Total has previously told analysts that its Uganda project would generate cash flow from operations of $800 million a year with oil at $50 a barrel, according to Jason Gabelman, an energy analyst at TD Cowen, which is the amount of cash flow at risk if the project were canceled.
"At some point, though, Total might have enough and walk away, given the issues as well as outside pressure from environmental groups on this specific project," says Allen Good, an oil-and-gas analyst at Morningstar.
Despite having the backing of one of the world's biggest energy companies, more than 25 banks have rejected the opportunity to finance EACOP, according to StopEACOP, an activist organization applying pressure against the pipeline's backers.
"It's virtually unprecedented," says Ryan Brightwell, a director at BankTrack, an organization that tracks and lobbies banks over the activities they finance.
"EACOP project is actively progressing discussions with various lenders, " Total said in a statement.
BankTrack is lobbying Chinese lenders and potential insurers of the pipeline, which has yet to secure sufficient insurance. Brightwell is hopeful that Chinese banks may still feel pressured by new rules from Beijing calling for foreign investments to follow global environmental standards.
The risk to Total doesn't stop at funding EACOP. Total is in the midst of a second legal challenge mounted in Paris by activists who allege that the company broke "duty of vigilance" laws.
Total declined to comment on ongoing legal cases, but noted in a prior challenge dismissed on procedural grounds that a judge had reviewed the company's plans and found them to be compliant with the criteria for summary proceedings.
Some shareholders, too, have turned against Total's expansion of its upstream business. At Total's shareholder meeting last year, a resolution filed by activist group Follow This and 17 institutional investors called for the company to reduce emissions by 2030 in line with the Paris Agreement. The commitment, which would effectively require Total to step back from oil production in Uganda, received 30% of the vote.
Total's CEO has maintained the credibility of its climate transition plan, and the company noted that in 2020 it set itself an ambition to get to net zero carbon emissions across worldwide operations by 2050. New investments in oil projects are still required in the short term, Total added, but the focus is on low-cost, low-emissions projects.
China's Retreat From Africa
Uganda isn't the only country facing funding delays from China. The country's largess has faded since lending to Africa peaked at almost $30 billion in 2016, a few years after One Belt, One Road was launched. A hallmark of President Xi Jinping's foreign policy, this trade initiative was defined by funding major infrastructure projects, many in the developing world. In 2022, Chinese loans to Africa had fallen below $1 billion, according to tracking from Boston University, including no funding for energy projects.
China's economic issues at home, prioritization of green investment, and exposure to several sovereign-debt defaults across Africa have tightened lenders' purse strings when it comes to projects like EACOP, says Oyintarelado Moses, an analyst at Boston University's Global China Initiative.
As Chinese lenders have matured, so has the burden to find commercially viable and high-quality growth opportunities, says Geoffrey Yu, a strategist at BNY Mellon. It remains to be seen whether EACOP meets that definition. It is a capital-intensive pipeline in a frontier market expected to operate for just 20 years, with most of that life cycle coming after peak oil demand, based on IEA forecasts.
In Uganda, there is recognition of why China has delayed EACOP -- namely, the faltering economic growth in China that has rattled global markets over the past year. "China has been trying to fix domestic consumption issues," says Rwabwogo, who along with leading Uganda's PACEID is the son-in-law of President Museveni.
China also is exhibiting heightened caution, perhaps understandable after its lenders got caught up in distressed debt quagmires from Angola to Zambia. A sticking point since 2021 is Beijing's demand that loans to Uganda flow through a Chinese escrow account, which would position Chinese lenders as preferential creditors in the case of default, says Henry Musasizi, Uganda's minister of state for finance, planning, and economic development.
A growth slowdown and reduced risk appetite have led China to retrench financing activities across sub-Saharan Africa, the IMF detailed in October, which is likely to negatively affect African trading partners over the medium term.
"The Chinese have learned that development lending is quite easy, but it's very risky, and it's quite hard to collect. It may be what you're seeing [in EACOP]," says Michael Pettis, a professor of finance at Peking University in Beijing.
Beyond Hoima
Pump Station One is near other construction sites, for Uganda's second international airport and a refinery project linked to EACOP. An hour's drive east lies Hoima, a city whose future may rest with Beijing but lacks evidence of China's footprint beyond a faded billboard on a roundabout with Chinese lettering.
There are no Chinese people living in Hoima, according to Badru Mugabi, the resident city commissioner for Hoima, who said there was one Chinese-owned restaurant here that closed down. "With or without the financing and the pipeline, we will be producing and refining oil for the [African] Great Lakes region," he says. "Is this about impressing Total or Cnooc, or taking advantage of our resources?"
Uganda needs the dollars that a flowing pipeline will provide. Its government debt in 2024 will approach 50% of gross domestic product, according to International Monetary Fund estimates, the result of spending ramping up since Tullow farmed off oil rights to Total and Cnooc. In 2012, a year before those deals, government debt stood at less than 20% of GDP.
Uganda's ministry of finance estimates that taxes and dividends from its EACOP stake will net $410 million, though EACOP and associated investments are expected to add some $10 billion to Uganda's GDP, which the IMF estimates at $57.9 billion for 2024.
But EACOP represents far more to Rwabwogo. The advisor to President Museveni delayed his interview with Barron's for hours as he darted among meeting rooms in Kampala's luxurious Sheraton Hotel. When he found time, it was in what appeared to be a wedding tent hours before nuptials .
Uganda hopes to build a railroad, improve roads, develop its mining sector -- including in critical minerals -- and even nurture a nascent tech industry. "We were asked to do the pipeline because that was the only way we could get investment," says Rwabwogo. "It's a bridge to be able to exploit the rest."
Ugandan officials remain assured that EACOP's financing will come through. And there has been some progress on the Chinese front. Uganda's energy minister was invited to China to hash out financing in April, with President Museveni's office declaring that President Xi has expressed support for EACOP. Niger, in the Sahel region, last month received a $400 million advance payment from one of China's state-owned petroleum companies for crude soon expected to begin flowing from a pipeline through Benin, local media reported -- a sign that Beijing may not have abandoned its African oil strategy.
Amid the uncertainty, Rwabwogo has entertained other options. These include turning to markets and borrowing money, he says, or seeking alternative foreign investment. "There are several [in the Persian Gulf] we are speaking to, and a few now committed," Rwabwogo says, adding that possible financiers are some of the region's largest crude producers and refiners.
A Persian Gulf rescue for EACOP would dovetail with a shift in geopolitical dynamics in Africa. China made a splash with lavish lending a decade ago, but today, Saudi Arabia, the United Arab Emirates, and Qatar all vie for influence.
Uganda has already had success with a Persian Gulf partner. After failures to find backers for a $4.5 billion refinery project linked to EACOP, Uganda inked a deal in December with a consortium led by Alpha MBM, the family office of the minister of finance for the U.A.E.
While Persian Gulf countries have stepped into the breach to finance African projects, it may not match the scale of China's past lending, as Saudi Arabia already looks stretched for cash as a result of financing its own large projects.
"We want to evolve our relationship with Africa from foreign aid and assistance to investments, trade, and technical assistance," says Faisal Alibrahim, Saudi Arabia's minister of economy and planning.
Back at Pump Station One, work will resume when the weather clears, just as work rolls on along EACOP's route, burning through diminishing cash and bringing closer the day when a lack of financing reaches crisis point. Under the drumming of the corrugated steel roof, it isn't just the rain that's dampening the mood.
Write to Jack Denton at jack.denton@barrons.com
To subscribe to Barron's, visit http://www.barrons.com/subscribe
(END) Dow Jones Newswires
May 03, 2024 21:30 ET (01:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments