Assessing Oil Opportunities in South Sudan

on September 19, 2013 at 2:00 PM

Sudanese Rebel Groups Arm Themselves As Peace Process Falters

Despite its significant oil wealth, American companies have long shied away from doing business in Sudan, initially because of security concerns and later in response to U.S. sanctions against the government in Khartoum.  The secession of South Sudan in July 2011, during which 80% of the country’s oil wealth went to the South, followed by an easing of sanctions in December of that year, renewed prospects for potential oil exploitation in the country.  However, the fact that South Sudanese oil must be exported through Sudan coupled with continued political and military sparring between the two sides makes investment in South Sudanese oil a risky prospect at best.

The resumption of oil exports in April 2013 based on a negotiated agreement between the governments of Sudan and South Sudan may ease the minds of some regarding the wisdom of investing in South Sudanese oil, a market which is currently dominated by Chinese, Malaysian, and Indian firms.  But there is still significant reason for hesitation, as the issues that have prevented oil from flowing across the border in the past are unlikely to be resolved any time soon.  Sudan and South Sudan continue to accuse the other of backing rebels in their territories; in addition, disagreements over oil transit fees and disputed territories along the border continue to complicate the relationship, making for an unstable environment for investment in oil or otherwise.

Rebellions & Allegations

The most potent source of discord since South Sudan’s independence is the suspicion on each side that the other government is backing rebels operating in their territory.  Sudan asserts that South Sudan is funding the Sudan People’s Liberation Movement North (SPLM-N), which has violently resisted Sudanese rule of Blue Nile and South Kordofan, two volatile states in the southern part of Sudan.  Though now formally separated, SPLM-N was created as an arm of the Sudanese People’s Liberation Movement, a political party formed out of the Sudanese People’s Liberation Army (SPLA).  The SPLA, led by rebel commander John Garang, led the fight for South Sudanese independence from 1983 to 2011.  On the South Sudanese side, there are regular accusations that Sudan is backing the rebellion led by David YauYau, a former Colonel in the South Sudanese army in the southern province of Jonglei.  South Sudan believes Sudan is using YauYau to foment unrest in the province in order to block potential efforts to build oil export pipelines through Jonglei and Ethiopia to a port in Djibouti, bypassing Sudan.

Oil Transit Fees

When South Sudan declared independence in 2011, a 2005 profit-sharing agreement that stipulated a fifty-fifty split between the two entities expired.  Since that time, the two sides have been negotiating over the transport fees charged by the North for the South’s use of the Great Nile pipeline, which runs from the Unity and Heglig oil fields north past Khartoum to the Red Sea, where it is shipped from Port Sudan.  The South is largely dependent on oil to keep its feeble economy afloat, and thus can’t afford to pay high fees and resists being held hostage to the North.  On the other hand, Sudan is largely dependent on those fees since the loss of the bulk of its oil revenue upon South Sudan’s separation.  An agreement reached in Addis Ababa in March 2013 for the South to pay around $10 per barrel allowed oil to begin flowing again in April, though at a significantly reduced volume from pre-January 2012, when production initially ceased.  Exports have continued since then despite threats from the North to cut off the pipeline if alleged support to the SPLM-N by the South does not cease.

Territorial Disputes

Heglig oil field, one of the largest fields discovered by Chevron Corporation in 1982, lies in the disputed state of South Kordofan, where the SPLM-N continues to fight against the Sudanese government.  The two countries have also fought over the still disputed state of Abeyi, which is now being monitored as a demilitarized zone by the United Nations Interim Security Force for Abyei (UNIFSA).  While the presence of UNIFSA is intended to dispel notions that South Sudan is supporting SPLM-N, and thus rob Sudan of its main leverage with regard to oil flows, many analysts portend that to monitor a border that is in rebel hands is nearly impossible in practice.  Thus, should Sudan decide to level such accusations in an effort to gain concessions with regard to oil fees, it is unclear whether the presence of UNIFSA would actually help defuse tensions.

Shaky Ground

Oil from South Sudan continues to flow at levels slowly approaching those of the pre-independence period, generating revenue for both states and for the foreign companies involved in Sudan’s oil industry.  But the factors described here make keeping the pipelines open a delicate balance.  The oil industry in South Sudan is also considered to be a poorly functioning, according to Revenuewatch, an NGO that tracks transparency and performance in natural resource producing nations.  The country scored particularly poorly on transparency, safeguards and quality controls, and government oversight, and humanitarian concerns abound on both sides of the border.  Thus, while conditions in South Sudan may appear ripe for investment, U.S. companies should tread carefully when considering entering this arena.

Jack Devine is former CIA deputy director of operations and chief of the CIA Afghan Task Force 1986-87. He is president of the Arkin Group, a private sector intelligence company based in New York. Whitney Kassel is a former foreign affairs specialist for counterterrorism policy in the Office of the Secretary of Defense. She is a regional director at the Arkin Group.