this is an offshore route from Dar es Salaam to Mombasa with a small branch to Tanga.
6.1
Assumptions
The route T3 (Railway) has been excluded for further investigation due to the fact that it is not possible to occupy the railway during the whole construction period, and the fact that access roads for maintenance are not available, and are to be constructed.
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The overall time schedule has been based on the following assumptions: The owner will be assisted by his consultant to prepare basic design for the gas pipeline. In this phase a more accurate alignment of the preffered route is outlined, class locations are further detailed and crossings are also to be further detailed. All to make a better basis for contractors to bid and prepare detailed design. The duration is estimated to around 1 year in total. The tendering for pipeline construction contract will be based on basic design. The contractor will purchase all materials and construct and commission the pipeline. It is anticipated to have a gap after submitting of this feasibility study to establish the financing of the project. This allows for signing of consultancy agreements for the basic design of the pipeline in 2012. The capacity for the pipeline construction contractor should match approx. 800 m per day including crossings.
6.2
Conceptual Design Basis
Based on demand for gas the pipeline has been estimated to be a 24" line all the way from Ubungo in Dar es Salaam to Vipingo in Mombasa. The pipeline is coated and buried at 1 meter and is designed for a pressure of 100 bar. The web thickness of the pipeline varies from 10 mm to 14.3mm depending on the class location, which is decided based on the GPTC Guide. The design has been chosen to suite a situation where the proposed production of electricity for Nairobi is not changed to be produced on gas. However if the decision is made to have the Nairobi electricity to be produced on gas, the pipeline can still be used, but a compressor station needs to be constructed at Dar es Salaam. T-sections are introduced to suite possible local markets (Morogoro, Arusha, Zanzibar and Kenya Coast). The pipeline sizing has been performed in accordance with API RP 14E "Offshore Production Platform Pipng Systems", Panhandle Equation. As it is shown in the figure below a 24" pipeline is capable to cover the normal consumption and minimum delivery pressure of 35 bar from 2015 until 2035. As the 600MW power plant comes to plan the pipeline will still be able to fulfil the high scenario usage by adding a compressor station at Dar es Salaam and increase the inlet up to 94 bar. A proposed construction program for Route no. 1 has been made, refer Appendix C. For further details on the design parameters please also refer to Appendix C.
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Figure 4 Pipeline design.
Total cost estimates for 5 different route-alternatives and the compressor station have been summarized in below table:
Table 7 Specifications of the routing options.
Route
Length Major Rail Major Estimated Price (km) road crossing river (Million USD) crossing crossing [incl. Design, procurement, supervision and compensation] 558 538 463 443 360 9 8 9 8 4 4 3 3 17 15 15 13 550 526 460 435 558 80
Route no. 1 (T1 & K1) Route no. 2 (T1 & K2) Route no. 3 (T2 & K1) Route no. 4 (T2 & K2) Route no. 5 (OS1) Compressor Station
For more detailed cost estimates please refer to Appendix C.
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Environmental and social impact assessment
The purpose of the ESIA is to provide evidence for the Feasibility Study on environmental and social impacts and opportunities of the routes included in the study. Further, the ESIA will allow the environmental authorities to make their decision on the scope and content of the full ESIA for the detailed design stage, once a specific gas pipeline solution has been identified and agreed upon in the EAC. The below information is based on the report Outline of Environmental and Social Impact Assessment, Appendix D.
7.1
Assumptions
The following assumptions have been made as a basis for the ESIA study in the Feasibility Study: A full ESIA will be required when the project enters the detailed design stage and will be registered with the environmental authorities in Kenya (NEMA) and Tanzania (NEMC); The full ESIA will include public consultations and consultations with key stakeholders along the selected alignment; Sacred forest plots (kayas) in Kenya can be avoided by the actual alignment; Ecologically sensitive coastal forests along the coastal route in Kenya can be avoided by the actual alignment.
7.2
Environmental impacts
The main environmental impacts of this project are expected to include the following: 1. Vegetation clearance within in the construction belt along the gas pipeline. The construction belt has a proposed width of 22 m. After construction no restrictions will be limited and minor plantation is allowed on top of the pipeline; 2. Disturbance (temporary) of fauna and livestock in and around the construction belt, particularly in the immediate vicinity of the construction works;
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3. The coastal route alternative goes through a national park (Saadani National Park). As other infrastructure like roads which have higher impacts than a buried pipeline currently cross national parks, the construction of the gas pipeline is assessed as being insignificant in terms of environmental impacts. A refusal of permission from TANAPA is therfore not foreseen; 4. Disturbance of littoral and benthic communities near or in rivers where the pipeline will cross; 5. Air pollution from dust particles raised from construction activities; 6. Noise and vibrations as a result of construction activities; 7. Potential disturbance of other infrastructure that may be present in the identified areas. However, it is not anticipated that there will be significant disruption; 8. Pollution of the surrounding areas in the case of a leak, fire or explosion of the pipe. This risk is considered to be extremely low; 9. Soil erosion risks in dry areas with loose soil (though can be mitigated during construction).
7.3
Socio-economic impacts
The main potential socio-economic impacts (positive and negative) of this project are expected to include the following: Disturbance of current land use and agricultural activities during the construction of the pipe; Employment opportunities during construction as well as operation phase of the project. In the long run during operations phase those who have technical skills will benefit as well; The project will supply alternative fuel source to industries and economic centres in the EAC; Resettlement activities may be necessary but this will depend on the final design of the project. Resettlement can potentially be an issue along urban sections of the alignment, where the pipeline can not be located off plots with houses etc. However, if resettlement would be necessary all procedures for compensation will be applied accordingly; The influx of people from other parts of the country and from outside Tanzania who come for employment could potentially change the social dynamics of the area. This may increase the risk of people being exposed to STD as well as HIV/AIDS. Overall the project will widen and deepen the economic, social and cultural integration in the EAC and will improve the quality life of citizens in the EAC. Specifically during operation of the gas pipeline impacts may include the following positive impacts:
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1. The project will contribute to the Clean Development Mechanism as defined in the Kyoto protocol11 2. Employment generation (formal and informal); 3. Increase revenue (trade and manufacturing); 4. Investment opportunities (trade and manufacturing); 5. Increase in land values.
Negative impacts include the following: 1. Permanent loss of (few) land plots and houses, when passing through urban and semi-urban areas as a consequence of the suggested safety zone of 50 m to each side of the gas pipeline; 2. Increased air pollution and green house gases and negative impacts on climate change due to incremental increase of energy consumption; 3. Public health from work operations - occupational health and safety (though expected to be insignificant); 4. Risk of accidents during operation (though considered extremely low).
Natural gas emits less carbon oxides, nitrogen oxides and particulates than coal when combusted.
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Financial analysis
The objective of the financial analysis is to see whether the project is feasible or not. The financial analysis is based on the Market Study in appendix A, the Survey report in appendix B, the Conceptual Design Report in appendix C and the Outline of Environmental and Social Impact Assessment in appendix D.
8.1
Assumptions
It will be possible to find investors and debt financing to the project. All values are in USD in real values (excluding inflation). The discount factor is equivalent to the weighted average cost of capital (WACC). The market demand is calculated with 3 different growth scenarios: low, medium and high as described in section 4.2.1
8.2
Methodology
The methodology used is the discounted cash flow approach where only cash inflows and outflows are considered (depreciation, reserves and other accounting items are disregarded). The analysis is made in constant 2010 prices in USD. The transmission project is a feasible project when the netback value of gas at the feed-in point in Ubungo exceeds the cost of gas at this feed-in point. The netback value is the levelized price of competing fuels at the markets in Tanga and Mombasa minus the transport tariff. The levelized transport tariff is calculated as the NPV (transport costs) divided by NPV (transported volumes). The levelized price of competing fuels is calculated as the NPV (sales revenue) divided by NPV (demand). According the Annual Report 2009 from Orca Exploration Group Inc. (field operator), the weighted average price for gas at Dar es Salaam in 2009 was 3.60 USD/Mscf. This price is calculated as a replacement cost in Dar es Salaam depending on the oil prices.
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The industrial market in Tanga counts for less than 10% of the total market in Tanga and Mombasa and therefore the pipeline solution is only relevant for Tanga if the pipeline to Mombasa is feasible. The transport tariff from Ubungo to Mombasa will therefore be a regular tariff independent on the distance between feed-in and take-out. After having analysed the feasibility of the pipeline extension, the sources of financing is discussed and the sources of financing are included in the analysis.
8.3
Revenue
The revenue for the calculation of financial return is a product of the amount sold in Tanga and Mombasa and the selling price of gas in Tanga and Mombasa.
8.3.1 Potential market The demand projections are based on the present consumption in Mombasa and Tanga. Described in section 4.2 above.
8.3.2 Selling price of gas Natural gas will be sold at a price that is competitive, i.e. the price per useful energy unit shall be below the similar price for the fuel presently used. This means that the price will depend on the energy content per unit of the present fuel and efficiency of conversion technology. The LCPDP study operates with a reference forecast with an average crude oil price of USD 70/bbl in 2009. Low and high forecast scenarios for the least cost plan were done with crude oil prices of USD 63/bbl and USD 100/bbl respectively. After a period from 2003 to 2008 with rapidly increasing oil prices and a major decrease in 2008, crude oil prices seem to have stabilised on a level between USD 70/bbl and USD 80/bbl12. The Heavy Fuel Oil (HFO) and diesel prices are linked to the crude oil price as 70% and 125% of the crude oil price respectively. The LCPDP operates with CIF price for coal in the reference case of USD 90/t in 2010. However, contact with some of the potential industrial consumers in Mombasa report prices of USD 110/t. Traditionally natural gas prices have been linked to oil prices. The International Energy Agency reports in their 2010 World Energy Outlook that world crude oil price has been 50-60% above the wellhead price of natural gas per energy unit over the last 15 years which means that long term gas contracts with the gas price linked to the oil price have been very profitable for suppliers of gas. The energy content (calorific value) of coal is 25 GJ/t and the energy content in Heavy Fuel Oil (HFO) is 40.7 GJ/t, 42.7 GJ/t in diesel and 39.9 GJ/m3 for natural gas.
12
IEA Oil Market Report, Average cif cost of imported crude oil, November 2010
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It is assumed that crude oil prices will increase over time due to limited reserves and increasing demand from the transport sector. Coal prices are assumed to be constant in fixed prices due to the larger reserves. Fuel prices in Mombasa The February 2010 Mombasa prices are informed by KENGEN and Athi River Mining Ltd.
Table 8 Fuel prices in Mombasa 2010 and February 2011.
HFO Diesel Coal LPG
Assumption 2010 USD/t 410 733 110 733
February 2011 Mombasa USD/t 495 125 -
We have assumed an increase in oil prices of around 20% from 2010 to 2011 which corresponds with the actual prices above.
8.3.3 Discount for conversion and back up A high utilisation of the pipeline capacity ensures a good economy and therefore incentives can be used to attract customers. In this financial analysis it is assumed that existing power plants are replaced by NGCC when they retire. The increased efficiency of NGCC plants is assumed to be sufficient incentives for the power sector to chose this technology and connect to the pipeline. Industries will need an incentive to connect. It has been informed that the discount in Dar es Salaam is around 30% of the price of the fuel that is being replaced13. In the calculation of revenues from gas sales to industries in Tanga and Mombasa the same discount is used. However, the size of the discount is negotiable between the relevant partners.
8.4
Costs
8.4.1 Pipeline costs There are various routing options. The local market option (T1+K1) is a routing along the main road from Dar to Tanga and along the cost from Tanga to Mombasa. The strength of this solution is opportunity of making future low cost branches to Morogoro and Arusha and Moshi on the Tanzanian side and along the coastal area on the Kenyan side. The weakness is the higher investment costs. This option will cost 550 million USD in investment. There might be a need for compressors stations at a cost of around USD 80 million depending on the demand.
13
Meeting with TPDC

