Date: Mon, 12 May 2014 22:53:45 +0200
Oil in South Sudan: Turning Crisis Into Opportunity
By Jill Shankleman
12 May 2014
Outside of donor and humanitarian aid, South Sudan's economy is almost
entirely dependent on the oil sector - and that sector is in crisis.
After a unilateral shutdown of the industry by the government in January
2012 that lasted 15 months, and ongoing partial shutdowns due to internal
conflict, not only are current oil revenues drying up, but the prospects for
new investment have been nearly destroyed.
As a result, demands on the donor community will grow rather than tail off
in coming years. However, looking further afield, and if geology allows, a
reformed South Sudan has the potential to turn what has until now been a
developmentally detrimental oil industry - generating the finance and
providing incentives for violent conflict - into one that generates positive
change for its war-torn people.
Steep Decline
Demands on the donor community will grow rather than tail off in coming
years
In 2005, when South Sudan was first established as an autonomous region
under the Comprehensive Peace Agreement with the Sudanese government in
Khartoum, oil production was close to its peak. Following full independence
in 2011, annual revenues were projected to be around $9 billion a year,
dropping off by more than half over the next 20 years as existing fields
were depleted (and in the absence of new investment). Development plans
focused on using the
period of foreseeable oil wealth to build infrastructure and expand the
non-oil economy, as well as seek large-scale investors for new oil
exploration and find alternatives to oil export through Sudan's Red Sea
ports.
Since 2012, the potential of the oil industry to provide revenues has
deteriorated very sharply. The government stopped all oil production for a
15-month period starting in January 2012 because of a dispute with Sudan
over oil transit, debt, and border issues. Eventually a
three-and-a-half-year agreement on access and fees for use of export
pipelines was reached. But before production could recover, it was reduced
again due to South Sudan's ongoing internal conflict. The Unity oilfields
are shut down and the other fields in Upper Nile are under threat. Some
workers have been killed, oil facilities are reported damaged, and oil
company staff evacuated. Furthermore, there has been no significant new oil
exploration in South Sudan since the original oilfields were found due to
political and security risks.
Questionable Recovery
At some point, South Sudan's civil war will end. The country will then face
a very different development scenario to that of July 2011, the spring of
independence. In particular, the oil revenues that produced a nominal GPD
per capita of over $1,800, much higher than South Sudan's East African
neighbors, are unlikely to return, let alone grow.
The oil industry worldwide has demonstrated an ability to operate
commercially in conflict areas, for example, during Angola's civil war and
in Sudan in the 2000s. But this is only where conflict does not impinge on
production or the safety of workers. This limit was evidenced when the first
steps to develop an oil industry in Sudan came to an end in the 1980s after
three Chevron workers were killed and the company withdrew.
In deciding where to invest - whether in repairs, upgrades, or new projects
- oil companies assess first the amount of oil, but then the commercial
viability of investment. What will be the profit after production and
transport to market and what are the political risks of investment? The oil
industry involves long-term investment that cannot be picked up and moved if
conditions deteriorate. Key political factors considered are whether
governments will stick to the conditions of long-term contracts, if violent
conflict could stop operations, and if pervasive corruption exposes them to
risks of Foreign Corrupt Practices violations. (The other side of the issue,
whether the presence of the oil industry itself contributes to conflict, is
rarely considered by oil companies other than the large U.S. and European
oil companies, who typically approach this indirectly by evaluating if they
could operate in a conflict zone consistently with standards such the UN
Guiding Principles on Business and Human Rights and the Voluntary Principles
on Security and Human Rights.)
Although there were high hopes for rapid economic growth in South Sudan
before civil war broke out (last year, The Economist projected it could have
the fastest growth rates in the world in 2014), the nascent country now
rates extremely high for political risk in terms of the unreliability of the
government as a partner and the ability to maintain operations.
Since Sudan's oilfields were first developed, alternative investment
opportunities have materialized for both Western and Asian oil companies. If
and when peace is re-established, the two most likely near-term scenarios
for oil are therefore not promising:
1.The operators of the oil fields will restore production as much as
possible with the most minimal spending on repairs needed to do so, then
produce crude oil as fast as they can until the fields are no longer
commercially viable; or
2.Damage to production fields and pipelines will be found to have been so
extensive that some fields are abandoned permanently.
The prospects that companies will invest millions to extend the productive
lives of existing oilfields are close to nil. South Sudan has to assume that
even with peace, government revenues from oil will stay low and dependence
on the international community for humanitarian and development aid will
stay high.
A Second Chance?
Looking further ahead, however, there is one bright spot: French oil giant
Total continues to hold onto exploration rights that were first sold in
1980, despite challenges to ownership of the concession and its likely
reduction in size. Total has undertaken almost no exploration on its blocks
due to conflict, but the fact that the company has maintained its rights
indicates a possibility that there could be substantial additional oil
resources in the country.
What is needed for a second chance at oil development to be successful? Over
and above sustained peace, which is a fundamental prerequisite, three things
are essential.
First, the 2012 Petroleum Law and the proposed Petroleum Revenue Management
Act must be implemented. They provide the necessary legal and institutional
underpinning for a modern oil sector. Successful implementation requires
building capacity and institutions, and since a second wave of oil industry
is at least a decade away, there is time to do this. Donors such as the
World Bank and Norwegian Agency for Development Cooperation have been
involved in
capacity building - it is essential that this continues and that the
opportunities offered to learn how to manage the sector are seized.
Peace is a Fundamental Prerequisite
Second, the time-limited deal with Sudan on export pipelines should be
extended so that any early oil from new finds can be exported quickly and
earn revenues to finance a new pipeline. The example of Azerbaijan, where
early oil was initially pumped through existing Russian pipelines while the
new BTC export pipelines through Georgia and Turkey were being built is
highly relevant.
Third, South Sudan needs to start building credibility as a reliable
investment location. One priority is cracking down on corruption. This means
improving the transparency of exploration and production contracts, payments
to governments, oil funds, and transfers to local governments and
communities, including the state oil company, Nilepet, and the oil services
sector. Joining the Extractive Industries Transparency Initiative would be
an important step, bringing in civil society and some international
oversight. Equally important, the government needs to reset its approach and
accept that companies will not make multi-million dollar long-term
investments if the government acts unilaterally by shutting down operations
or allows political tensions to deteriorate into violent conflict that
affects the industry directly.
These changes are a tall order, but the scale of the current crisis in the
oil sector cannot be overestimated. Under the right conditions, new oil
exploration in South Sudan remains a possibility a decade or so out. These
conditions are easy to describe, hard to deliver: sustained peace in
oil-producing areas, stable long-term contracts, and assurance of
uninterrupted and safe oil industry operations. If this basis could be
established, then oil wealth could provide the financial foundation for the
economic and social infrastructure that South Sudan so desperately needs.
For this to happen, the post-war government will have to recognize the need
for thorough reform in the oil sector. Without this, the golden goose is
unlikely to lay again.
<http://www.shankleman.com/> Jill Shankleman has been a scholar at the
Wilson Center and a senior social and environmental specialist at the World
Bank. She writes extensively on the oil industry, including
<http://www.usip.org/publications/oil-profits-and-peace> Oil, Profits, and
Peace, and is a consultant on social and political risk to multinational
companies and banks. She will be speaking on prospects for the oil industry
in South Sudan at a forthcoming conference at St. Anthony's College, Oxford.
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