* Project would cross areas of tribal violence, bandits
* South Sudan oil supply seen falling (Adds South Sudan negotiator's
comments)
By Hereward Holland and Aaron Maasho
By Aaron Maasho and Hereward Holland
ADDIS ABABA/JUBA, Jan 25 (Reuters) - South Sudan's oil output is on track to
be more than halved as it moves toward a full shutdown, an official said on
Wednesday, one day after the country signed a deal to build a new export
pipeline through Kenya rather than its old civil war foe Sudan.
Landlocked South Sudan - which seceded from Sudan last July under a 2005
peace accord - has long sought an export route through East Africa but
analysts say the project faces security and financial challenges that could
prove difficult to overcome.
The announcement of the pipeline agreement late on Tuesday comes amid an
increasingly bitter row with Sudan over how much South Sudan should pay to
use Khartoum's pipeline and Red Sea port which the new nation depends on to
export its oil.
Sudan began confiscating some oil exports from South Sudan this month to
make up for what it called unpaid transit fees. On Jan. 20, Juba said it
would shut down its output of roughly 350,000 barrels per day (bpd) within
two weeks.
"The government of South Sudan is making good progress with the shutdown of
all oil wells in its producing fields," South Sudan's top negotiator Pagan
Amum told reporters in Addis Ababa, where the two sides are meeting for
talks.
"The volume of oil production will have been gradually reduced from 275,000
barrels per day to 135,000 barrels per day," he said.
All 55 wells in Block 5A, operated by the White Nile Petroleum Operating
Company, as well as all 274 wells in Blocks 1, 2 and 4 have been fully shut
down, and the shutdown of other wells was going smoothly, Amum added.
More than 600 wells in Blocks 3 and 7 had reached a "reduced production
stage," he said.
Amum said South Sudan would resume production if Sudan immediately paid the
value of "stolen or confiscated" oil at the sales price contracted to
purchasers, agreed not to block vessels coming to load oil, and met other
conditions.
There have been few public signs of progress toward a deal. Analysts say
Sudan's stated demands of about $36 per barrel as a transit fee have been
far in excess of international norms. South Sudan has said it wants to pay
under a dollar per barrel.
ANALYSTS SCEPTICAL ON PIPELINE
South Sudan's deputy petroleum and mining minister Elizabeth James Bol told
Reuters it would take around 11 months to build the new pipeline to the
Kenyan port of Lamu on the Indian Ocean.
"They will start as soon as possible," she said, adding the company which
has won the contract will be announced this week.
South Sudan has held talks with Toyota Kenya over a pipeline to Lamu, where
Kenya wants to build a port and refinery. Amum, the negotiator, said
officials also approached Ethiopia to discuss a pipeline that would pass to
Djibouti.
Officials have also talked to other firms about connecting to an existing
Kenyan pipeline from Eldoret to the port of Mombasa.
Analysts said a Kenya pipeline would be difficult to build across rough
terrain hit by tribal violence and also passing through bandit-stricken
regions in western Kenya.
South Sudan has said it would cost around $1.5 billion, but analysts say a
hefty insurance premium would have to be added because of the security
concerns.
Forecasts for dwindling supply from overpumped fields could further
complicate the argument for the project.
"It would be really difficult," said Dana Wilkins at Global Witness. "We're
looking at least a year or two because of the length of the pipeline, the
terrain it has to cover and security concerns in the region."
They said a route from blocks 3 and 7 in Upper Nile run by a consortium of
mainly Chinese and Malaysian firms which produce 250,000 bpd would mean a
pipeline of about 500 kilometres to Juba from where another line running
1,260 km could go to Lamu.
The project would also require building two central processing facilities
for fields in the Unity and Upper Nile states since the existing ones are in
Sudan, Wilkins said.
Oil experts have questioned the economic viability of a pipeline in the
medium-term as output is expected to fall sharply in coming years because
some fields were overpumped by Khartoum in the run-up to South Sudan's
independence.
South Sudan output will decline to 200,000 bpd by 2016, to 160,000 by 2018
and further thereafter, according to estimates by the European Coalition on
Oil in Sudan, which is comprised of research groups, non-governmental
organisations and activists.
Some analysts say a pipeline would be viable only if new finds were made,
but exploration in the vast Jonglei state have been hampered by tribal
violence. France's Total holds a concession in Jonglei which is largely
unused due to violence.
"Production in Upper Nile peaked in 2010, Unity in 2005. Even if major new
fields were discovered today, it could be years before they come online in a
real way," Wilkins said.
Yet there are powerful political motivations supporting the push for the
pipeline by South Sudan, which broke away from Sudan last July under a 2005
peace deal that ended decades of civil war, said Zach Vertin at the
International Crisis Group.
"Such a decision may not be taken on the grounds of economic rationality
alone, but rather guided by a feeling that they won't realise full
independence as long they're held financially hostage," Vertin said.
The biggest buyer of oil from the two countries is China which bought some
12.99 million barrels last year. That amounted to five percent of crude
imports by China, which is also the top investor in South Sudan's oilfields.
(Additional reporting and writing by Ulf Laessing and Alexander Dziadosz;
editing by Jason Neely and James Jukwey)
C Thomson Reuters 2012 All rights reserved
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Received on Wed Jan 25 2012 - 17:04:11 EST