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The least cost option (T2+K2) is the routing along the coast line from Dar to Tanga and from Tanga directly to Mombasa. The feasibility of this pipe routing is determined by the market in Tanga and Mombasa. The strength of this solution is the low cost while the weakness is the limited market that can be reached from Dar to Tanga and from Tanga to Mombasa. In addition there is a risk that this pipeline will be interrupted during floods. This option will cost 435 million USD. There might be a need for compressors stations at a cost of around USD 80 million depending on the demand. There is an option of establishing an offshore connection between Dar, Tanga and Mombasa. However, this is a very expensive solution with no potential for connecting local markets in the coastal area.
Table 9
Cost estimate in million USD
No
Million USD Local market option in Tanzania and Kenya (T1+K1) Local market option Tanzania and least cost option Kenya (T1+K2) Least cost option Tanzania and local market option Kenya (T2+K1) Least cost option in Tanzania and Kenya (T2+K2) Compressor for all options 550 526
1 2
460
435 80
While the difference between the local option and least cost option is 90 million USD in Tanzania the difference in Kenya is 24 million USD. The local market option results in a cost increase of around 25% compared to the least cost option. Choosing the local option in Kenya will result in an increase of around 5% while the local option in Tanzania will result in an increase of around 20% compared to the least cost option. These cost increases should reflect additional revenues from the local markets to make them attractive. The cost estimates for all 4 routing options includes compensation costs to land owners.
8.4.2 Gas price The feed-in point for gas will be Ubungo and it is assumes that gas is delivered from Songo Songo at conditions similar to the purchase agreements for Addi-
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tional Gas from Songo Songo. According to the Annual Report 200914 from the field operator, the weighted average price for gas at Dar es Salaam in 2009 was 3.60 USD/Mscf. This price is a weighted average of a gas price for industry of 8.36 USD/Mscf and a power gas price of 2.40 USD/Mscf. The gas prices are replacement costs in Dar es Salaam and depending on the oil price development.
8.5
Financial calculations
The financial calculations use the discounted cash flow approach and are based on assumptions regarding the discount rate, the market demand and the routing of the pipeline. The results of the calculations are presented as a comparison of netback value at Ubungo and cost of gas at Ubungo, with the netback value calculated as the levelized price of competing fuels at the market in Tanga and Mombasa minus the transport tariff. The levelized price of competing fuels is calculated as the NPV (sales revenue) divided by NPV (demand). The levelized transport tariff is calculated as the NPV (transport costs) divided by NPV (transported volumes)15.
8.5.1 Discount factors The calculations have been made with 4 different discount factors that are based on weighted average cost of capital (WACC) calculations. WACC = E/V * Re + D/V * Rd Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V=E+D E/V = percentage of financing that is equity D/V = percentage of financing that is debt The WACC calculations are based on 2 different capital structures of the pipeline company. WACC 1 and WACC 2 are 100% debt financed with different interest rates.
14 15
Annual Report 2009, Orca Exploration group Inc. Strategic Growth. It is assumed that NPV(demand) = NPV(transported volumes).
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Table 10 WACC calculations for 100% debt financed structure.
Loan A Interest rate A (LIBOR + bank margin) Loan B Interest rate B (LIBOR + bank margin) WACC
WACC 1 WACC 2 33% 33% 2.45% 4.45% 66% 66% 5.45% 10.45% 4.41% 8.38%
WACC 1 consists of 33% of one loan (A) with an interest rate of 2.45% (0.45% LIBOR16 + 2% bank margin) and 66% of another loan (B) with an interest rate of 5.45% (0.45% LIBOR + 5% bank margin).17 The structure of WACC 2 is similar to WACC 1 only with higher bank margins of 4% and 10% (the LIBOR is unchanged). WACC 3 and WACC 4 consist of 33% equity financing and 66% debt financing with different interest rates.
Table 11 WACC calculation with a 33% equity and 66% debt financing structure.
Equity Return on equity (ROE) Loan Interest rate (LIBOR + bank margin) WACC
WACC 3 WACC 4 33% 33% 20% 20% 66% 66% 5.45% 10.45% 10.26% 13.56%
WACC 3 consists of 33% of equity with a required return on equity (ROE) of 20% and 66% of a loan with an interest rate of 5.45% (0.45% LIBOR + 5% bank margin). WACC 4 has a similar structure as WACC 3 only with a higher bank margin of 10% (the LIBOR is unchanged). With these assumptions the highest WACC calculates at 13.56%. It is further assumed that there is no tax-shield which can be applied on the interest rate payments. The calculated WACC is used as the discount rate in the financial analysis. It is assumed that the WACC is used even if the capital structure is financed by 100% equity as it should be possible to obtain loan (66%) in the market at an interest rate of 10.45% and thereby reducing the WACC. This WACC is similar to the WACC approved by EWURA in relation to the expansion project18
16 17
London Inter Bank Offered Rate African Development Bank and Tanzanian Ministry of Energy and Minerals 18 This is consistent with EWURA, Order no 09-004
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If the governments of the EAC member countries will finance the project with 100% equity from the state budgets then it is definitely an opportunity. The WACC for this option will be the ROE for alternative investments the governments could have invested in instead. It is therefore fair to use a lower discount factor, such as WACC 1 or WACC 2 calculated above.
8.5.2 Routing options The Conceptual Design Report presents various routing options see overview map in section 1 (Executive Summary: Local market option in Tanzania (T1) and Kenya (K1). The potential demand in the local markets is not known and will have to be assessed in detail before any decision is taken on this option. This analysis will shows how large a local HFO fuelled market will be required to justify an increase in investment of around 25% compared to the least cost option. It is important to highlight that this is a particular sensitivity analysis to have an indication if this option is feasible. Local market option in Tanzania (T1) and least cost option in Kenya (K2). This option represents a lower cost compared to the local market option by choosing a shorter route in Kenya and keeping the opportunity for connecting local market in Tanzania. This option represents an increase in investment of around 20% compared to the least cost option. Least cost option in Tanzania (T2) and local market option in Kenya (K1). This is a similar option reaching the local markets in Kenya but choosing a shorter route in Tanzania. This option represents a 5% increase of investment compared to the least cost option. Least cost option (T2 + K2). The major issue in the analysis of the least cost option is the potential industrial market based on replacement of coal. If coal replacement for industries is not an option the demand for gas is reduced by around 10%.
8.5.3 Results The results of the financial calculations are presented as a netback calculation. The netback values are calculated for the medium demand scenario (1% annual growth) with the four (4) routing options and the four (4) discount factors. The transport tariff is calculated as transport cost per transported unit of gas, i.e. levelized cost of constructing and operating the pipeline and profit to the pipeline owner/operator in relation to levelized volumes transported over the lifetime of the project. The transmission project is a feasible project when the netback value of gas at the feed-in point in Ubungo exceeds the cost of gas at this feed-in point. The netback value is the levelized price of competing fuels at the markets in Tanga and Mombasa minus the transport tariff.
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Table 12 Levelized netback value USD/Mscf, medium demand scenario (1% per annum).
Market demand - medium growth Discount factor (4.4%) Replacement cost Transport Tariff Netback Ubungo Discount factor (8.4%) Replacement cost Transport Tariff Netback Ubungo Discount factor (10.3%) Replacement cost Transport Tariff Netback Ubungo Discount factor (13.6%) Replacement cost Transport Tariff Netback Ubungo
Route 4 (T2 & K2) 10.27 1.09 9.18 10.06 1.39 8.67 9.97 1.56 8.42 9.83 1.89 7.94
Route 3 (T2 & K1) 10.27 1.12 9.15 10.06 1.43 8.63 9.97 1.61 8.37 9.83 1.96 7.87
Route 2 Route 1 (T1 & K2) (T1 & K1) 10.27 10.27 1.19 1.22 9.08 9.05 10.06 10.06 1.55 1.59 8.52 8.47 9.97 9.97 1.74 1.79 8.23 8.19 9.83 9.83 2.13 2.20 7.70 7.64
The calculated netback values shall exceed the weighted average price for gas at Ubungo of 3.6 USD/Mscf for the project to be feasible. The least favourable case with the highest investment cost (Route 1) and the discount factor (13.6%) results in a netback value of 7.64 USD/Mscf which is above the average price of 3.6 USD/Mscf.
Table 13 FIRR, medium demand scenario.
1% growth 4.4% 8.4% 10.3% 13.6%
Route 4 Route 3 (T2 & K2) (T2 & K1) 4.2% 4.5% 7.3% 7.7% 8.7% 9.1% 11.3% 11.8%
Route 2 Route 1 (T1 & K2) (T1 & K1) 5.3% 5.6% 8.6% 9.0% 10.2% 10.6% 13.0% 13.4%
The above table illustrates the financial internal rate of returns (FIRR) for the four (4) routes and the four (4) discount factors (WACCs). The FIRRs for the medium demand scenario (1% annual growth rate) are in the range of 4.2%13.4% depending on the route and the WACC. These FIRRs are preliminary as the exact cash flow of the pipeline company is unknown.
8.6
Financing plan
8.6.1 Access to capital and funding costs A key issue is whether the project should primarily seek funding on the local capital markets or on the international capital markets.
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The key parameters that will have to be taken into account in this are: The currency in which the project revenues will be available to the pipeline company (USD or local currency (LCU)). The local capital market ability provides suitable long term loan products in LCU. The pipeline company's ability to access long term loans in USD on the international capital markets.
The local capital market
A significant number of international and local banks are present in Kenya and Tanzania. However, bank lending continues to be conservative and not very sophisticated. This is likely to limit the ability to secure non-recourse or limited recourse project financing in LCU. Interest rates and foreign exchange are liberalized, but there continues to be restrictions on repatriation of capital although profits and dividends are fully remittable.
The International Capital Market
It is assumed that the pipeline company will have access to long term loans in USD on the international capital markets and obtainable loan terms (maturity, grace period and interest spread).
Project funding costs
Assuming that the project revenue will be available to the pipeline company in USD and that the pipeline company will be able to access long term loans in USD on the international capital markets, an assessment of the Weighted Average Cost of Capital (WACC) for the project is provided in section 8.5.1.
8.6.2 Ownership The ownership of the gas pipeline infrastructure from Dar es Salaam to Mombasa can be organised in several ways. There are several ways of structuring the pipeline company. This feasibility study will assess the following two options: Special Purpose Vehicle (SPV) with state guaranteed loans A Special Purpose Vechicle for the purpose created governments owned company (the SPV) would implement the project and based on the state guarantee be able to access funds on the capital market at terms similar to the governments. Public Private Partnership (PPP) A PPP is a long term contract based cooperation where the public sector transfers the general responsibility for the delivery of a public service to a private company but still keeps the political responsibility. The private company would
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be responsible for implementing the project under a concession agreement and would directly access the domestic and international capital markets.
Special Purpose Vehicle (SPV) with state guaranteed loans
The equity of the SPV could be owned by the Government of Tanzania, the Government of Kenya, the Government of Uganda, the Government of Rwanda and the Government of Burundi and the SPV could obtain a loan with a state guarantee (e.g. based on bonds). The degree of equity required from the owners (Governments of the EAC countries) would have to be assessed in the onward work but the international experience indicates that a state that guarantees the debt component enables a relatively high degree of debt financing thereby reducing the combined cost of financing (WACC). The loan guaranteed however commits the owners (the governments of the EAC countries) to service the debt obligations in case the company is not able to do so. The SPV will be responsible for designing, building, financing and operating the gas pipeline. The revenue of the SPV will come from the transportation tariffs and will initially be allocated to operational costs and to service the debt obligations of the SPV. Any profit accrued at the termination of the SPV will be allocated to the owners (the Governments of the EAC countries).
Figure 5 The structure of the setup around a SPV.
The Governments of the EAC countries

