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Oil firms wary despite South Sudan's peace deal

Juba is seeking new partners after the government abandoned Total negotiations

A tentative peace agreement in South Sudan amid plans to repair infrastructure and beef-up security will go some way towards helping the country reach ambitious oil production targets. But it'll take more than words to get the industry back on side, as talks with Total over exploration and development are halted.

Oil production has plummeted since South Sudan's independence from Sudan in 2011. Prior to that their combined output was around 480,000 barrels a day. South Sudan had the lion's share of around 350,000 b/d from proved reserves of about 3.5bn barrels. But output has since dwindled to below 130,000 b/d, as a long-running conflict between warring factions in the newly created state forced the cessation of production and exploration efforts.

The production that's still underway comes from Blocks 3 and 7, in which China National Petroleum Corporation (CNPC) and Malaysia's Petronas have stakes. South Sudan's petroleum minister Ezekiel Lol Gatkuoth has said the government believes production on those blocks will rise in the coming months, to more than 200,000 b/d, though it remains unclear how this will be achieved.

Juba is also trying to reignite interest in re-starting production and fresh exploration on other blocks, claiming that an improved security situation should assuage the concerns of international oil companies.

The government's case was bolstered by the signing, in July, of a power-sharing agreement with rebels in the Sudanese capital Khartoum. That followed on from the signing of a ceasefire and peace agreement between the government and opposing factions in June.

In March, the US imposed sanctions on 15 South Sudanese oil operators, claiming their revenues were helping the government to buy weapons and fund irregular militias to the detriment of the peace process.

As part of the power-sharing deal, Riek Machar, leader of the main Sudan People's Liberation Movement-in-Opposition (SPLM-IO) rebel group, was re-instated as vice president in the government of President Salva Kiir. The SPLM-IO and other opposition groups were also given government posts.

Potentially just as important for the hydrocarbons sector was a related agreement with Sudan, to repair oil infrastructure facilities destroyed by the conflict over the next few months and to create a joint security force to protect oilfields from attack.

The Sudanese government, led by President Omar al-Bashir, still has significant clout in South Sudan. Not just because of its role in maintaining security around the border oilfields, but also because it controls the only oil export pipeline out of landlocked South Sudan.

Total talks end

Gatkuoth says oil companies don't need to worry unduly about security issues. Even before the pact with Sudan was signed, he was downplaying the risks. He told Petroleum Economist in May that the Asian-led consortiums on the currently producing fields had been operating in a safe, protected environment and that the same was possible on other blocks.

However, the industry will take some convincing that the potential benefits of investment outweigh the risks in South Sudan at present. Even as power-sharing talks were making progress in late July, the government announced it had abandoned long-running talks, stretching over five years, with a group led by France's Total, which included Tullow Oil and Kuwait's Kupe, over exploration and development of two oil blocks, B1 and B2.

Gatkuoth said in May he was confident that any concerns over security and the operational framework for the blocks, which lie close to the border with Sudan, could be assuaged. But, at the same time, industry sources were suggesting Total was less enthusiastic about prospects and so it has proven.

"South Sudan needs to move quickly to bring investment to blocks B1 and B2, and after a long period of talks Total has been unable to agree on economic terms and a timeline that work for the country," Gatkuoth said in a statement issued on 25 July. The petroleum ministry said Total had "insisted on an extremely long exploration period and on economic terms that are not viable for the government", without giving details. South Sudan now wants to open talks on the blocks with companies prepared to develop the fields at a faster pace.

Economic collapse

The country sorely needs that search to be successful. Its heavily oil-dependent economy has been left in tatters following years of fighting, exacerbated by a collapse in oil revenues due to the shutdown of production facilities and the post-2014 oil price crash.

Conflicts starting in December 2013 and then again in mid-2016 have resulted in the deaths of hundreds of thousands of people, while more than 4.2m people have been displaced and over 40% of the country's population of 12m face severe food insecurity, according to the World Bank. With the economy beyond oil largely comprised of low-paid or subsistence agriculture or herding, the country's gross domestic product per capita fell to less than $200 in 2017 from $1,111 in 2014. Inflation is rampant, and, in the absence of oil export revenues, the dollar exchange rate of the South Sudanese pound has soared.

The pace of oil industry reconstruction will depend, to a large degree, on how well the current peace agreement holds over the coming months. Previous deals have failed, and some opposition groups have already suggested the current agreement lacks sufficient detail over how the country will be governed to make it workable.

Investors will also need to factor in dealing with Nile Petroleum (NilePet), the state oil company, which has attracted criticism from international organisations, notably in a recent Global Witness report highlighting its lack of transparency and autonomy.

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