Continuing conflict cripples South Sudan oil industry

Continuing conflict cripples South Sudan oil industry

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South Sudan is the world’s newest officially recognised country, gaining independence from Sudan in July 2011, along with jurisdiction of approximately 75 percent of the oil reserves and production in the previously unified Sudan. At a time when oil prices were at an historic high, its future seemed bright. However, trade disputes and armed conflict, which affected oil production, have made for a bumpy ride for the fledgling country.
In May 2015, fighting intensified in the Upper Nile and Unity states of South Sudan. They contain many of the key oil fields and towns, such as Tangrial Bil, Melut, Foluj, Malakal, and Bentiu. Rebel forces have announced that they are targeting control of the oilfields in order to cut off the government’s oil revenues and disrupt its ability to function and wage war. At current oil prices of $60–65 per barrel, South Sudan is earning around $100 million in profit per month from oil exports, which is around 90 percent of the government’s income. According to recent reports, Paloch in Upper Nile state is the only region currently producing in South Sudan, at approximately 160,000 barrels per day (bpd). Rebels are thought to be closing in on this location.
China’s CNPC is the main operator in South Sudan, with Petronas of Malaysia, India’s ONGC Videsh, and state-owned Sudapet also holding major equity stakes. In May 2015, CNPC and Petronas evacuated over 400 foreign staff, at least temporarily, following fighting in the northeast, close to the major oilfields. This followed demands from rebel forces for oil companies to suspend production at oilfields under their control. ONGC Videsh shut down operations in Unity state after the conflict started in December 2013. In its latest financial report, published in May 2015, ONGC Videsh state that operations in South Sudan will not restart until the security situation improves. At the end of 2013, prior to the start of the conflict, reported production in South Sudan was approximately 240,000 bd. In 2014, production is reported to have fallen to around 165,000 bd. The main cause of this was the shutdown of fields in Unity state due to the security issues. It is likely that 2015 production will fall even further following the recent conflict escalation around the oil regions.

Oil operations will continue to be affected in the short to medium term due to the instability in the area. Neither government nor rebel forces are in full control of the locations in key oil regions, with both sides claiming to be in command of strategic sites. The Chinese government has actively intervened in South Sudan, deploying 700 peacekeeping troops as part of the UN mission and brokering peace agreements between the factions in support of CNPC’s investments. The aim of the peace talks was for the warring factions to form a power-sharing government by July 9, 2015. However, after several rounds of negotiations since June 2014, no agreements were reached and the talks in March 2015 ended early. Delegates met again in June 2015, but it is unlikely that the internationally mandated deadline for the formation of the joint government will be met.
According to Jonathan Markham, GlobalData’s upstream oil and gas analyst, the South Sudanese government has repeatedly borrowed from oil companies to cover budget shortfalls, accumulating large debts. ‘In August 2014, it was reported that the government was seeking an emergency loan of $200 million from CNPC, Petronas, and ONGC Videsh, in addition to the $1.6 billion it had previously borrowed. However, the oil companies declined to offer any further loans due to falling exports and ongoing conflict,’ Markham said.
Another factor hindering long-term development in South Sudan is the reliance on two Sudanese pipelines to export crude oil. South Sudan pays between $9.1 and $11 per barrel to use Sudan’s facilities and a further $15 per barrel as compensation for Sudan’s lost oil revenue after independence. South Sudan currently has no other export routes if these pipelines are cut off. The government has explored the possibility of building new pipelines through Uganda and Kenya, but these plans have not progressed past the feasibility study due to the ongoing conflict. Without alternative export routes, South Sudan will remain vulnerable to shutdown threats and unfavourable transportation contracts.
The oil industry in South Sudan is facing a difficult period after 18 months of conflict and the recent fall in oil price. Existing asset holders are reducing investments such as loans and employees due to recent events, especially ineffective ceasefire agreements and falling oil exports. Potential investors are also being deterred; for example, Exxon decided not to renew an agreement with Total to negotiate for joint exploration over parts of a 120,000 sq km (46,300 square-mile) concession in Jonglei state in April 2014. Despite 1P reserves of 3.5 billion barrels and potential for further exploration, oil companies are not willing to invest until the political and security situation improves.

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