Shareholders agreement Construction contract
State guarantee
Bank
Loan Security
Special Purpose Vehicle
Service contract
Contractors
Service Providers
Pros and cons of the SPV Lower risk of cost overruns
International studies show that large government sponsored infrastructure projects often have cost overruns. The SPV has an incentive to assess more risks from the beginning and reflect risks associated with the project as the SPV is commercially run and has debt obligations to service.
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Efficiency in the construction period
The SPV has an incentive to be efficient in the construction period as the SPV will not start to generate any revenue until the construction is finished and the infrastructure is ready for operation.
Innovative solutions
The SPV has an incentive to optimise the economy of the project and be innovative to reduce operating and maintenance costs during the contract period.
Loss of flexibility
There is a higher flexibility in the SPV project compared to the PPP after the project has started as it is easier for the customer (the EAC member countries) to make changes in the project scope, content and framework conditions, as the owners of the SPV are the EAC member countries.
Cost of financing
A SPV is most likely to have lower higher cost of financing compared to the PPP as the SPV has a state guarantee. This depends on the credit rating of the countries owning the SPV.
Higher transaction costs
A SPV contract and tender process is not very complex and it will therefore often not result in costly transaction advice as the PPP model.
Public Private Partnership
The equity of the PPP Company will typically be owned by an investor group representing the main contractors and service providers for the project as well as financial investors (e.g. pension funds). In this context it should be considered whether the key users of the transportation service, TPDC and Songas in Tanzania and KPC in Kenya, could be one of the equity holders. It also needs to be considered whether this will jeopardize the independency and make possible later third party access difficult. A PPP Company is typically financed by 60-90% loan and 10-40% equity from private investors. i.e. a debt component of 60-90%. This setup normally increases the cost of financing compared to the SPV model as it is not possible to obtain a loan with a similar low interest rate as the state guaranteed loan. Further the expected return on equity is also higher which increases the weighted average cost of capital (WACC) further. This conclusion may however be different if the PPP Company is better able to access funds on the international capital markets. In the PPP model the Governments of Tanzania and Kenya enters a Concession agreement or a DBFO agreement with the PPP Company under which the PPP Company will design, build, finance and operate the infrastructure over a period of e.g. 30 years. The PPP Company will own the infrastructure in the contract period after which the asset will be handed over to the state. The PPP Company has a strong incentive to optimise the economy of the project in the contract period as the PPP Company is not only responsible for designing and building the infrastructure but also operating it during the contract period.
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Under a Concession agreement the PPP Company will receive the revenue from the transportation tariffs in the operating period. Under a DBFO agreement the PPP Company will receive periodical payments (annual, semi annual or monthly) in the operating period. Both models create an incentive for PPP Company to finish the construction within (or before) the agreed construction period so the operation can begin and the PPP Company can start generating a revenue. A typical PPP structure is shown in the chart below.
Figure 6 The structure of setup around a PPP.
Investors
Loan Shareholders agreement
Bank
Security
Public-Private Partnership
Construction contract Service contract
Contractors
Service Providers
Pros and cons of PPPs Lower risk of cost overruns
International studies show that large government sponsored infrastructure projects often have cost overruns. The studies also show that when implemented as PPPs the projects more often stays within the budget as the PPP companies have an incentive to assess all risks from the beginning and reflect all risks associated with the project in the tender price.
Efficiency in the construction period
PPPs has a great incentive to be efficient in the construction period as the PPP will not start to generate any revenue until the construction is finished and the infrastructure is ready for operation.
Innovative solutions
The PPP Company has an incentive to optimise the economy of the project and be innovative to reduce operating and maintenance costs during the contract period.
Loss of flexibility
There is less flexibility in the PPP project compared to the SPV after project has started as the nature of the PPP contract significantly limits the ability of
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the government to make changes in the project scope, content and framework conditions after contract signature.
Cost of financing
A PPP may have higher cost of financing compared to the SPV as the PPP does not have a state guarantee. At the same time, the PPP may however also have better accesses to international funding than the sponsoring government(s) depending on the credit rating of the country.
Higher transaction costs
A PPP contract and tender process is very complex and it will therefore often require more costly transaction advice than a SPV model.
Table 14 Pros and cons of the different ways of structuring the organisation.
Pros and cons Low risk of cost overruns Incentive for efficiency in the construction period Innovative solution Flexibility Low cost of financing Low transaction costs
Government financed (Public) + + +
Private financed + + + -
SPV PPP o o o /+ o /+ + o + + -
The table above summarizes the pros and cons of the different ways of structuring the organisation of the pipeline company.
Taxation
The tax calculations have been excluded from this analysis as the high uncertainties in relation to how the pipeline company will be structured, in which country will the pipeline company be registred, will there be any tax exemption and for how long. Until the final route, the capital structure of the pipeline company, the country where the pipeline company will be registered as a legal entity is known there are too many ubncertainties and there will have to be made too many assumptions in order to be able to calculate the tax payments for the pipeline company.
Depreciation
The depreciation is only interesting when the tax is analysed as the depreciation is tax deductable. The depreciation has been excluded hence the exclusion of the tax calculations.
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Economic analysis
The objective of the economic analysis is to identify the direct benefits of the project. The economic analysis is based on the financial analysis.
9.1
Assumptions
Social discount rate: 5.5%19 and 10%20 as described in the Methodology Report. Market: low, medium and high as described in section 4.2 The gas hubs around the world are efficient i.e. the gas prices reflect the demand and supply and are not tied up to the oil price.
9.2
Methodology
The economic analysis is undertaken from the point of view of society. The economic analysis uses the incremental method, i.e. the project is evaluated on the basis of the difference in costs and benefits between the scenario with the project and an alternative scenario without the project. The economic analysis starts from the financial cash flow and adjusts financial costs and revenues into economic costs and benefits. The adjustments to market prices will be fiscal correction, i.e. corrections for subsidies whenever the scenario without the project operates with subsidies to reduce fuel prices. There will also be corrections for externalities, i.e. reduced emissions for combustion of coal and oil. Finally indirect economic benefits and impacts will be discussed.
9.3
Costs
The economic costs are: Investment and maintenance costs of the pipeline; Incremental costs of replacing retired HFO fired plants with combined cycle power plant as well as end-user conversion of industries;
19 20
EU standard: 5.5%. WB standard: 10%.

