Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya)

Transcription

1 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

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3 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 1 Table of Contents 1 Executive summary 3 2 List of Abbreviations and Units 5 3 Introduction 8 31 Structure of the report 8 32 Background 8 33 Socio-economic context 9 34 Project objectives and focus Least cost solution 10 4 Market analysis Assumptions Demand projections 13 5 Pipeline routing options Objective Proposed Routes 20 6 Conceptual design and cost estimates Assumptions Conceptual Design Basis 23 7 Environmental and social impact assessment Assumptions Environmental impacts Socio-economic impacts 26 8 Financial analysis Assumptions Methodology Revenue Costs Financial calculations Financing plan 35

4 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 2 9 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 Binder Binder 4 58

5 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 3 1 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 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

6 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 4 Figure 1 Overview Map, showing alternative routes

7 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 5 2 List of Abbreviations and Units Abbreviations AfDB CC CCS CIF CNG EAC ENPV ERC EWURA EIRR FIRR FNPV GPTC Guide HFO KenGen KPC LCU LIBOR LNG 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

8 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 6 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 Standard Cubic Feet Standard Cubic Feet per day 10^3 Standard Cubic Feet 10^6 Standard Cubic Feet 10 6 Standard Cubic Feet per day 10^9 Standard Cubic Feet Normal Cubic Metre 1 scf Nm^3 1 scf 0028 Sm^3 Energy kw MW 10^3 Watt 10 6 Watt

9 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 7 1 kj 1055 BTU = 10^3 Joule 1 MJ 10^6 Joule 1 kwh 36 MJ 1 scf 1,025 BTU 1 Nm^3 399 MJ 1 Sm^ MJ

10 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 8 3 Introduction 31 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 32 Background The 3rd East African Community (EAC) Development Strategy 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

11 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 9 33 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 economy 1 A monetary union is expected to be operational by 2012 and a free trade zone to be fully operational by 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 people 3 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 1 EAC Development Strategy 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

12 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 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 CO 2 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 35 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 351 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

13 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 11 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 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 CO 2 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 352 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 4 Energy Technology Perspectives 2008, IEA 2008

14 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 12 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 Association 5 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 5 Comparing Pipes & Wires, Bonneville Power Administration and Northwest Gas Association, 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

15 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 13 4 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 41 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) $36 /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 42 Demand projections The demand projections are based on the present consumption in Mombasa and Tanga

16 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 14 Peak demand in Kenya was around 1100 MW in 2009 and is expected to grow with 10% per year until 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*125 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 4136 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 Wärtsilä 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 Wärtsilä Operations as a contractor for Tsavo Power Company LTD Kipevu II is a HFO fuelled power plant with a total installed electrical output of 745 MW and an electrical efficiency of 425% 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 4080 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 3308 MMscf per year based on a conversion factor of 3,497 Mscf/MWh 7 Report of the 17th Meeting of the Energy Committee, EAC Secretariat, June Least Cost Power Development Plan, Study Period , Ministry of Energy, 31 March 2010, p66 9 Ibid p 67

17 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 15 Rabai: The 90MW Rabai power plant is owned by Rabai Power Limited and consist of five 175 MW 18V46 Wärtsilä 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 4963 MMscf per year based on a conversion factor of 3,497 Mscf/MWh New Plants Kipevu III: KenGen is constructing Kipevu III as a 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 specifications 10 the 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 6617 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 836 USD/Mscf which indicates that the relevant replacement cost of coal is higher than the fuel replacement cost of around 3 USD/Mscf 421 Demand scenarios The financial calculations are made using 3 demand scenarios: low, medium and high Low scenario 10 KenGen Kipevu III Power Project, Volume II Technical Specifications, 18 June 2009

18 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 16 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, ie 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 31,430 56,188 Industry 9,817 9,817 Total 41,248 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 MMscf Power sector 33,364 72,778 Industry 10,421 12,716 Total 43,785 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

19 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 17 Table 4 Demand in Mombasa and Tanga, high growth (2%) MMscf Power sector 35,396 94,027 Industry 11,056 16,429 Total 46, ,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

20 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 18 Figure 3 The demand in Mombasa, the 3 demand scenarios, MMscf 140, , ,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, Bcf Low Medium (1%) High (2%) Power sector Existing consumers Future consumers Industry Existing consumers Future consumers Total 1,085 1,283 1, , ,291 1,525 1,805 The table below illustrates the split in the demand between Tanga and Mombasa in the period 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

21 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 19 Table 6 Demand split between Tanga and Mombasa Bcf Low Medium (1%) High (2%) Tanga Mombasa 1,215 1,435 1,699 Total 1,291 1,525 1,805

22 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 20 5 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 51 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 52 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

23 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 21 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

24 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 22 6 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 61 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

25 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 23 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 62 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 143mm 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

26 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 24 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 (km) Major road crossing Rail crossing Major river crossing Estimated Price (Million USD) [incl Design, procurement, supervision and compensation] 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

27 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 25 7 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 71 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 72 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;

28 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 26 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) 73 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:

29 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 27 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) 11 Natural gas emits less carbon oxides, nitrogen oxides and particulates than coal when combusted

30 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 28 8 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 81 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 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 360 USD/Mscf This price is calculated as a replacement cost in Dar es Salaam depending on the oil prices

31 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 29 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 83 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 831 Potential market The demand projections are based on the present consumption in Mombasa and Tanga Described in section 42 above 832 Selling price of gas Natural gas will be sold at a price that is competitive, ie 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/bbl 12 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 407 GJ/t, 427 GJ/t in diesel and 399 GJ/m3 for natural gas 12 IEA Oil Market Report, Average cif cost of imported crude oil, November 2010

32 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 30 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 Assumption 2010 February 2011 Mombasa USD/t USD/t HFO Diesel Coal LPG We have assumed an increase in oil prices of around 20% from 2010 to 2011 which corresponds with the actual prices above 833 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 replaced 13 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 84 Costs 841 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

33 Feasibility Study for a Natural Gas Pipeline from Dar es Salaam to Tanga (Tanzania) and Mombasa (Kenya) 31 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 No Cost estimate in million USD Million USD 1 Local market option in Tanzania and Kenya (T1+K1) Local market option Tanzania and least cost option Kenya (T1+K2) 3 Least cost option Tanzania and local market option Kenya (T2+K1) Least cost option in Tanzania and Kenya (T2+K2) 435 Compressor for all options 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 842 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-