Case Study: Reviving South Sudan's ailing oil sector

South Sudan wants to double its oil output in the next financial year. International oil companies are ready to move in but they want to know if their operations will be secure.

Investors want to resume operations

In December 2016, the South Sudanese government announced it intended to double its oil output from 130,000 barrels per day (bpd) to 290,000 bpd in the next financial year. With its current reserves, South Sudan is sub-Saharan Africa's third largest oil producer  when it operates at its full capacity. Due to the armed conflict that has, since December 2013, embroiled the government of the Sudan People's Liberation Movement (SPLM), led by President Salva Kiir, and the SPLM-In Opposition in a bloody civil war, South Sudan's oil sector has been almost entirely disrupted. This, along with low oil prices globally, has led to an economic downturn, as the government is highly dependent on oil revenue for its budget, about 97 per cent of which comes from oil exports. In December, the International Monetary Fund (IMF) estimated that real income in South Sudan had essentially halved since 2013, that inflation had almost reached 500 per cent, and that foreign exchange reserves were practically depleted. This indicates the urgency created by the current downturn. Meanwhile, India's state-owned Oil and Natural Gas Corporation (ONGC) Videsh Ltd indicated that it wants to resume operations in the northern Unity state, but not unless the security of its staff and facilities can be assured by the government. ONGC Videsh is one of three main players in South Sudan's oil sector, which also includes state-owned oil firms China National Petroleum Corporation (CNPC) and Malaysia's Petroliam Nasional Berhad (Petronas). The armed conflict between the government, led by the SPLM, and the SPLM-In Opposition (SPLM-I.O.) rebel forces, broadly loyal to its exiled leader Riek Machar, has almost entirely disrupted South Sudan's oil production. ONGC Videsh completely stopped its two stakes in the northern Unity state  Greater Nile Oil Project (GNOP) and Block 5A  and airlifted its 11 employees who were on-site on 21 December 2013. This came after 14 South Sudanese oil workers were killed due to fighting between the Sudan People's Liberation Army (SPLA) the government's armed forces and SPLM-I.O. forces. Other international oil firms, including CNPC and Petronas, quickly followed suit. Others, such as France's Total, have since put exploration agreements and other activities that could improve output on hold due to the poor security situation.

Can security be ensured?

The security situation in South Sudan is extremely poor, and there are signs that it could get even worse. Almost coinciding with South Sudan's fifth anniversary since independence from its northern neighbour Sudan, heavy fighting broke out between the two belligerents in the capital Juba on 9 July 2016. It quickly became evident that civilians could not be protected, despite a heavy military presence of the United Nations Mission in the Republic of South Sudan (UNMISS). And several international aid organisations accused SPLA forces of systematic abuses, including rape, of local populations living in camps for internally displaced persons. Although fighting has calmed in Juba, hostilities have occurred sporadically across the country, including the northern Unity and Upper Nile regions, where most of the country's oil reserves are located. In October 2016, heavy fighting also broke out in the city of Malakal, situated 174km south of the Paloich oilfield in the Melut basin, a major oil reserve in Upper Nile. An SPLA spokesperson told Reuters news agency on 16 October that SPLM-I.O. rebels planned to besiege Malakal, after claiming they had captured the two nearby towns of Lalo and Wajwok. While most media attention has focused on the fighting between the two main belligerents  the SPLA and the SPLM-I.O. and their associated ethnic communities, Dinka and Nuer  loyalties on the ground are much more balkanised and fluid. Throughout the conflict, local militias incorporated into the SPLA or SPLM-I.O. have changed allegiance between the two fighting sides, with myriad local militias having emerged since the civil war broke out. For instance, in December 2016 local media outlets reported that over 300 SPLA soldiers in Unity state had defected to the SPLM-I.O. In addition, local grievances towards both the government and formerly active oil companies in the region have grown over the past years. On the one hand, this is because local populations do not deem that the oil industry has benefited them, either financially or socially. On the other hand, local grievances towards oil companies that used to operate, for instance, in Unity state and Upper Nile are growing, following signs of environmental degradation which is putting communities in the area at increased health risk. A six-year study published in 2015 by Sign of Hope, a German NGO, estimated that between 180,000 and 500,000 people could be affected by oil-contaminated drinking water in the area. Should oil firms resume activities there, their operations and staff will probably be targeted directly by armed groups, as they have been in the past (see Box). Looking west to Nigeria, Africa's largest oil producer, environmental degradation caused by oil spills in the southern oil-rich Niger Delta has increased grievances against multinational oil companies, and locals have taken up arms to launch attacks on oil and gas infrastructure and have kidnapped oil workers for ransom. A similar situation could evolve in South Sudan.

