Newly independent, oil-rich South Sudan holds some 75% of Sudan’s total oil resources, but it may be too early to risk things here. Ask Total (NYSE: TOT). The government just split up one of the French oil major’s massive concession blocks to give the bulk of it away to other companies.
According to a Reuters report on Wednesday, Total’s largely unexplored Block B has been split into three parts, one of which Total will be allowed to keep, while the other two may go to US major ExxonMobil (NYSE: XOM) and Kuwait’s Kufpec. (Though the government says they’ll be put up for tender).
It’s a pretty sour message for potential investors.
Here’s what’s happening: South Sudan gained independence from Sudan in July 2011. Total’s Block B concession had been negotiated under a united Sudan. Officials in Juba (the capital of South Sudan) believe that their newly won independence gives them the right to renegotiate a concession that was granted under the old Sudan.
The concession block is located in South Sudan’s remote eastern Jonglei state. This is a restive region riddled with rebel formations.
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Block B has been an eternal headache for Total. In 1985, Total halted work in the block due to the civil war between the north and the south. Everything was on hold until 2005, when the war ended in a fragile peace.
Exploration has never begun, despite Total’s announcement in February that it would, soon. This is rankling South Sudan, which is desperate to get this massive block explored and production underway. Its economy is collapsing and Block B will be one of its saviors. Block B is, after all, some 120,000 square kilometers.
The legality of this move is a bit murky, but it’s unlikely that Total will have any recourse to challenge Juba’s move. South Sudan’s right to redistribute its concessions is enshrined in the new hydrocarbons legislation it passed after gaining independence.
Certainly, the situation is dire for South Sudan. After reaching output of around 350,000 bpd, in January, South Sudan shut down production entirely over Sudan’s attempt to charge prohibitively high transit fees for exports. For now, South Sudan has no alternative to pipelines that transport its product through Sudan. South Sudan’s economy—almost 100% dependent on oil revenues—came to a grinding halt.
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Fighting in April between South Sudan and Sudan over the disputed Heglig/Unity oilfields caused severe damage to fields and equipment. But now, South Sudan says it’s nearly ready to resume production and should be producing 230,000 bpd by the end of November.
Also behind South Sudan’s growing desperation is the fact that its reserves are on the decline, so without new exploration and production, we’re looking at production figures cut in half by 2020. South Sudanese officials also say they lose some 40% of product due to inferior technology.
What this is really about is Juba wants to cut a deal with ExxonMobil—hedging its bets that the US company will pick up the pace where Total was dragging its feet.
This, though, is not the greatest of South Sudan’s concerns. Talks between Juba and Khartoum are languishing, and while the two sides have agreed on reasonable transit fees for South Sudan’s oil, no oil will flow from South Sudan until a border security deal is in place.
By. Charles Kennedy of Oilprice.com