A standby letter of credit (L/C) proposed in the financing arrangements for the US$100 million Eldoret-Kampala Oil Pipeline Extension Project in East Africa is unacceptable to the project sponsors. They have delayed signing the winning bid for this major project for several reasons.

The bid, submitted by Tamoil East Africa, the Libyan firm that won the tender, remains unsigned until revised financing arrangements satisfactory to the project sponsors have been agreed.

Confused plans

Plans to extend the oil pipeline beyond Kenya and Uganda to Rwanda and Congo aim to reduce the high costs of transporting petroleum products in Africa's Great Lakes region.

Several queries regarding the financing of the project have emerged while the matter has been further confused by the recent acquisition of Tamoil in a US$5.4 billion private equity deal by the giant Colony Capital of the US. It is also buying Tamoil's sister company Oilinvest in the deal.

Tariffs and guarantees

Queries include the tariffs the pipeline operators will charge over the 20-year lifetime of the build, own, operate and transfer (BOOT) project and issues to do with which organisation will stand as guarantor for financings arranged by Tamoil.

Libya's state-owned Libyan African Investment Portfolio, for example, was set to be a guarantor in the project, but whether its guarantee will hold now that Tamoil East Africa is owned by private US venture rather than a Libyan state-owned one is in question.

L/C arrangements

Tamoil East Africa had also said it would provide a standby L/C to guarantee its performance in the project, but it is only valid only until 1 January 2009.

This does not meet the project sponsor's requirement of a bank guarantee valid for 20 years and subject to the project developer reaching agreed-upon performance milestones.

Unsatisfactory documents

Moreover, a recent meeting in Kampala heard that the draft deed of guarantee submitted by Tamoil East Africa had been altered and signed without the sponsor's consent.

During a recent meeting, Tamoil officials argued that the unconditional and irrevocable standby L/C is considered firm security by the Libyan Foreign Bank and should be allowed if banks in Uganda and Kenya find it acceptable.

New arrangements

The sponsors were apparently unimpressed by this argument, and Tamoil East Africa has since agreed to provide a bank guarantee for 10 per cent of the project value across its 20-year lifespan.

The sponsors also asked Tamoil East Africa to upgrade its bid bond from US$400,000 into a financing bond worth US$1 million to cover the initial stages of the project.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.