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Gas cost at the feed-in point in Ubungo.
9.3.1 Investment costs Estimates of the pipeline costs are presented in section 8.4.1.
9.3.2 Conversion costs Estimates of conversion costs for power plants is a rather comprehensive exercise requiring individual assessment for each power plant. Existing power plants are assumed to be in operation with present fuel until retirement and then replaced by NGCC fired plants. According to table 1 in section 3.5.1 there is a clear indication that investment costs for combined cycle plants will not exceed the investment cost for comparable coal and diesel fired plants because of environmental requirements. Therefore no incremental costs are included for gas fired plants compared to new coal and diesel power plants The costs of converting industries are included in the discount on the gas price for these customers and not included in the economic calculation.
9.3.3 Gas costs at Ubungo The wellhead production costs are not known. During the last decades with emerging gas markets in USA and Europe, regional gas markets have established referred to as gas hubs. Assuming these hubs are efficient a hub generates a reference price that is believed to reflect the real market prices and is not, like long-term contracts, bound to the oil price development. There is not a hub in East Africa which means that the prices available from the operator of the Songo Songo gas field is an operating netback price based on sales prices of oil in Dar es Salaam and thus linked to the world market oil prices. The operating netback price was 2.21 USD/Mscf in 2009 which was a decrease from 2.6 USD/Mscf in 2008 due to the decrease in world market oil prices in that period. In the calculation of the economic cost of gas delivered in Ubungo it is assumed that the netback price in 2009 is following the estimate for crude oil price development. The weighted average unit cost at Ubungo is informed by Songas to be 3.60 USD/Mscf for 2009 which is a reduction from 4.01 USD/ Mscf for 2008.
9.4
Benefits
The economic benefits from establishing a gas pipeline will be: Revenue from sales of gas in Tanga and Mombasa. Reduced primary energy consumption by end-users due to higher efficiencies in gas fuelled technologies compared to coal and oil fuelled technologies; Reduced emissions; Security of supply;
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Indirect economic effects and impact on employment and economic growth as a result of the investment and access to a reliable and price stable fuel. Some of these benefits can be quantified and monetised while other benefits will be qualitative and long term impacts. The below table illustrates how the different economic benefits contribute to the total economic benefit.
Table 15 Monetised economic benefit by category.
Category (Million USD) ENPV(Sales revenue) ENPV(Energy efficiency) ENPV(CO2 reductions)21 Total
Social Discount Social Discount Factor Factor 5,5% 10% 5,027 8,752 848 486 314 185 9,914 5,699
The major component of the economic benefits is the sales revenue accounting for around 90% of the total economic benefits.
9.4.1 Sales revenue Sales revenue will be taken directly from the financial analysis assuming that there are neither taxes nor subsidies related to cost of fuels being replaced by gas.
9.4.2 Improved energy efficiency The volumes in energy units will be reduced compared to the present consumption of oil and coal as a result of the higher efficiency in the gas fired power plants compared to conventional oil and coal fired plants. Most combined cycle units, especially the larger units, have peak, steady state efficiencies of at least 50% compared to around 40% for Kipevu II. It is assumed that efficiency increases with 10% point when using gas fired combined cycle compared to HFO generation. The efficiency improvement means a reduction of primary energy consumption. Combined with the increase in load factor from 80% to 90% the total reduction of primary energy per power plant is 10%. The improved energy efficiency could result in reduced electricity prices or expansion of the national grid and improved competitiveness for industries in the target areas.
9.4.3 Environmental benefits The environmental benefits are caused by the low carbon content of natural gas per unit of primary energy. CO2 emissions from combustion of coal are 95 kg/GJ and from combustion of HFO 78 kg/GJ compared to 56.9 kg/GJ for natural gas.
21
This is based on a CO2 price of 10 USD/t.

