South Sudan Struggles To Boost Its Oil Production

The youngest internationally recognized nation on earth, South Sudan’s relationship with its oil and gas reserves has been troubled and ambivalent – ever since its first day of existence oil was Juba’s immediate opening to generate a steady flow of government revenues that could rejuvenate the country’s war-torn economy. To a certain extent, South Sudan did manage to maintain a level of production feasible enough to resolve the quintessential issues of existence yet failed to pay attention to the nascent state’s teething problems. Protection of the environment turned out to be one of those overlooked topics that suddenly took center stage this summer and might even jeopardize the country’s future prospects. Could South Sudan weather such an environmental storm?

Forced ethnic clearing of the Dinka and Nuer after oil was found in what is now South Sudan in the 1970-1980s, a subsequent sanguinary civil war bordering on genocide, oil majors coming and going against the background of intense fighting, the long-awaited start of production at the turn of the 3^rd millennium – to cut a long story short, South Sudan has seen everything an oil-prolific country potentially could (it stands 5^th in Africa’s largest reserves list). Well, almost everything for it was still to witness a full-blown legal dispute with regards to crude production causing allegedly unmitigable damage to the environment, up until this year. This April a South Sudanese non-governmental organization called Hope for Humanity Africa (H4HA) filed an injunction against the Juba government, claiming that it neglected and overlooked environmental damage resulting from recurring oil spills in the north of country.

H4HA alleged that the total environmental damage tally shot up to 720 million at that point. Yet the South Sudanese NGO did not stop there as evidence of oil spills began to mount, in late June 2020 it filed another injunction at the East African Court of Justice, demanding a total production halt that would include both the Greater Pioneer Operating Company (GPOC) and the Dar Petroleum Operating Company (DARPET), operated by a consortium of China’s CNPC and Sinopec, Malaysia’s Petronas and South Sudan’s NOC Nile Petroleum. Both the Juba government and the producing consortium has shrugged off accusations of its pipelines leaking into the River Nile (the largest source of water in the area, both for people and animals) and have heretofore not reacted to the temporary injunction. Related: U.S. Oil Production Won’t Make A Comeback Under Current Prices

Mitigating the environmental impacts of crude production is by no means a novelty for the South Sudanese authorities – in January 2020 President Salva Kiir announced that the government would conduct a comprehensive audit of all oil fields to gauge all environmental risks. Unfortunately for everyone involved, the environmental audit was called off as soon as COVID-19 reached East Africa (the 1^st confirmed case in South Sudan was identified on April 05). Against such a background, it seems unlikely that either the South Sudanese government or the Asian majors active in the country would want to voluntarily cut output. If anything, it is CNCP, Sinopec and Petronas that face the risk of increased regulatory burdens in case the EACJ finds the suitors’ claims legitimate.

Just as South Sudan’s oil production was nearing its 2020 objective of 200kbpd (the long-term target is 350kbpd, without any specific deadline attached to it), coronavirus has adversely affected the country’s output rates, decreasing it by 20-25kbpd. Fears of the pandemic spreading have also delayed the commissioning of South Sudan’s first refinery in Sabinat, which albeit at a mere 8kbpd capacity could substantially improve oil products’ availability. Whilst the COVID-related restrictions and adverse market conditions might disappear within a couple of months, replenishing South Sudan’s quickly evaporating reserves (estimated at 1 BBbls in late 2019) might turn out to be an even bigger challenge. Ever since South Sudan became independent in 2011, it made only one (minor) discovery last year in Northern Upper Nile State with a 5.3 MMbbls recoverable reserves tally. Related: Why Natural Gas Prices Just Exploded

Whilst the price drop remains in and of itself negative enough, the COVID-induced market depression came at a very tense period for South Sudan. One of the founding pillars of its independence era was the oil exports’ agreement in 2012, whereby South Sudan would pay Khartoum a tariff of $24.1 per barrel for Dar Blend and $26 per barrel for Nile Blend, the larger part of which ($15 per barrel) covers the cost of debt repayment shared by the two nations and the remaining part covers transportation of crude to Sudan’s largest port, Port Sudan. Although the latest version of the original amendment, prolonged in late 2019 for another 3 years, allows for certain flexibility in times of depressed oil prices, the margins that drillers in South Sudan have been working with recently are little to none.

Cognizant of the difficulties that the upcoming period might entail, South Sudan is assumed to end the previous practice of offering fixed discounts to the final crude price should the buyer pre-finance its purchase. From now on, the South Sudanese energy ministry would no longer offer 10% discounts on pre-financed deals, every sale would be done on an open market basis. Probably the only positive market development that South Sudan witnessed in the past 6 months was both Dar and Nile Blend trading at a premium to Dated Brent (some 10 years ago both would be trading at -6/-7 to Brent because of the grades’ waxiness). Considering all the above and given how important crude is to the South Sudanese economy (99.2% of exports), one can fairly firmly assume that its authorities and companies will prefer to ignore the environmentalists’ threat and only act when confronted with a binding decision.

By Viktor Katona for Oilprice.com

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