South Sudan eyes Western oil investment
Decades of civil unrest, a plunge in oil prices and international sanctions have spooked investors. Now the country's oil minister wants to lure them back
It has been a traumatic birth for the world's youngest nation. Since gaining independence in 2011, South Sudan has been battling civil war, economic disaster, famine and corruption. Seven years on from its split with Sudan, border disputes between the two countries remain a point of serious contention—and a major security risk to operators in the oil industry.
In a central London hotel I meet South Sudan's oil minister, Ezekiel Lol Gatkuoth. He is in the capital to catch the onslaught of industry executives who have come to network during International Petroleum Week. He is on a charm offensive to attract upstream investors.
"I would like to see BP, ExxonMobil and Chevron—the main players in oil exploration. We want them to come to South Sudan and to continue to enjoy what they've discovered," Gatkuoth told Petroleum Economist.
It's not an easy sell. Ongoing civil unrest, international financial sanctions and plunging crude prices have spooked Western investors.
The south relies on Sudan to pipe, process and transport its crude to international markets—mainly China. This relationship is frequently fraught with tensions—not least over border disputes.
In January 2012, a disagreement over transit fees with Sudan resulted in violence. South Sudan's army, along with Sudanese opposition forces, seized an oilfield and destroyed infrastructure. Output plummeted.
The country descended into violence again at the end of 2013, between forces loyal to President Salva Kiir and those supporting former Vice-President Riek Machar. Several peace deals failed to stop the fighting, including one brokered in December 2017, which was broken within hours of its inception.
'For us, oil should not be a curse, it should be a blessing for the people of South Sudan'—Gatkuoth
US financial sanctions against Sudan were partially lifted in October 2017, but at the time of writing the UN was mulling imposing an arms embargo on the country.
These conditions, coupled with the resulting slump in output, are hardly alluring for international oil companies.
According to the US Energy Information Administration, combined oil output from both Sudan and South Sudan fell to 257,000 barrels a day in 2016. Last year it slumped again, down to 252,000 b/d, with South Sudan accounting for 150,000 b/d of the total.
Gatkuoth said South Sudan's oil output is now around 139,000 b/d—all of which is Dar Blend. (A year before Sudan and the south separated, production from the Dar blend stream alone was around 300,000 b/d.)
The current level is down from a peak of 486,000 b/d (across the then unified country) in 2010. Gatkuoth insists South Sudan's output can reach 170,000-200,000 b/d this year before surging to 480,000 b/d by the middle of 2019. A more-than trebling of oil output would be an ambitious target over a five-year period, let alone one.
South Sudan's plummeting oil output—coupled with the slump in crude prices since its independence—has had a catastrophic impact on the country's economy. The World Bank says South Sudan is "the most oil-dependent country in the world", with crude accounting for 60% of its GDP. "On current reserve estimates, oil production is expected to reduce steadily in future years and to become negligible by 2035," the bank says.
South Sudan's Dar Blend trades at a significant discount to Brent crude prices, so any substantial fall in international oil prices has a direct impact on the country's finances.
Bringing back petrodollars to South Sudan is crucial for the country's recovery from its war-ravaged economy, as Gatkuoth acknowledges.
"We use oil revenues to finance major projects like roads because South Sudan is a landlocked country. We want to connect with Uganda, Kenya, the Central African Republic, with Sudan and Ethiopia," he told Petroleum Economist. "And then of course financing basic services: schools, clinics. For us, oil should not be a curse, it should be a blessing for the people of South Sudan."
Conflict slashed the country's 2015/16 GDP by 6.3%, according to World Bank data, while the number of people living in extreme poverty has reached 65.9%. "Avoiding protracted crisis requires recommitment to a political settlement and major fiscal adjustment," the World Bank said.
To achieve the 480,000 b/d output figure which Gatkuoth insists is possible, around $500m of upstream investment would be needed, he said. And, of course, some willing majors.
South Sudan's upstream is dominated by Asian firms, including China National Petroleum Corporation, India's Oil and Natural Gas Corporation and Petronas. Last year Nigerian firm Oranto Petroleum invested $500m in South Sudan's upstream. Now Gatkuoth wants to lure the big, Western majors back.
"CNPC have taken risks, even though we have had some security issues. They continue to be there and they are maintaining production and benefitting. It is the same with Petronas and ONGC," he said. "I think the Western-orientated companies are very keen not to take risks or they are politically-driven."
The minister said he was in discussions with Total over exploration rights to several blocks, but there were sticking points over issues including the length of exploration period, cost recovery and tax rates. Gatkuoth added that he was proposing a tax rate, including royalties, of around 10-15%, exploration lengths of up to eight years (Total asked for 12 years, he said) and for the government to foot the bill for 47-50% of recovery costs (Total had asked for 80%, according to the minister).
South Sudan has to pay Sudan a $9/b fee for transportation, transit and processing of its crude. It began paying the fees to Sudan in cash, Gatkuoth said, but fell behind on payments (when exactly he didn't say), so its neighbour is taking payment in crude instead—to the tune of 600,000 barrels every two months until April.
When South Sudan gained independence, Sudan lost 75% of its crude production and, consequently, the resulting revenue. In 2012, to compensate the north for this loss of income, South Sudan agreed to pay Sudan $3bn in transitional financial assistance over a three-year period. Payments, however, continue.
"We translate this ($3bn payment) into $15/b (of crude produced)," he told journalists at a briefing in London.
This $15/b transitional financial assistance payment, coupled with the $9/b for transit and processing fees means in reality that South Sudan is tied to giving Sudan $24 per barrel of crude produced. This will continue until 2020, Gatkuoth said.
In November, South Sudan signed a deal—along with Opec and nine other countries—pledging to limit crude output to help the oil market return to balance. South Sudan pledged to cut 8,000 b/d—not of its current output but of the 480,000 b/d of production that it used to have in 2010. In practice, this means very little, given that the country is producing less than a third of that.
Gatkuoth admits that this symbolic "cut" pledge is part of a wider aim to join Opec—in part, ultimately, to help attract investment. He added that it was "very crucial" for South Sudan to be part of the group, and as soon as possible.
"We want to become an Opec member because it is an organisation that you can benefit from as a country," he told Petroleum Economist. "As a non-member we are participating in stabilising the oil market. Then we want to eventually get into the organisation (Opec) so that we can be a key player."
The minister said he believed the existing cuts deal would be extended past June.
139,000 b/d—South Sudan's oil output
"We are benefiting from that decision as a country and we believe that they will continue to extend (the deal) because extending it means that we will actually control the market and stabilise," he said. "This is good for everybody."
Gatkuoth said the government was trying to alleviate IOCs' concerns over security by launching an "Oil Protection Force"—a special security agency to ensure both the safety of industry workers and the protection of oilfields.
He added that in his contacts with Western majors he had been "appealing to them", pointing to South Sudan's proven oil reserves of 3bn barrels—only 30% of which have so far been explored.
Gatkuoth said that the Asian firms which dominate the country's upstream have remained in South Sudan because they are more willing to manage risk. (He neglected to mention US financial sanctions, which remain in place.)
"Security is stabilised, we will protect the investors, physically and also using our investment laws, which are favourable to them, such as tax exemption," Gatkuoth said. "Opportunities are there and we want them (companies) to come to build the Republic of South Sudan with us together. We want the whole world to come to South Sudan."