The future of the East African nation's oil industry remains uncertain following the July 2011 secession of South Sudan, reports Glenn Freeman
SOUTH SUDAN, possibly the world’s newest state, made its first oil shipment as an independent nation in July this year. Though after more than 20 years of conflict between north and south and a major ongoing dispute around pipeline transit fees, the sustainability of this transport route hangs in the balance.
These pipeline transit fees being demanded by the north lie at the heart of the latest dispute. This fee is reported to be between US$23 to US$34 per barrel, according to various official sources including the US Energy Information Agency (EIA) along with news agencies. Both sides rely on oil for a massive majority of their national revenue.
According to the International Monetary Fund, over half of Sudan’s government revenue and 90 per cent of its export earnings come from the fuel source. In South Sudan, oil provides 98 per cent of its total revenues. Also key is the fact that around 75 per cent of Sudan’s oil is produced in what is now known as South Sudan, while the north holds all the pipeline, refining and export infrastructure.
While by global standards, the production capacity of 500,000 bpd from the two Sudans is relatively small, “it is a reasonably significant second tier producer and is quite important to the Chinese, who get a significant proportion of their oil exports from Sudan,” according to Robin Mills, head of consulting at Dubai-based Manaar Energy Consulting.
In terms of oil reserves, Sudan ranks fifth out of the six African proven reserve holders, behind Angola and ahead of Egypt. Estimated reserves vary according to different sources, ranging from Wood Mackenzie’s figure of 4.2 billion barrels to 6.7 billion barrels as quoted by BP’s 2011 Statistical Review - up from an estimated 563 million barrels in 2006.
“There was talk of some natural gas discoveries in 2009, an offshore field in the Red Sea that Petronas had looked at over the years, followed by some fairly modest quantities of onshore gas,” says Mills, though emphasises these were “not enough for export, and would only be useful for domestic use”.
IOCs in the Sudans Sanctions imposed by the United States Government along with the United Nations and the European Union effectively stopped international investment in Sudan from companies operating within these jurisdictions – including IOCs.
In mid December this year, just before Pipeline went to press, the US relaxed its sanctions on South Sudan in response to its new independence. The notices issued on December 8 authorised activities “including but not limited to” oil exploration, development and production, as well as field auditing services, oilfield services and activities related to oil and gas pipelines.
US companies can also ship goods, technology, and services to or from South Sudan through Sudan in the North, which remains under US sanctions, though with some amendments regarding payments to Sudan-located companies, and only in connection with South Sudan’s petroleum industries.
These sanctions had been imposed during Sudan’s war of independence and as a result of international outrage over atrocities committed in Sudan’s western region of Darfur between 2003 and 2009, where the United Nation’s estimated some 300,000 people had been killed.
“Sudan is a very important supplier to the Chinese, but European and American firms do not operate there because of sanctions against the Bashir regime. These sanctions and the poor security situation have forced\ international supermajors to suspend operations or leave Sudan altogether,” says Snyder.
As a result, Asian operators currently hold the most significant international presence in both Sudans. “Wider instability in the area makes it difficult to foresee risk-averse western companies operating in the border area. Chinese NOCs, however, are less deterred by violence and will likely continue to operate regardless of how or when the security situation is settled,” he adds.
India’s ONGC, China’s CNPC and Malaysia’s Petronas are the largest international companies currently in operation within both Sudans.
Among the European companies expected to take renewed interest here is Total, which has had fields in South Sudan for 30 years and a small office on the ground in Bor, in the centre of South Sudan. The French supermajor has a large share in Block B in Jonglei, in the South, yet it has remained out of the country for 30 years mostly due to the security situation.
Low domestic demand
Creating a local market for gas consumption would be a considerable challenge in itself. Only around one-third of Sudan is electrified, according to figures from the International Energy Agency (IEA), which suggest petroleum accounted for only 32 per cent of Sudan’s total primary energy consumption in 2008, with 68 per cent of its energy consumption coming from combustible renewables and waste.
This reflects the large population segment living in rural areas without access to the electricity grid, relying largely on biomass for heating and cooking needs.
Oil production
Sudan’s oil production began in the late 1990s, following the first early discoveries by Chevron in the 1970s and 1980s, with the industry growing rapidly after the July 1999 completion of an export pipeline linking central Sudan to the Port of Sudan.
Oil production averaged just over 470,000 bpd in 2010 according to the EIA, declining to 460,000 bpd in the first half of 2011 and further declines forecast for the years ahead.
Production is sourced from two groups of blocks in addition to output from smaller, newer areas developed more recently. The Greater Nile Oil Project is the first and oldest development, covering Blocks 1, 2 and 4, which produced an estimated 150,000 bpd of Nile Blend in 2010.
This is operated by the Greater Nile Petroleum Operating Company (GNPOC), a consortium of China National Petroleum Corporation (CNPC), which holds 40 percent along with partners Petronas (30 percent), India’s ONGC (25 percent) and Sudan’s national oil company, Sudapet (5 percent).
The second major field covers Blocks 3 and 7, operated by the Petrodar consortium of CNPC (41 per cent), Petronas (40 per cent) Sudapet (10 per cent) and Kuwait’s Tri- Ocean Energy (3 per cent). This produced around 260,000 bpd of Dar Blend in 2010. Other smaller sources include Block 6 which produced just over 40,000 bpd and Block 5a, another source of Nile blend, which produced between 20,000 bpd and 30,000 bpd in 2010.
Contested territory
Abyei, an oil producing region that traverses the new border between Sudan in the north and South Sudan, has been a flashpoint for some time. UN authorized peacekeeping troops from Ethiopia were monitoring the situation here from a few weeks prior to the South’s independence.
