South Sudan Referendum: Oil Industry Implications
A week after a largely-peaceful independence referendum in southern Sudan set the stage for the creation of Africa’s newest state, many questions remain over the future of the country’s critical oil industry. As a result of Western sanctions against the government in Khartoum and a precarious security situation, the country has long been off the radar of most Western international oil companies (IOCs), allowing mostly Asian national oil companies (NOCs) – and the Chinese in particular – to establish a stranglehold over some of Africa’s largest oil reserves. The question facing the industry as well as officials in Khartoum and Juba is if and how this picture might change after the referendum.
Southern Sudan’s oil minister Garang Diing gave some insight on how the government in Juba sees the industry progressing in an interview with AFP that took place as the referendum was underway. He confirmed that the South would honour contracts signed before the 2005 Comprehensive Peace Agreement (CPA). That will come as a relief to China National Petroleum Corporation (CNPC), which has invested billions of dollars in the country and has repeatedly defended the government in Khartoum from Western criticism. The state-run company is responsible for about half of Sudan’s oil output, much of which is produced from fields in the South, and owns stakes in critical refining, pipeline and export infrastructure in the North. In spite of its historically close ties with Khartoum, as the referendum approached, CNPC sought to shore up its interests in the South, and the minister’s comments indicate that this effort may have paid off.
His comments, however, also offered a warning to CNPC and indicated that the government in the South is eager to ease CNPC’s grip on the country’s oil industry. Diing said that the South needed to diversify and acquire ‘Western experience, the best technologies and the best practices’. He was especially critical of the lack of environmental and human rights safeguards in the contracts signed with the Chinese, an indication that the South would seek to tighten regulations as it develops a national oil policy.
The question remains as to whether the South will find Western IOCs interested in investing in the country. French major Total is the only prominent Western company to maintain its interests in the country and has said that it is eager to get back to work. Total entered Sudan in 1980 by taking a 32.5% operating stake in the 120,000sq km Block B. The security situation deteriorated in the mid-1980s, however, and as a result Total has done little exploration on the block, which is about the size of neighbouring Eritrea. Total, however, appears eager to restart operations, saying it could begin exploration as early as mid-2011. Star Petroleum, a small Spanish explorer, has also said that it wants to start exploration this year at the adjacent Block Ea.
In BMI’s view, though, Sudan still has to resolve some very difficult outstanding problems before Western IOCs will commit significant investment in the country. There are three matters that I see as particularly critical:
· 1: A settlement on the question over whether Abyei State will join the North or the South
· 2: The full demarcation of the border
· 3: An agreement on a fair and transparent oil revenue sharing agreement
A settlement on these questions would lay the groundwork for a cooperative relationship between North and South. Nearly 80% of Sudan’s oil production comes from fields in the south, while nearly all of the critical refining, pipeline and export infrastructure are controlled by the north, making cooperation between the governments a critical factor for potential investors.
Looking to the future, the South is considering a proposal to build a 1,400km, 450,000 barrel per day (b/d) pipeline from Juba to the Kenyan island of Lamu, bypassing infrastructure in the North. The South is also considering the construction of a new refinery in Warrap State. These projects, however, would take years to complete and foreign investors would want to see an agreement that assures security and access to international markets in the interim.
The international community, and the US in particular, will have an important role to play as well. The status of Western sanctions that have prohibited investment remains unclear, though the South will presumably not be subject to sanctions aimed primarily at the Omar al-Bashir government in Khartoum. Beyond that, however, the US will play an important role in encouraging the North to pursue an amicable relationship with the South in spite of losing the majority of its oil reserves as a result of the partition. The Obama administration has offered to lift sanctions on Khartoum if it fulfils its obligations under the CPA. Commitment from both sides to that agreement will be critical to the security situation and the countries’ ability to attract much-needed investment.