Africa Oil & Gas: A new year and a new crisis for South Sudan

Impact on the oil industry
There has already been some impact on the oil sector. Oil industry sources revealed that national oil production fell by around 15% during the course of December as a result of the conflict.

Indian firm ONGC Videsh, which holds equity in both the Greater Pioneer Operating Company (GPOC) and SUDD Petroleum Operating Company (SPOC), reported that “production from the oil fields was completely stopped. Operations will be resumed once the situation is normalised”. The two companies jointly produce about 41,600 b/d from four blocks. In addition, the Adar oil field was attacked by Nuer police officers on 26th December, after they defected to Machar’s side.

The core of the army, which supports Kiir, is confident that it can retain control of the oil fields in Upper Nile Province’s Melut County, which are the foundation of the country’s oil wealth and usually yield 200,000 b/d. Fighting in Upper Nile has centred on the state capital, Malakal, rather than on the oil fields.

Paul Adong Deng, the managing director of the state-owned Nile Petroleum Corporation, has also sought to play down fears that domestic oil production would be badly affected. In a statement, the oil ministry reported: “In blocks 3 and 7… oil production and operation is running normally. The production level is at 200,000 b/d and most staff have reported back to work.”

The two biggest investors in the two blocks are China National Petroleum Corporation (CNPC) and Malaysian firm Petronas.

Yet while established investors continue to produce oil, recent events are likely to reinforce the opinion that South Sudan is a risky bet for new investment. Fighting between the north and south was concentrated in oil-rich Abyei region in 2008 and 2009, before the agreement was signed that awarded Abyei’s Heglig oil field to Khartoum.

Even then, South Sudan’s reliance on export pipelines through Sudan continued to strain relations. In February 2012, a dispute over the division of export revenues and transit fees saw Khartoum close the taps on the export pipelines for more than a year, with obvious economic repercussions for both sides.

Given that Juba is almost entirely reliant on oil revenues, it was forced to severely cut its expenditure, undermining efforts to build a nation, virtually from scratch. It unilaterally cut the budget of every Ministry in half, creating unease that may have contributed to the political and ethnic tensions that are currently being exposed.

The conflict could also affect Sudan this time around. The Sudanese Finance Minister Badreldin Mahmoud Abbes said: “Even if the oil production in South Sudan stops, we have prepared first aid arrangements to compensate for the loss. We will deal with this issue without imposing new taxes or increases in prices, but will reduce government spending, and we will take other measures in due time.”

Khartoum’s budget for 2014 incorporates a $2.09bn deficit but also relies on total payments of $1.5bn from South Sudan in the form of oil transit fees and compensation for the loss of oil fields that was agreed as part of the secession agreement.

The governments of South Sudan’s two eastern neighbours, Kenya and Ethiopia, have sought to kick start a peace process. After decades of war, it had been hoped that South Sudan would gradually stabilise and begin to coalesce into a nation state. This would benefit the South Sudanese themselves, their neighbours and the prospects for the country’s oil industry.