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South Sudan's oil suitors still skeptical over security

Major investments in the civil-war ravaged country are likely to depend on the success of a recently signed peace deal

An agreement under which South African state-controlled companies could invest as much as $1bn in South Sudanese energy projects, including a refinery, is welcome news for the ailing oil sector whose output has been severely curtailed by civil war.

However, there is no guarantee the projects will materialise or that the South Sudanese government can meet its own ambitious target of boosting oil production back towards historic highs of around 350,000 bl/d by the early 2020s from some 150,000 bl/d in recent months.

The memorandum of understanding (MoU) was signed by South Sudanese energy minister Ezekiel Lol Gatkuoth and his South African counterpart Jeff Radebe during an energy conference in Juba in late November.

Under it, South Africa's Central Energy Fund (CEF) agrees to collaborate with South Sudan's state-controlled Nile Petroleum (NilePet) with a view to investing in a 60,000 bl/d refinery and pipeline infrastructure to serve the country's oilfields. The South Africa's state oil company PetroSA is part of CEF.

A new domestic refinery would provide a valuable asset for the landlocked country that is currently dependent on neighbouring Sudan-from which it became independent in 2011-for pipeline access to the coast and refining capacity.

Talk of pipeline investments also rekindle hopes that an alternative export route could be built to take crude exports to the Kenyan coast at Lamu, from where Kenya plans to export its own oil production from the early 2020s.

However, any funding in exploration, refining or pipeline capacity by South Africa is likely to require a stable political and investment climates and these are not assured.

Caution over peace deal

A power-sharing agreement, drawn up earlier in 2018 and signed on 12 September, between President Salva Kiir and opposition chiefs, including key rebel leader

Riek Machar, was aimed at ending the five-year civil war that has caused hundreds of thousands of deaths and wrecked South Sudan's already impoverished economy.

But investors will want to see if the agreement sticks before risking substantial capital in the expansion in South Sudanese oil production and the chances of a breakdown seem high.

"There are plenty of reasons to be sceptical," former EU Special Representative for Sudan Rosalind Marchand said in a note for think tank Chatham House in November.

"Two months after the signing of this latest deal, fighting has continued in several areas, humanitarian workers have been attacked, political detainees remain in jail and independent websites are still blocked," she said. Marchand noted that Kiir and Machar had been unable to work together during a previous attempt at power sharing in 2015.

Persistent allegations of corruption at NilePet and human-rights abuses in South Sudan are also likely to give potential investors cause for hesitation before entering the country.

Russian talks

The energy ministry can point to some new interest, having signed an MoU with Russia's Zarubezhneft to explore on four blocks. However, the timetable and nature of that investment remains unclear.

The Asian national oil companies (NOCs) that currently hold most of the country's oil licences have been doing little more than keeping their current operations running, despite government efforts to persuade China's CNPC, Malaysia's Petronas and India's ONGC to invest in exploration.

Aislinn Clarke, a regional analyst at consultancy Wood Mackenzie, says these NOCs are likely to remain cautious in terms of fresh exploration and new projects. Until there is more evidence that the peace deal is going to hold, they will restrict spending mainly to well workovers and small-scale infrastructure repairs, she says. 

She also highlights the challenges facing the long-touted Kenya pipeline. 

"A new pipeline to Kenya would be a positive. However, you've got big pipeline projects planned in Kenya and also Uganda through Tanzania that have a lot of good things going for them. But these are still struggling to get across the line. So, building a pipeline through South Sudan seems very hypothetical and, in any case, would probably take years to build given the long lead times in East Africa," she says.

Reopening fields

Until recently, virtually all of South Sudan's production came from blocks 3 and 7 in the Melut basin in the east of the country, away from the zone of most intense conflict. These produce around 130,000 bl/d.

Government hopes of a rapid increase in output are based on the assumption that production from fields that were badly damaged in the fighting, can be ramped up fast in the near future. These fields straddle or are close to the central part of the border with Sudan and are dependent on cooperation between Sudan, South Sudan and the rebels to function. They comprise the fields of the Greater Nile Oil Project (GNOP), in which China's CNPC is largest stakeholder, and the neighbouring Block 5A, operated by Petronas.

So far, one of the GNOP fields, Toma South is believed to be producing—with estimated output of 20,000 bl/d-with others scheduled to come back on stream over coming months.

Sudanese oil minister Azhari Abdulqader Abdalla said in late November that repair work would start in the Thar Jath field on Block 5a at the end of that month, and that the field would be operational by May 2019. Block 5A, which lies entirely within South Sudan, is capable of producing around 45,000 bl/d.

Analysts remain cautious over the potential to increase output. Wood Mackenzie estimates production could rise to around 170,000 b/d by 2020 with the incremental reopening of fields, but will struggle to get back to pre-independence highs over 300,000 bl/d

If output from the GNOP fields can be expanded, the light sweet crude they produce is likely to find ready buyers among European and Indian refiners seeking alternatives to sanctioned Iranian supply. But the above ground-risks are likely to remain challenging for the foreseeable future.

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