Deal Paves Way For Resumption But Past Calls For Caution


BMI View: Our view that economic and , to a lesser degree , political pressure would force the resumption of oil production is on track to play out, with an official agreement calling for South Sudan to restart production by the end of March. Yet , with economic realities rather than a resumption of longstanding disputes motivating the rest art, technical as well as political challenges remain downside risks to the stable resumption of oil flows from South Sudan.

South Sudan announced on March 10 2013 its intention to resume oil production within two weeks following a halt since January 2012. Protracted disputes over borders and security saw tensions heightened despite the landmark agreement signed in August 2012 that allowed for the resumption of oil exports. Yet , implementing the agreement has proven more difficult, with longstanding tensions and unresolved issues regarding the demarcation of borders and armed groups which continue to operate in the region.

According to an implementation timeline, as reported by Reuters, 'resumption of production shall take place as soon as technically feasible.' South Sudan's oil minister Stephen Dhieu Dau told reporters there were few technical obstacles to the resumption of oil flows, with production expected to resume at 80% of pre-shutdown levels of 350,000 barrels per day (b/d). Another oil ministry official in South Sudan assumed flows would not be less than 160,000b/d initially.

Yet, these optimistic assessments can only be confirmed by an actual restart of production. Previous reports that infrastructure was damaged in fighting and that fields were improperly shut off in the suspension of production raise questions regarding the rate at which South Sudan's oil will return to markets. Further, a shortage of oil workers has in the past disrupted oil output, and could now be an obstacle if adequate preparation has not been carried out to support a return to production. Indeed, it could still be months before South Sudan's crude is available for export. In preparation for the presumed restart of production following the August 2012 deal, South Sudanese officials at the time reportedly expected it would be months before oil would flow into the pipeline network.

Despite the optimism supported by progress on a long sought-after deal to resume oil production, it appears that the deal is more a reflection of economic realities for both oil-dependent countries, rather than progress on long-disputed political questions. Indeed, the disputed border region of Abeyi, which has in past provoked clashes, remains without a final status and no date was set under the deal to reach a conclusive settlement. The economic realities are immense and immediate, with South Sudan depending on oil for 98% of its revenue, and Sudan missing out on up to US$1.5bn annually in transit fees under the outlines of the existing deal.

While we are optimistic that oil will soon flow from South Sudan, we highlight not only the downside risk from technical or operational challenges to the timeline and volume of flows, but also outstanding political and security challenges that have not yet been fully resolved, and thus remain further threats to the stable return of oil.

Yet, we continue to believe the outlook for South Sudan's oil sector will be dependent on the development of a reliable export route. Plans continue to advance for the development of a pipeline to Kenya; however, the politics and financing of such an option will remain obstacles to this critical infrastructure link as well.

Deal Paves Way For Resumption
Sudan & South Sudan Oil Production ('000b/d & % chg y-o-y)
This article is tagged to:
Sector: Oil & Gas
Geography: Sudan, South Sudan