Disruption is likely

A full understanding of the security issues at stake in South Sudan cannot be complete without taking into account the security situation in Sudan, its northern neighbour. This is because South Sudan exports all its oil through two pipelines passing near Khartoum, the Sudanese capital, and further north to the Marsa Bashayer export terminal, just south of the coastal city of Port Sudan. The security outlook also deteriorated in Sudan in 2016, with government forces facing overlapping conflicts between competing government and rebel factions, particularly in the western Darfur region and the southern Two Areas': Blue Nile and South Kordofan, both located on the border with South Sudan's Unity state. Hostilities reached their most severe levels since 1997, according to the Armed Conflict Location and Event Data Project, a data-collection centre operated by the University of Sussex in the United Kingdom. The overall fighting in Sudan was mainly conducted by forces loyal to the government and Sudan's Liberation Movement / Army, aligned with Abdul-Wahid al-Nur (SLM/A.W.), a non-state armed group (NSAG). In the 'Two Areas, specifically, fighting intensified and has opposed the NSAG Sudan People's Liberation Movement North (SPLM-N) and the Sudanese armed forces, including the Rapid Support Forces (RSF), a paramilitary unit. In South and West Kordofan, where many of Sudan's oil reserves are located, violence targeted areas that had previously been unaffected by conflict on land upon which many local populations rely for their livelihoods. Furthermore, the RSF engaged in the Blue Nile for the first time since it was formed in 2013, when Janjaweed militias, which played a central role in the Darfur conflict that has been ongoing since the early 2000s, were incorporated into the armed forces. Additionally, since 2011 the Sudanese economy has experienced a slowdown, which to a large extent was exacerbated by the South Sudanese secession. At the time, the countries agreed to share their oil wealth and production. Around 75 per cent of Sudan's oil reserves fell on the southern side of the border, while Sudan retained control over oil infrastructure. This was a bad deal for both parties. The IMF estimates that Sudan lost roughly 55 per cent of its fiscal revenues as a consequence, and the country's oil exports plummeted from nearly USD11 billion in 2010 to under USD2 billion in 2012. This, along with the global slump in oil prices, has caused an economic downturn in Sudan which in the second half of 2016 saw increased levels of civil unrest. In November, civil society organisations organised a three-day-long walkout strike against austerity measures implemented by the government, including subsidy cuts to fuel. Given that the Sudanese economy is also highly dependent on oil revenue for government spending, the economy is unlikely to improve significantly in the six-month outlook, increasing the risk of more protests in the capital and fighting over control of natural resources and land in rural areas.

A bad deal and poor outlook

Putting aside the volatile security environment and poor economic outlook of both countries, oil production in South Sudan and Sudan has probably already peaked, unless any new major oil reserves are discovered in the near future, which is unlikely given the current security outlook as investors will be unwilling to send staff there. As mentioned above, South Sudan is completely reliant on its northern neighbour to export its oil, via the Red Sea. There are currently two oil pipelines that connect the country to Port Sudan via oil installations near Khartoum; one is drawn from Unity state through West and South Kordofan, and the other runs from the Paloich oil field in Upper Nile via Blue Nile, and onto Port Sudan. Read the full article