While recent headlines have focused on fuel strikes in Nigeria and their impact on fuel prices, South Sudan is also a key region to watch for the oil industry.
The ongoing oil-transit dispute between South Sudan and Khartoum hasn’t just threatened political stability in the region, but is a risk to investors, and international oil companies operating there.
Here’s a map of emerging global risks from the past two weeks, and an article on the increasing business environment risk in South Sudan from Maplecroft.
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South Sudan threatened to instigate legal action in early January 2012 against any country or company implicated in purchasing what Juba alleges is oil stolen by Sudan. The announcement is the latest development in an ongoing dispute between South Sudan and Sudan over oil transit fees and pipeline usage. Following the imposition by Khartoum of monthly charges on South Sudanese oil transported through Sudan, South Sudan’s Minister of Petroleum and Mining, Stephen Dhieu Dau, alleged in early January 2012 that Khartoum had illegally diverted 550,000 barrels of crude oil. Moreover, Sudan was accused of preventing ships entering or leaving Port Sudan because of their involvement in the transportation of South Sudanese oil. In addition to legal action, Dau has warned that any company perceived to be benefiting from allegedly diverted oil “will enjoy no future business with the Government of South Sudan”.
Revenue from the oil industry remains highly important for both the Juba and Khartoum governments. This has accentuated tensions over oil transit fees and contributed to a faltering and disruptive negotiation process. The oil industry accounted for just under 98% of the South Sudanese administration’s revenues in 2010, according to the country’s National Bureau of Statistics. Meanwhile, Sudan has suffered serious macroeconomic instability as a result of South Sudan’s independence in July 2011 – and the subsequent loss of 75% of its oil reserves – and is struggling to diversify its economy. Given the importance of the negotiations for both countries, the manner and speed with which a resolution is likely to be found remains unpredictable.
However, the importance of a functioning investment climate in the oil sector for both states suggests that an agreement – or a workable informal compromise – will have to be reached in the medium term. If this is not achieved, the fragile economies of both states could be severely harmed, thus risking further societal dislocation on either side of the new international border.
In addition, the involvement of international petroleum companies in oil transit-fee negotiations – which was announced in December 2011 – may boost the possibility of a business-friendly resolution. The removal of US sanctions on South Sudan’s oil industry also creates the possibility of greater investment from western companies. Following its independence in July 2011, South Sudan inherited sanctions imposed on the Khartoum government. However, Susan Page, the US ambassador to South Sudan, announced in December 2011 that US sanctions had been removed, in an ostensible “tremendous benefit” to the country and investors. It may also be possible to by-pass the oil transit fee dispute in the longer term if plans for a pipeline through Uganda and Kenya (proposed by Total in December 2011) come to fruition. However, the feasibility of this project remains unclear.
Further volatility in the investment climate is likely in the short term
In the short term there continues to be the risk of provocative actions taken by both sides which could contribute to a worsening business environment. For instance, South Sudan effectively expropriated shares held by the Sudan National Petroleum Corporation (Sudapet), Sudan’s state-owned oil company, in November 2011 as part of the ongoing wrangling between the states. South Sudan defended the policy as a “legitimate act of sovereignty”, although Sudan branded the move an “arbitrary decision”. However, the incident can be viewed within the context of the protracted division of the former Sudan into two states, and, therefore, is not necessarily indicative of a trend towards further expropriations in South Sudan.
Disruptions to oil revenue and foreign direct investment (FDI) in South Sudan also risk increased pressure on the government, which is already struggling to contain unrest in its northern border region and to control significant internal unrest. For instance, there has been severe instability in southern Jonglei State – particularly around Pibor – with rival ethnic groups carrying out attacks that have resulted in hundreds of deaths and the displacement of tens of thousands by January 2012. The unrest has largely taken place away from areas of oil production, although exploration could be affected. In addition, both the governments in Juba and Khartoum have accused their counter-parts of supporting rebel activity in each other’s countries. While these accusations may not be clearly proven, rebel activity could be viewed as a tool being used to improve each country’s relative bargaining position.
A resolution of the oil-transit dispute – along with a number of other outstanding independence issues – would also help to reduce the risk posed by rebel groups to oil infrastructure in South Sudan. For instance, the South Sudanese army warned in November 2011 that militias – which it alleges are backed by Sudan – were planning to attack oil-producing regions to claim them for Khartoum.
With the oil transit fee issue unresolved, investors face the risk of cross-border transport disruption, potentially fluctuating costs and possible effects from oil confiscation in Sudan. Moreover, engagement in the industry could expose investors to an active role in a dispute which may contribute to conflict, while creating complicity risks by inadvertently funding the oppressive Sudanese regime. It is possible that further incidents will occur as part of the negotiating process, which would heighten tensions in the short- to medium-term. However, an oil industry which attracts FDI and produces significant revenues remains in the interest of both governments.