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44
Natural gas emits lower levels of nitrogen oxides and particulates and produces virtually no sulphur dioxide and mercury emissions. These benefits are not calculated and monetised.
9.4.4 Security of supply The gas pipeline shall provide at least the same level of security of supply as the present oil and coal based solutions in Tanga and Mombasa. With a gas pipeline of approximately 500 km, there is a risk of interruption which is further discussed in section 10.2 Risk analysis. Security of supply can be maintained through the contracts with customers in Tanga and Mombasa. Customers will receive a discount in the gas prise against keeping and maintaining their existing fuel storage tanks and reserves to be used in the dual fuel plants in case of interruptions of the gas supply. The specific costs of maintaining reserve capacity will require detailed assessments. This financial and economic analysis operates with an assumption that a negotiated discount in gas price compared to the price of competing fuel will compensate customers for these extra costs. This arrangement is cost efficient compared with central gas storage solution for local and regional gas supply systems which will be far too expensive and not feasible. In addition to the physical security of supply there is an economic security of supply with a gas contract being more independent from the fluctuations in crude oil prices. The present development in crude oil prices as a result of the situation in the Middle East illustrates the value of increased security of supply. The benefit of increased security of supply is not calculated and monetised.
9.4.5 Indirect economic benefits and impacts The direct economic effects of the investment in pipeline extension are the initial direct investment and the direct revenue as presented above. However the initial investment may have a larger impact on the economies of the countries affected by the investment. This impact depends on the economic multipliers. An economic multiplier is a single number that summarises the total economic benefits resulting in an increase in economic output. The number summarises economic impacts which can be expected from changes in a given economic activity. The economic multiplier can be decomposed into direct, indirect and induced economic effects: Direct effects are mainly the increase in employment in the construction sector during the implementation of the project; Indirect effects are changes in transactions with sectors that provide inputs and services to the construction sector; Induced economic effects are changes in household spending associated with income changes as a result of an increase in employment.
45
There is a 2008 study22 of multipliers in Tanzania based on an updated Social Accounting Matrix (SAM). The SAM-based multiplier model is a general equilibrium model. The study shows that the construction sector has an economic multiplier of 1 meaning that there will mainly be direct effects, i.e. employment effect during construction. The direct employment effect can be calculated by using a rule of thumb saying 3 person years per million USD invested. The improved energy efficiency will reduce household spending on electricity and improve the competitiveness of industries in the area, assuming that the electricity prices will be reduced. This will have an effect on economic growth in the region but it is not easy to quantify this effect.
9.5
Economic calculation
The economic calculations use the discounted cash flow approach and are based on assumptions regarding the social discount rate, the market and the routing of the pipeline. The results of the calculations are presented as the NPV of net economic benefits.
9.5.1 Results The results are presented for the high demand scenario for the 4 routing options and the 2 discount factors.
Table 16 Economic NPV, million USD, medium demand scenario.
Social Disc. factor 5.5% 10% EIRR
Route 4 Route 3 Route 2 Route 1 (T2 & K2) (T2 & K1) (T1 & K2) (T1 & K1) 2,778 1,454 32.1% 2,755 1,433 31.1% 2,696 1,378 28.8% 2,674 1,358 28.1%
The project is economic viable with a social discount factor below 22%. In addition all the non-quantified and non-monetised economic benefits will increase the economic internal rate of return (EIRR).
Economic multipliers for Tanzania: implications on developing poverty reduction programs, prepared by a cooperation between researchers from Sokoine University of ASgriculture, Tanzania, Maruku Research Institute, Tanzania, Ministry of Livestock development, Tanzania and Southern University and A&M College, USA.
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22
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10
10.1
Risk assessment
Sensitivity analysis
The critical variables are investment cost, fuel replacement cost, demand, gas purchase price and discount factor.
10.1.1 Investment increase An increase in the investment cost will result in an increase in the transport tariff as the tariff is based in a full cost recovery. A 20 % increase of the investment cost for the local market option (T1+K1) with the high discount factor will reduce the netback value from 7.64 USD/Mscf to 7.30 USD/Mscf which is far from the switching value for the scenario i.e. cost of gas at Ubungo (3.6 USD/Mscf).
10.1.2 Discount increase Industrial customers will receive a discount in the gas price to compensate for the required storage facilities. An increase in the assumed discount will mean a reduction in the revenue from the gas sale. The levelized sales price of gas (NPV(sales revenue of competing fuels)/NPV(demand)) is highly sensitive to changes in the demand. The levelized transportation tariff (NPV(transportation cost)/NPV(transported volumes)) is not sensitive to changes in the market size. The transport tariff is independent of the replacement costs and therefore the pipeline company will not be affected by changes in the sales price of gas.
10.1.3 Demand reduction The sensitivity on changes in the demand of gas is analysed for two performance indicators: The levelized sales price of gas (NPV(sales revenue of competing fuels)/NPV(demand)) is not significantly sensitive to changes in the market size. The levelized transportation tariff (NPV(transportation cost)/NPV(transported volumes)) is highly sensitive to changes in the demand.
47
The transport tariff will increase from a demand reduction and therefore the pipeline company will be affected by changes in the demand for gas.
10.1.4 Increase of the gas price at Ubungo An increase of the gas price at Ubungo will either be caused by an increase in the well head price or an increase in the transportation tariff. An increase in the well head price caused by an increase in the worldwide oil prices will be not have a direct affect as the price of competing fuels in Mombasa and Tanga will increase accordingly. Today the transportation tariff (Songo Songo - Ubungo) account for 17% of average gas price at Ubungo. An increase in the transport tariff of 10% will mean an increase in the Ubungo gas price of 1.7%.
10.1.5 Discount factor The discount factor is the chosen WACC and thereby the capital structure of the pipeline company, i.e. the combination of the equity and debt and the requested return on equity and debt. The lowest WACC is assumed to be 4.4%, see section 8.5.1 if the WACC is increased to the highest WACC at 13.6% this will result in a reduction of the netback value. The analysed WACCs are not critical for any of the routing alternatives but for the local Tanzania market options (Route 1 and Route 2) the netback value at Ubungo is close to the selling price at Ubungo for the high discount factor.
10.2
Risk analysis
The major risk relates to (1) investment cost (2) demand and supply. Risks affecting investment costs Increasing steel prices There is a close historical correlation between IMF global GDP growth and world steel demand. Steel is produced by iron from ores or from scrap. The global market in iron ore is dominated by a few mining companies. Traditionally iron was sold on annual fixed prices but now the minors have switched to three month contracts. Demand has increased during 2009 and prices have increased as well. The price increases is a result of under supply because of under investing in mining and milling capacity. The increasing steel prices will result in increasing capacity which will stabilise the steel price. During the last year the global composite carbon steel price has increased from 700 USD/t in March 2010 to around 900 USD/t in March 2011.
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The risk analysis is not based on a probability distribution but is referring to experience from similar projects as referred to in the EU guide to Cost-Benefit analysis of investment projects23. The EU Guide refers to cost overruns and too optimistic estimates of benefits as classic risks for major infrastructure projects. The local market option with a netback value close to the selling price, represents an extra cost of 20% compared to the least cost option. It can therefore be concluded that the least cost option is robust up to a cost overrun of 20% as described in section 9.1.1 above. However, the local market option will be extremely sensitive to cost overruns unless it is possible to identify a substantial market in Arusha and Moshi. The extra investment costs for the local market option in Tanzania compared to the least cost option in Tanzania is around 90 million USD which is 18% of the least cost option. In order to achieve a financial viability comparable to the least cost option, a market in Arusha and Moshi shall be at a volume which is 18% of the Mombasa market. This is equivalent to the double of the market in Tanga. It is not possible to conclude if a market of this size is available in Arusha and Moshi. This will require a detailed market study. As mentioned it is very likely with cost overruns and the mitigation measure is to ensure that the project is a robust project that will still be financial viable even with a 20% cost overrun Interruptions The least cost route is following the coast and therefore exposed for risk of interruptions caused by flooding. During the rainy season it can be difficult to repair the line which may cause interruptions over a longer period. To mitigate this risk the more expensive local market route (T1+K1) can be selected or local storage capacity can be established at the customers in Tanga and Mombasa. Today all customers in Tanga and Mombasa are major customers who have storage capacity for the competing fuels used today. These customers will be interruptible customers who will require a discount to compensate for the cost of maintaining their storages as described in section 9.4.4. It is not possible to judge about the probability of flooding interrupting the coastal routing. It is recommended that a detailed risk assessment is undertaken before the final routing decision is made. The detailed risk assessment will show if a solution with interruptable customers are sufficient or the more expensive choice of the local market routing (T1+K1) will be required.
Risk affecting the demand and supply It is a precondition that the gas resources will be available at Ubungo. This availability will require that reserves are available and that processing and transport capacity is available. There are ongoing investigations about the reserves and negotiations about the new processing plant and the new pipeline
23
Guide to Cost-Benefit Analysis of investment projects, European Commission, June 2008.