Though it has been the centre of fighting, its importance tends to be more “cultural and symbolic” according to Stephen Snyder, analyst, Ergo, a global intelligence and advisory firm.
“Abyei’s output has declined precipitously over the past five years, mostly related to the fields’ ageing, not violence,” he says, though explains that in October, Juba made an offer to buy Abyei back in exchange for oil. “But it does not appear that Khartoum directly addressed the proposal.”
According to Snyder, the real trouble areas where oil production is high are South Kordofan, Blue Nile, and Jonglei states: “There are so many pockets of ethnic tension in Sudan that trying to stop violence is like playing ‘whack-a-mole.’”
A tough proposition
According to Mills, one of the defining characteristics of Sudan’s oilfields is that they all tend to be quite small “there’s a lot of them, but they’re small. So you’ve got a lot of scattered operations – it’s structurally very complicated and it’s difficult to drill.”
Beyond the political situation, the most significant challenge that lies ahead of South Sudan in building its own oil industry relates to this lack of infrastructure – a point echoed by Marc Buchner, head of office, South Sudan, Integrity Research and Consultancy.
Buchner has been on the ground in Juba, central South Sudan, since August this year in his role with Integrity, a UK-based organisation that conducts research in areas of conflict, post-conflict and otherwise fragile environments.
“There is literally 30 km of road in the entire country – and we’re talking about a vast country; there is a huge lack of infrastructure,” he says.
A severe shortage of skilled labour in South Sudan, from technical skills through to managerial staff, is a further impediment to the new nation in building a self-sufficient oil industry.
“While the north was a centralized high-capacity government [for IOCs to deal with], in the south there just is not the expertise…and it is a very federalised system…there is no central body they are dealing with,” he adds.
The major sticking point
“There is a severe current disparity in the negotiations between South Sudan and North in terms of transit fees,” says Buchner.
“The main reason for this is how payments for the projected financial deficit in the North’s annual budget by the loss of oil revenue (though it is the South’s oil) are to be calculated. The IMF have calculated a figure for this projected deficit at roughly US$10 billion.”
He explains that the South’s proposal is to make a grant payment of roughly a third of this amount over five years and to pay a transit fee based on a barrels per kilometer spend, which equates to roughly 60 cents per barrel for the shorter pipeline and 80 cents per barrel for the longer one.
“The North have demanded a flat fee of $34 per dollars per barrel. They have changed their rationale for this figure – originally it was just the rate per barrel, now it is justified as being the rate per barrel inclusive of a revenue disparity grant,” Buchner adds, revealing that the most recent round of negotiations broke down in early December.
Robin Mills agrees on just how out of step with international market rates the figure being demanded by the north is.
“The figure of that transit fee is just crazy…my understanding of international law is that a landlocked state is supposed to be given cost-free access to the sea. They would be allowed to charge them for use of the pipeline, to cover their construction costs, but to charge them for the transit shouldn’t be allowed,” he adds.
According to some research undertaken by Manaar Consulting, Mills says a reasonable charge for the transit would be “around US$4 to US$5 per barrel… certainly not US$32.”
The talking continues
Discussing the prospects of the next meeting between the two Sudans, which was set to take place in Addis Ababa, Ethiopia on December 20, just before Pipeline Magazine went to press, Buchner was quite skeptical there would be any significant outcome.
“They are very far apart in their standpoints. By all accounts, it’s not about one side or the other being particularly belligerent, but it is just a very difficult problem to solve,” he says, explaining that he can see the problem from the perspective of both sides.
He believes the involvement of Chinese stakeholders in negotiations will also do little to smooth the process towards a resolution on either the sovereign rights to the resources of Abyei or the bigger issue of pipeline access.
Before the South’s secession, exports to China accounted for some 40 per cent of Sudan’s oil exports, meeting around 5 per cent of the Asian country’s energy demand, according to EIA figures. “There is only going to be measures of assistance, there is no silver bullet solution and there won’t be any major outcome [from this meeting],” says Buchner.
He alludes to the situation whereby international oil companies operating in the country now also have to adjust to dealing with the new South Sudan government and its NOC, Nilepet, after decades of working with Sudapet, the north’s NOC.
Difficult compromise
South Sudan has raised the prospect of building a pipeline that would link up with the oil distribution network planned between Uganda and Kenya. Total, which is set to buy into blocks in Uganda where 1.1 billion barrels have been discovered, recently offered its
services if South Sudan decides to pursue this option.
Speaking on the sidelines of the World Petroleum Congress in Doha last month, Total’s CEO Christophe de Margerie said this was “just thoughts today,” indicating Malaysia’s Petronas and China’s CNPC may also be interested in the project.
Though this option is far from a comprehensive or easy solution.
“I can’t emphasise enough how slow the pace of progress here is. I think two years [for building the pipeline] is a very conservative estimate,” says Buchner.
He explains that in addition to working in some extremely harsh terrain, there are a lot of different tribes and areas to deal with: “It is a very tough working environment on contractors, and literally nothing is made in South Sudan, everything has to be imported.”
Buchner also raises the prospect of relations between north and south cooling further if a pipeline from South Sudan into neighbouring countries becomes increasingly likely.
Asked whether he expects a mutually agreeable resolution on pipeline transit fees from South Sudan into the north will be reached, he says: “That’s the million dollar question. I’d like to be optimistic and say somehow a negotiation resolution will be reached – but there is also a chance negotiations will get harder if the pipeline idea progresses.”
The fluid situation continues In the post-secession environment, South Sudan is currently awaiting the finalisation of new legislation that will outline the process for more international companies to move into the newly-formed nation.
As Integrity’s Kate Ives says: “Our expectation is that once the political climate stabilises and the new Juba government pushes through the Petroleum Bill, which is currently in draft form, more international companies will start to move in.”
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