Are South Sudan oil fields economically viable at the current oil prices?
By John Deng Ateny, Perth, Western Australia
October 20, 2016 (SSB) — South Sudan made headlines internationally for its independence and for its oil resources. Many oil nations and their multinational corporations bid for South Sudanese Oil development. The interest in South Sudan oil is ongoing.
The assessment of commercial viability and technical extraction of hydrocarbon deposit is very complex; it includes a number of significant variables, estimation of resources, reserves, proven reserve, probable reserve and possible Oil reserves.
Petroleum deposit form when sufficient hydrocarbon is concentrated at the earth crust. Petroleum resource deposit is defined as accumulation of oil and gas in the ground that may or may not be economically recovered. The portion of resource that is economically recoverable at a given time is referred to as petroleum reserve.
The challenges to resource profitability are fluctuating economic conditions and unpredictable political situations. For instance, a reserve extractable in a stable country or in a developing world may not be economically exploited in a politically unstable or in a technically advanced world.
The objective for oil operations is to find, extract, refine and sell the outputs for profits. Lack of positive finance return deems the resource uneconomical. The process of extracting oil resources is exposed to macroeconomic conditions such as commodity prices, currency fluctuation and political stability.
In their 2012 Economic Cooperation Agreement, the republic of South Sudan and Sudan agreed to commit to the resumption of oil flow in South Sudan. The two states agreed to a $9.10 a barrel fee for processing and transporting oil through Sudan and $15 a barrel Transitional Financial Agreement (TFA) payment to Sudan government. The Agreement was reached at the time the price of oil was $106.53 a barrel. The oil price has since dropped to less than half at $49.58 a barrel. The Agreement however, made no provision with regard to change in prices. Lack of such provision is currently impacting on South Sudan economy.
Immediately after the agreement, the oil prices start sliding to a third of its peak in 2008. According to today WTI crude oil price, the barrel is selling at 6 cent below $50. The statutory cost (TFA and transit fee) alone is 70% of the current sell price; the cost exceeds the sale when the cost of production is added. A drop in commodity price does not only affect export incomes but also impacts the resource report. Resource and reserves may be downgraded as a result. Profitable oilfields may no longer be producing at a profit.
Besides drop in prices, South Sudan has continued to experience the political unrest. The political instability escalated to civil war in 2013. The outbreak of armed struggle threatened the production fields. China negotiated the deployment of its state military service personnel to protect the employees, oil facilities and the production disruptions from warring parties.
The Oil and Gas Industry has continued to face challenges globally. The financial, strategic, compliance and operational plans are impacted from time to time. Oil reserves in challenging areas and in politically unstable countries are mostly uneconomical due to the operational challenges in such areas. South Sudan has been fighting with itself since inception, hence the profitability of it oil is affected. The reserves within disputed areas cannot be accessed. On a global scale reserve in unfamiliar and protected heritage listed areas are not permissible for exploitation.
Fluctuating fiscal measure in the host country put pressure on Oil and Gas producing companies. Unpredictable currency fluctuation creates insecurity on companies’ spending strategies and investment policies. The industry needs secure predictable fiscal policy to encourage investment and reinforce confidence among investors and operating companies. The latest volatility in South Sudan pound against the US dollar is not suitable for Oil production in the country.
Corporate Social Responsibility is one of the non-monetary benefits local community enjoys and is one of the variable Oil Corporations are assessed on. It is incumbent upon operating companies to establish, promote and uphold good relationship with the communities in which they operate. The government should clearly define the legislations governing corporate responsibilities with regard to the local communities, employees, and the environment. Other practices such as corruption, bribery and fraud should be legislated.
The petroleum corporations with vested interest in Africa see South Sudan as a gateway to their prospect. Although the country does not present safe political landscape, it offers well defined petroleum reserve; therefore it is the suitable base to open up new exploration frontiers such northern Kenya, Ethiopia, Congo and the rest of the Great Rift Valley. However, the main challenge South Sudan faces despite this potential is that, it lack the international coastline (landlocked).
This presents huge logistical challenge to the country. As already mentioned, use of oil transport pipeline passing through the northern neighbour state of Sudan has significantly added to the cost of Oil production. Use of hired infrastructure through other nation has negative political and diplomatic relation to the host nation (case of South Sudan vs Sudan).
The region has been neglected and has only been independent for 6 years. This will impede infrastructure quick turn round to benefit the country. Although many businesses in Sub-Saharan African particularly South Sudan has many challenges, the management of material flow particularly Oil from production to the point of consumption is a nightmare.
These challenges cost the operations. Some of the challenges are monetary, others are social and the rest are environmental. If they are left unaddressed, the cost can be enormous including obstructing of production (case of Nigeria militia). Rising oil production couple with falling prices paint a grim picture for South Sudan oil benefactors. The primary losing stakeholder in the business of oil is South Sudan.
Natural reserve estimates are periodically updated to reflect the presence economics condition. It is a reporting requirement in the World Petroleum Congress (WPC) guidelines. South Sudan should mandate exploration as well as production companies to periodically submit resource reports that meet the world Resource Reporting Standards.
The size of resource and reserve has direct relationship to investment. Reserve with more life span attracts better, more reputable investors. The volume of resource estimated has strong influence on the country’s borrowing power.
In conclusion, South Sudan is a potential emerging economy within Sub Saharan African. Its natural resources particularly Oil reserve has a potential to boost the national economy and enhance the country’s development. However, the highlighted challenges need to be addressed and managed. The mineral and hydrocarbon natural resources are non-renewable. Therefore, it is important; they are exploited at profit in order to benefit all the stakeholders including the communities and the citizens amongst others. Resources exploitation impacts on the environment. It is imperative some financial return is put a side as Safety Net for future rehabilitation.
You can reach the author via his email: john ateny <jateny@gmail.com>
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