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49
from Songo Songo to Ubungo. A decision about extending the pipeline to Mombasa must await decisions about extending the gas processing and transport infrastructure in Tanzania. The financial and economic analysis shows that the project is a viable project even with a low demand projection. The presence of this market is a precondition for initiating the project. The risk related to demand can be mitigated with long term contracts with industries and power plants. Normally a gas transportation infrastructure project will not be implemented until the market is secured through long term contract with the industries and the power plants.
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11
11.1
Logical Framework
Logical framework assessment
A Logical Framework Approach (LFA) to the project cycle management consists of a causal hierarchy of causes and effects. The overall objective describes the broad development objectives to which the project contributes. The East African Community and the national governments will be focusing on the regional and sectoral level impacts on economic, social and environmental development The development outcome at the end of the project or more specific the expected benefits to the target groups must be access to reliable, cheaper and less polluting energy for customers connected to the gas system. The output is tangible results (goods and services) that the project delivers and which are largely under project management's control From the point of view of the implementer the LFA matrix will look as follows:
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Narrative summary Overall objective Improved economic opportunities and reduced emissions from power sector and industry.
Indicators
Source of verification
Important Assumptions
Annual sales volumes to customers
Annual reports from the pipeline company
Development outcome Power plants and industries in Tanga and Mombasa have access to natural gas. Increased energy efficiency Annual report from the power companies and industries connected to the pipeline
Development outcomeoverall objective line
CO2 emission reductions in accordance with estimates Man month employed Outputs A gas pipeline connecting Dar es Salaam and Mombasa km pipeline constructed Progress reports Customers connected as planned Output-development objective line
Activities Authority approval, detailed design, construction and O&M organisation Detailed engineering Budget
Activity-output line Authority approval of ESIA
Pre-conditions A company established as owner of the pipeline Enough gas available at Ubungo. Regulatory authority clarified
52
Preconditions: The feasibility study is based on an assumption that there is sufficient gas in the Songo Songo fields to supply the market over the life time of the project. This assumption is justified in the Market Study. However it is not only a question of physical amounts. There is a need for a firm commitment from the Government of Tanzania that the requested amounts of gas will be made available for export to Kenya. There are options for using the gas in Tanzania but no analysis of the potential markets in Tanzania to indicate if these markets are more attractive from a financial and economic point of view. (Information about the potential gas reserves in relation to local markets in Tanzania (Arusha, Moshi and Morongoro) and the local coastal markets in Kenya indicates that supply of gas is not a bottleneck). There are regulatory authorities in Tanzania and Kenya respectively but so far there is no decision about who will approve the transport tariff for a pipeline from Tanzania to Kenya. This legal issue will have to be solved before the project can be initiated and should be raised by EAC as an issue related to the integration of the energy markets.
11.2

