More Risks To Output As Tensions Flare


BMI View: Although Sudan has walked back slightly from a threat to halt exports of oil from South Sudan, we continue to see more downside risk tha n upside to the sector .

In an announcement that underscores our continued caution, Sudan again threatened to halt the export of South Sudanese oil. On June 8th, Khartoum threatened to close its pipeline's to South Sudan's oil unless Juba ended its alleged support for rebel groups. Oil production only restarted in March after a 16 month halt following long-standing tensions between Sudan and newly independent South Sudan. With the first cargo of crude from South Sudan only sold the previous week, and output levels struggling to return to pre-crisis levels, the announcement only further underscored the precarious state of affairs.

In more recent statements, Sudanese officials seem to have moved back some from their earlier pronouncements but the risks are still high. Sudan's information minister Ahmed Belal Osman told reporters, 'we plan to close the oil pipelines within 60 days...but we might reverse the decision.' Osman went on to say 'the door is open for rational thinking...but we won't' allow the support of rebels.' Alleged support of rebels by Juba, has been constant source of tension in the relationship between the two countries ( see, 'Latest Accusations Underscore Uncertainty,' May 13 ).

Another sudden halt to oil exports could result in further deterioration of the already battered oil sector. With pipelines easily blocked by South Sudan's waxy crude if flows are stopped midway, the cost of a halt flows would be high. Moreover with South Sudan's fields still ramping up, an absence of storage facilities would mean halting exports would require again stopping production altogether. This could damage recovery rates from fields and translate into higher costs to boost output levels or accepting lower production figures. Indeed, the Chinese, Malaysian, and Indian firms responsible for the majority of output from Sudan and South Sudan have already reported frustration with rising operating costs and continued political uncertainty as the threat of another production refuses to dissipate.

In short, these events support our cautious outlook to the sector. While we see limited potential for an impact on Brent prices from another halt to supplies, the impact of another production shut-in the oil-dependent economies of Sudan and South Sudan would be dramatic. We expect the above ground risks in the region to remain high, with tensions fuelled by decades of civil war and unsettled political questions.

Flows Could Halt Again Just Months After Restart
Sudan & South Sudan Oil Production & % Change y-o-y ('000b/d)

Ultimately, barring some unlikely major political agreement between Juba and Khartoum, certainty that South Sudan's oil will reliably reach markets will come only with the construction of new pipelines that remain uncertain. We note that the latest incident will only further highlight the risks of investing in the South's oil sector, where a recent entrance by ExxonMobil was seen as an encouraging sign for badly needed exploration in the face of declining reserves ( see, 'Block B Restart Cautious Optimism For Upstream,' June 5).

Although economic realities would make another halt of the oil trade damaging, we cannot exclude the prospect Khartoum will place security and politics above economics. Thus we continue to see more downside than upside risk, and we will watch events as they play out with an eye toward our forecast.

This article is tagged to:
Sector: Oil & Gas
Geography: South Sudan, Sudan