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Mar 27, 2013 | 14:30 GMT

South Sudan: Oil Production to Resume, but Concerns Remain

HANNAH MCNEISH/AFP/Getty Images
Summary

It appears that recent security and oil transit fee agreements between Sudan and South Sudan have emboldened some in the international community to buy South Sudanese crude oil. On March 27, Swiss-Dutch commodity marketer Trafigura announced that it would buy South Sudan's crude. Details of the deal are unknown, and while South Sudan can be expected to export crude oil in the coming moths, several obstacles to reaching full-scale production remain. 

South Sudan can extract crude from its robust reserves, but since the country is landlocked it must rely entirely on Sudan for transporting what it produces. The two countries have been at odds over oil transit fees since January 2012, when South Sudan shut down oil production. The shutdown hurt both countries economically, but Juba depends heavily on revenue from oil exports. After the shutdown, the government was forced to enact austerity measures and survive off dwindling foreign exchange reserves.

In September 2012, the two countries reached an agreement on transit fees that allocated approximately one-third of Juba's oil revenue to Khartoum through transit fees and financial transfers. However, the governments failed to reach an agreement over border security, which Khartoum demanded be addressed before allowing South Sudanese crude through its pipelines. After several negotiations, Juba and Khartoum finally reached an agreement on outstanding security issues March 8. The agreement entailed an immediate withdrawal of troops from the border. The deal with Trafigura was signed prior to the withdrawal, but the deal could have been contingent upon resolving the border issue.

While many political and security obstacles have been removed, at least for now, South Sudan still will be unable to export as much crude as it did before the shutdown (roughly 350,000 barrels per day) for quite some time. The pipelines will need to be flushed to remove residue that has built up over the last 14 months. Most of the wells are still intact and ready to produce oil, but several oil fields in Unity state were damaged during fighting with Sudan. These fields produce the country's Nile blend, a light sweet crude that has historically been bought by Asian refiners because of how easily it can be refined. It has been estimated that repairs at the field may take six to eight months.

Sudan-South Sudan Border and Oil Fields

Most of South Sudan's oil is the Dar blend, a heavier, waxier blend produced in Upper Nile state. Before being transported, this blend must be heated during extraction and in transit to lower its viscosity. In October, it was estimated that it could take as many as 18 weeks before the Dar blend could reach export terminals in Port Sudan. After the pipelines are flushed, oil fields with higher water yields will be brought online first, followed by the rest of the Dar blend producing wells. If preparations are under way already, then about 200,000 barrels of oil exports could be brought back online as early as the middle of July.

Yet two concerns remain for Juba. Abruptly shutting down wells and fields often causes irreparable damage, which can prevent them from ever reaching previous levels of production. Unfortunately for Juba, drilling wells at new sites likewise will not sufficiently augment production to pre-shutdown levels.  

In addition, tensions between Khartoum and Juba will remain high throughout the next few years. In the past, both countries have backed rebel groups tasked with fighting one another, and it is rumored that both still do. So while South Sudan can be expected to produce and transport oil in the coming months, the transit fee agreement between Juba and Khartoum lasts for only three and a half years, so a more permanent solution must eventually be found.

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