By Ese Awhotu
South Sudanese oil now sells at $20-25 a barrel, possibly the lowest rate on earth, according to a report by the London-based Financial Times newspaper.
“South Sudanese revenues have now fallen to about $100m a month, equal to an oil price of about $20.5 per barrel based on output of 160,000 barrels a day,” the FT report said.
Citing traders as well as unnamed South Sudanese and foreign officials, the report attributes the drop to low oil prices worldwide and high pipeline fees paid by Juba to Khartoum.
Oil prices have plummeted in recent months thanks to a surge in petroleum production in the United States, where new ‘fracking’ technology enables drillers to reach previously hard-to-get fossil fuel deposits.
However, South Sudan pays a fixed rate of $26 per barrel for use of Sudan’s pipelines regardless of market value, as per a 2012 agreement between the two countries.
South Sudanese oil is also cheaper due to its quality. The government in Juba earns over 90% of its revenue from oil sales.
.Poverty-stricken South Sudan , which became independent in 2011 and is battling a year-long civil war, could become one of the biggest victims of the oil crunch after the OPEC cartel decided to battle the US shale oil boom by maintaining production levels, driving down prices. Brent crude, the North Sea benchmark, closed at $61.38 on Friday.
Financial Times reports that oil companies in some new shale regions in the US and the tar sands in Canada are also realising prices significantly below international benchmarks because of a lack of pipeline or rail capacity to transport their production. But traders said none were making as little as South Sudan.
The extremely low realised price is partly due to the low quality of South Sudanese crude, which is sold at a discount to Brent.
But it is chiefly because of an ill-fated decision to introduce a fixed payment for the use of a pipeline that runs north through neighbouring Sudan, rather than a sliding scale linked to global prices, as the industry favoured.
“The lack of a sliding scale is a big mistake,” says a South Sudan-based oil executive. “They are making a very small amount of money.”
In 2012, the governments in Juba, in the south, and Khartoum, in the north, signed a deal for the use of the pipeline running from southern oilfields to Port Sudan on the Red Sea after months of negotiation to secure South Sudan’s independence.
Against the advice of the industry and despite the memory of an oil price crash in 2008-09, during the global financial crisis, Juba agreed a fixed payment.
In effect, the government banked on oil staying at $100 a barrel and pledged to pay $11 per barrel for the use of the pipeline plus another $15 a barrel as compensation to Sudan for the loss of oil income after independence.
The package was seen as an expensive political necessity to secure independence from the Khartoum regime after decades of war. But international officials say the decision to back a fixed fee, rather a sliding one linked to prevailing international price, “is now unravelling”.
The International Monetary Fund estimates that oil accounts for 95 per cent of the South Sudanese government revenue and forecast that the African country’s fiscal deficit will balloon to 12 per cent of its gross domestic product next year.
South Sudanese revenues have now fallen to about $100m a month, equal to an oil price of about $20.5 per barrel based on output of 160,000 barrels a day.
Oil executives believe South Sudan could become an example of how falling oil prices can exacerbate political risk as countries are forced to slash budgets.
The US Department of Energy said: “Geopolitical risk may also be elevated because of lower government spending”.
Oil production in the world’s youngest country has more than halved since civil war broke out last December. Oil executives and diplomats say a return to full production is unlikely without a peace deal between the warring factions.
On December 15, 2013, fierce fighting broke out in South Sudan’s capital, Juba. Rebel forces loyal to Machar targeted South Sudan’s oil fields, and what started as a clash, quickly escalated to a civil war. Violence swept the country, killing tens of thousands people and displacing over one million.
The UN estimates that almost a third of the population, or 4 million people, is now in dire need of humanitarian assistance. The promise of nation-building seems to be a distant memory as South Sudanese leaders viciously struggle to claim power.
When South Sudan became independent, it gained not only sovereignty but control of about three-fourths of Sudan’s oil production, a devastating blow to Sudan’s economy. The IMF estimates that Sudan lost roughly 55% of its fiscal revenues and about two-thirds of its foreign exchange earnings. Sudan’s crude oil export revenues were dramatically slashed from a near $11 billion in 2010 to less than $2 billion in 2012.
Due to its dramatic loss of oil export revenue, Sudan relies heavily on the fees it charges South Sudan for using its pipelines and facilities. In January 2012, disagreement between the two countries over oil transportation fees led South Sudan to boldly shut down its entire oil production.
After nearly 15 months of fruitless negotiations, both countries finally agreed on a transit fee and South Sudan resumed oil production. In late December 2013, it was armed civil conflict that once again interrupted South Sudan’s oil output.
The Oil & Gas Journal (OGJ) predicts that Sudan had 1.5 billion barrels and South Sudan had 3.5 billion barrels of proved oil reserves, as of January 1, 2014. One of three companies that pump oil in South Sudan, China’s state-owned National Petroleum Corporation (CNPC) holds a 40% stake in a joint venture that operates in South Sudan’s enormous oil fields. The company boasts a 1,600 kilometer export pipeline that carries crude through abutting Sudan to Port Sudan.
Chinese and South Sudanese official statistics predict that about 120 Chinese enterprises currently operate in South Sudan. Over the past six years, these companies have concluded $10 billion worth of deals with the South Sudanese government.
The eleven-month-old rebellion in South Sudan is posing a serious threat to China’s desire of a flourishing economic liaison with South Sudan and restoration of stability has become a priority for Beijing.
Analysts and some experts say Nigeria with its heavy burden of insecurity involving the Boko Haram, other armed gangs, oil scramble and the power struggle, stands to draw lessons from Sudan.
Nigeria they say is at risk over the sustained slide in the international price of crude oil on its economy.
Their worries were that benchmarking posed a serious challenge to the country’s economy, as there are strong indications that crude oil prices might drop below the current price of about 62 dollars per barrel, making it imperative for government to embark on aggressive diversification of its revenue base.
Apparently the 65 dollars per barrel benchmark is seen as too dangerous for the nation. While some Nigerians have called for deregulation of the downstream petroleum sector following the sliding oil price, The Nigeria Labour Congress (NLC) has called for the reduction of the pump price of petroleum products in line with falling crude prices in the international market.
The General Secretary of the NLC, Dr Peter Oso-Eson, at an interactive meeting with journalists recently, bemoaned the way political leaders are reacting to issues, saying that they seem to be the only ones who do not know that the nation was actually at war.
He noted that, as crude prices are falling, in order countries, what that is immediately translating to, is that the price of petroleum products and pump head is coming down.