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Djibouti City: Djibouti seals pipeline deal with Ethiopia

2016/01/16

A $1.55bn pipeline transaction signed in late September is set to boost the volumes of petrol, diesel and jet fuel that Djibouti is able to transport to landlocked Ethiopia.

Additional infrastructure, to be rolled out alongside the pipeline initiative, will as well strengthen Djibouti’s efforts to reinforce its position as a strategic gateway to East Africa.

A long-term link

The 550-km Horn of Africa Pipeline ­– to link Djibouti’s Damerjog port with a storage terminal in Awash, to the east of Addis Ababa – is expected to increase efficiency in the fuel supply chain. This should help reduce transportation costs and cut journey times significantly at the same time as the project is completed in late 2018.

The pipeline, which ranks as the major US investment in the country to date, is being financed by the US-based private equity firm Blackstone Group and will be carried out by a 50:50 joint venture between Blackstone’s Black Rhino Group and South African service provider Mining Oil & Gas Services, a unit of Royal Bafokeng Holdings. The two companies plan to raise at least $1bn in senior deficit financing, with financial close expected in 2016.

The Horn of Africa Pipeline will operate as a 20-to-30-year concession once commercial operations begin, in line with the developers’ long-term vision. “What Djibouti puts in place presently should be appropriate for what we expect to happen across the border long term, rather than offering a five- or 10-year solution,” Gregory Meneses, managing director of Black Rhino, told OBG.

In addition to the pipeline, the project will as well include construction of an import facility and 950,000 barrels of storage capacity in Damerjog, which, together with off-loading facilities, is set to increase efficiency and capacity at the port.

“The project is much additional than just a pipeline; critical infrastructure is going into Djibouti,” Meneses told OBG. “Although the investment into Djibouti is less than half the total investment of the Horn of Africa Pipeline project, the infrastructure included significantly bolsters the strong existing regional increase trajectory.”

Fuel for growth

At present, transporting fuel to 90m-person Ethiopia is a difficult task and involves navigating an 800-km, two-lane route across mountainous terrain. Some 500 tankers make the journey to better Addis Ababa each day, according to Black Rhino, in what amounts to a costly and timely exercise.

Once completed, the pipeline will have the capacity to transport 240,000 barrels per day, which should help fuel Ethiopia’s rapidly growing economy. The country’s GDP expanded by 10.3% in 2014, according to the IMF, outpacing its peers, and is expected to grow by an average of 8% per annum through to 2020.

This has led to higher request for energy, which is increasing by additional than 15% each year, according to Black Rhino, rendering dependency on road-transported fuel unsustainable. The pipeline is as well expected to address other disadvantages of land transport, such as waste from fuel leaks that occur en route.

Regional ambitions

The new pipeline dovetails with other projects aimed at increasing transport capacity and efficiency between Addis Ababa and Djibouti, which processes some 90% of Ethiopian inbound and outbound trade.

Both nations have invested heavily in projects aimed at developing a Djibouti-Ethiopia economic corridor, which the two nations hope will take on a additional prominent role as an entry point for the region in the coming years.

A 750-km rail link connecting the capital cities of Addis Ababa and Djibouti has by presently been completed, cutting travel times from two days to less than 10 hours. The railway was built by the China Railway Group and the China Civil Engineering Construction Corporation at a cost of around $4bn. There are as well ambitions to extend the line into West Africa and build an extra track linking Djibouti to the northern Ethiopian city of Mekelle.

Competitive edge

The Horn of Africa pipeline project is not the only such initiative under way. Kenya, one of East Africa’s major economies, has as well undertaken several infrastructure projects targeting improved connectivity with inland markets, such as the Lamu Port-Southern Sudan-Ethiopia Transport corridor, a $24.5bn package of projects stretching across northern Kenya and into East Africa.

However, Djibouti is particularly keen to play a key part in the accelerated integration under way between the Horn of Africa and better East Africa, and is working to extend the reach of its new linkages further afield.

There is potential, for example, to enhance the strategic price of the Horn of Africa pipeline, particularly if Awash is connected to the Djibouti-Addis Ababa and Djibouti-Mekelle railway lines. According to Meneses, linking up the railway systems, trucking delivery and pipeline could pave the way for wider distribution to Ethiopia, South Sudan, Uganda and northern Kenya.

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