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Oil in South Sudan: Turning Crisis Into Opportunity

This article was originally published May 5 2014, by New Security Beat, the blog of the Environmental Change and Security Program (ECSP) at the Wilson Center.

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.

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 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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