Monitoring of project benefits
The benefits from the project are mostly direct benefits represented by: Increase in employment during construction Increased energy efficiency at end-user level Reduced emissions Increased security of supply
11.2.1 Energy efficiency The increased efficiency among end-users could be monitored by recording use of primary energy in relation to final use of energy. Monitoring should be easy for power plants that are publishing these figures on an annual basis. Not all industries are publishing physical amounts of primary energy in relation to output of final products and increased overall efficiency could also be caused by other initiatives.
11.2.2 Emission reductions All end users would benefit from emission reductions resulting from fuel shift to natural gas. The reductions in CO2 emissions have a value if the conversions are approved under the Clean Development Mechanism. There are very well defined monitoring procedures under this mechanism.
53
11.2.3 Employment effects The increased employment can be monitored through the progress reports from the contractor.
11.2.4 Security of supply Today the power plants and industries in Mombasa and Tanga are depending on imported fuels. The world market price on oil has shown significant variations over the last years affecting the cost of electricity and manufactured products. By introducing a new option for indigenous fuels the security of supply increases and there is an opportunity to have more predictable prices included in the contracts. It is difficult to monitor security of supply.
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12
Conclusion
The expansion of the gas pipeline system to reach Tanga and Mombasa is a feasible project. The main market is in Mombasa consisting of power plants and industries. The connection of the industrial market in Tanga is a spin-off from the pipeline to Mombasa as the Tanga market represents less that 10% of the Mombasa market. The analysis comprises various demand scenarios and routing options. The demand scenarios analyse a low, a medium and a high demand scenario with the high demand scenario representing an annual increase in demand of 2% representing 50% increase in demand over the 20 years of lifetime for the analysis. The local market routing option (T1 + K1) is designed to address the opportunity of future connections of local markets in Tanzania (Arusha and Moshi) and Kenya (coastal area between the border and Mombasa). This result in a longer pipeline and has the highest investment costs of 630 million USD (550 + 80 for compressor stations). The least cost routing option (T2 + K2) is designed to minimize investment costs resulting in an investment costs of 515 million USD (435 + 80 for compressor stations) or 25% below the investment costs of the local market routing option. The criterion for a feasible pipeline project is that the netback value of gas at Ubungo exceeds the cost of gas at Ubungo. The netback value is the gas price in Mombasa minus transportation tariff. The gas price in Mombasa is calculated as the levelized price of competing fuels, i.e. the NPV of future sales revenue (of the competing fuels) divided by the NPV of the demanded volumes. The NPV is calculated with different discount factors where the different WACCs have been used under various assumptions of equity/loan share and size of interest rate. The financial analysis shows that the least favourable case with the highest investment cost (the local market routing option, T1+K1) and discount factor of 13.6% results in a netback value of 7.63 USD/Mscf which exceeds the cost of gas at Ubungo of 3.6 USD/Mscf (2009 price) under the medium demand scenario. The conclusion is that the even the local Tanzanian market routing options (T1) will be robust financially viable projects. The sensitivity analysis shows that both the least cost routing option (T2+K2) and the local market option (T1+K1) are robust to changes in market growth
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55
and interest rate. An overrun in investment cost of more than 20% will not bring any of the options in a critical situation. Increases in oil prices will only have minor impact on the viability of the project. The economic analysis shows that all routing options have a positive ENPV with both 5.5% and 10% social discount factor. The project has an economic internal rate of return (EIRR) of 28-32%. The conclusion is that the local market routing option will only be an economic acceptable project when the social discount rate is below 28%. In this calculation there are not included benefits like improved security of supply and indirect economic benefits as these are difficult to monetise. An EIRR of 28% is very acceptable compared to the criterion in the EU guidelines. Environmental and social impacts and opportunities from the project can be summarized as follows: The construction of the pipeline will cause temporary disturbances to human communities affected directly by the alignment The construction of the pipeline will cause temporary disturbances to sensitive natural habitats which are affected directly by the alignment. These habitats include river beds, forest areas and protected areas (including the Saadani National Park, if the coastal route will be selected) During operation of the gas pipeline the environmental and social impacts are assessed as being negligible, and resettlement activities are expected to be minimal; The project will contribute to the Clean Development Mechanism as defined in the Kyoto protocol The ESIA report will allow the environmental authorities to base their decision on the scope and content of the full ESIA for the detailed design stage, once a specific gas pipeline solution has been identified and agreed upon in the EAC. The Beneficiaries of the project will be the following: Tanzanian government will benefit from royalties and other benefits and TPDC will benefit from profit gas. The pipeline owner/operator benefits from the profit from the pipeline. Power consumers and industries in Kenya and Tanzania will benefit from cost reductions caused by improved efficiency and thus reduced unit costs for energy. Climate will benefit from reduced emissions from power plants and industries fuelled by gas.
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13
Recommendations
The feasibility study has shown that there is an attractive market for selling the gas at Mombasa and that a pipeline between Ubungo and Mombasa for transporting the gas is a financial and economic viable project. During the study there has been raised concern on the amount of gas reserves in Tanzania. The feasibility study shows that there will be a critical balance between the potential gas supply and the potential gas demand from the markets in Tanga and Mombasa. The proven gas reserves in Songo Songo are not suffiecient to supply the potential demand from Tanga and Mombasa. However, with the information of the vast gas reserves in Mnazi Bay there should be sufficient gas to supply the demand from Tanga and Mombasa in all the demand scenarios analysed. It is important for getting a broad acceptance of the project, that there will be made proof of the current expected gas reserves, on amount and accessibility. When proofs of the expected gas reserves are made the route selection must be done. The table below shows pros and cons for the 2 relevant routes mentioned in the previous section.
Route 1 (Local Market) Serving local markets in Arusha and Morogoro. Serving local markets at Kenya coast. Easy access to construction site. Route 4 (Least Cost) + 115 mill USD cost saving compared to Route 1. + Less populated areas => Less right of way issues. + Passing National Park - Acceptance from TANAPA is pending River crossings more critical
+ + -
COWI recommends the following: A detailed market study in Arusha and Moshi is crucial for the choice of routing: 1. If the market in Arusha and Moshi are minor, i.e. cannot justify an extra investment of 115 million USD in pipeline investment, then the least cost (T2+K2) routing should be implemented; 2. If there is a substantial market in Arusha and Moshi, i.e. can justify an extra investment of 115 million USD in pipeline investment, then the local market
57
(T1+K1) should be implemented. However, in this case the capacity of the pipeline infrastructure as well as gas reserves should be reviewed. Along with the above tasks EAC are to seek Developers, Financing and Consultant for the project.
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14
Appendices
Binder 1 is current binder.
14.1
Binder 2
Appendix A- Market Study Appendix B- Survey report Appendix C - Conceptual Design Report Appendix D - Outline of Environmental and Social Impact Assessment Appendix E - Minutes of workshops Appendix F - List of people and places contacted
14.2
Binder 3
ESIA Tanzania
14.3
Binder 4
ESIA Kenya

