Africa Oil & Gas: “Insecurity and conflict still hampering South Sudan’s oil” – Petroleum Economist reports

Heavily in debt and still suffering ruinous violence, South Sudan desperately needs to lift oil production and has bright hopes to send exports to neighbouring Ethiopia. The government in Juba has even suggested that output could reach 0.5m barrels a day, the level it says it was pumping before civil war broke out in 2013.

It seems unlikely. Plagued with debt, hurt by low crude prices, and still suffering through a civil conflict, South Sudan will struggle even to maintain its current output, let alone ramp it higher.

Combined production from Sudan and South Sudan is thought to be around 220,000 b/d, according to IHS Markit, a consultancy. South Sudan’s share is
between 130,000-150,000 b/d.

Verner Ayukegba, an analyst at IHS, describes notions that South Sudan could increase this by 350,000 b/d as “laughable”. Even before fighting broke out in 2013, production was only around 150,000 b/d. “Even if they could reach 200,000 b/d by the end of the year that would be quite a feat. Before that they need significant work on fields.”

At the end of August, Sudan and South Sudan agreed to extend an oil deal over the transit terms for crude exports. The agreement had been due to expire in October. It gives an outlet to South Sudanese crude exports, but through the country it separated from five years ago.

Severed assets

When the South split from Sudan in 2011 after decades of war, South Sudan took 75% of the once-united country’s oil production with it. Sudan, however, maintained control over the only export route, a pipeline to the Red Sea.

That jarred with politicians in Juba. Six months after independence, in January 2012, South Sudan voluntarily shut in all of its oil production because of a dispute with Sudan over oil transit fees. Khartoum, citing the loss of revenue from production, had demanded payment for transit rights of between $32-36 a barrel. South Sudan wanted to pay $1/b, so the north confiscated some of its oil.

Since 2013 South Sudan has been paying around $15/b to Sudan in transit fees. But, says Ayukegba, production in the south only breaks even at $40/b, meaning the country is making a loss at less than $55/b.

The problems have worsened with missed payments. “They have no current clear terms to the agreement on transiting fees on Sudan. So when oil was hovering at $30/b they were making a loss because they had fixed the transit rates rather than made them flexible. So there is a backlog of existing fees,” Ayukegba says. It has left Juba with no power in negotiations-and if the south keeps refusing to pay, Sudan could just confiscate the oil again.

The other problems are in the upstream itself. Attracting badly needed foreign investment, especially from US and European oil service companies, is crucial to stopping South Sudan’s production from slipping further.

Asian firms, particularly in China, which have long been involved in Sudan’s oil sector, would be the likeliest to get more deeply involved. China’s CNPC, India’s ONGC and Malaysia’s Petronas hold large stakes in the leading consortia operating oilfields and pipelines in South Sudan.

Western firms, however, remain distant, demanding hefty premiums because of the heightened security risk. In 2014,ExxonMobil ended its oil-exploration deal with Total on a concession in in Jonglei state, partly because of security concerns. Jonglei is remote, lacks supporting infrastructure for oil exploration and is virtually impassable during the rainy season.

In July, this year CNPC evacuated most of its South Sudanese-based staff because of fighting in Juba. “The biggest challenge remains security,” Ayukegba says. “You couldn’t even plan for three months in South Sudan because the political situation is changing every day.”

South Sudan’s post-independence conflict started in 2013, after President Salva Kiir dismissed his vice president Riek Machar. Fighting has marred the country since, punctuated by UN-led efforts to bring peace and a 2015 compromise deal. In July 2016, the two sides began fighting again. The UN has since agreed to install peacekeepers in the country, but the ethnic undertones of the power struggle continue to surface. An estimated 300,000 people have been killed in the fighting since 2013.(Source: Petroleum-Economist)