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East African Community (EAC)

Figure 1 Overview Map, showing alternative routes.

List of Abbreviations and Units

HFO KenGen KPC LCU LIBOR LNG

Energy kW MW 10^3 Watt 106 Watt

1 kJ 1 MJ 1 kWh 1 scf 1 Nm^3 1 Sm^3

Project objectives and focus

Least cost solution

Levelized energy costs

Energy Technology Perspectives 2008, IEA 2008

MMscf Power sector Industry Total

2015 31,430 9,817 41,248

2035 56,188 9,817 66,006

MMscf Power sector Industry Total

2015 33,364 10,421 43,785

2035 72,778 12,716 85,494

Table 4 Demand in Mombasa and Tanga, high growth (2%).

MMscf Power sector Industry Total

2015 35,396 11,056 46,451

2035 94,027 16,429 110,455

The demand in Tanga, the 3 demand scenarios, MMscf.

Tanga Market, MMscf

Tanga, low growth

Figure 3 The demand in Mombasa, the 3 demand scenarios, MMscf.

Mombasa Market, MMscf

Mombasa, low growth

Low 1,085 285 801 206 206 1,291

Table 6 Demand split between Tanga and Mombasa 2015-2035.

Medium (1%) High (2%) 90 1,435 1,525 106 1,699 1,805

Mombasa 1,215 Total 1,291

Pipeline routing options

Conceptual design and cost estimates

Conceptual Design Basis

Figure 4 Pipeline design.

For more detailed cost estimates please refer to Appendix C.

Environmental and social impact assessment

HFO Diesel Coal LPG

Assumption 2010 USD/t 410 733 110 733

February 2011 Mombasa USD/t 495 125 -

Meeting with TPDC

Cost estimate in million USD

Table 10 WACC calculations for 100% debt financed structure.

Table 13 FIRR, medium demand scenario.

1% growth 4.4% 8.4% 10.3% 13.6%

Special Purpose Vehicle (SPV) with state guaranteed loans

The Governments of the EAC countries

Special Purpose Vehicle

Pros and cons of the SPV Lower risk of cost overruns

Efficiency in the construction period

Public Private Partnership

Pros and cons of PPPs Lower risk of cost overruns

Government financed (Public) + + +

EU standard: 5.5%. WB standard: 10%.

Gas cost at the feed-in point in Ubungo.

This is based on a CO2 price of 10 USD/t.

Social Disc. factor 5.5% 10% EIRR

Guide to Cost-Benefit Analysis of investment projects, European Commission, June 2008.

Annual sales volumes to customers

Annual reports from the pipeline company

Development outcomeoverall objective line

Activity-output line Authority approval of ESIA

Monitoring of project benefits

Binder 1 is current binder.