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Juba — * Security concerns hamper exploration, restarts
* Indian oil companies interested but wary
* Questions over OPEC agreement cut

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The future of South Sudan's oil industry, Sub-Saharan Africa's third-largest, looks grim, at least in the short term, as armed conflict and falling international oil prices have combined to undermine the country's fledgling oil industry.

Unless these trends are reversed, analysts fear the fall in production to 130,000 b/d in 2016 from 245,000 b/d in 2013 may continue well into 2017 or even beyond. This is because, they say, it will be impossible to explore new oilfields and restart the Unity and Tharjath oilfields due to problems surrounding security.

Both the Unity oilfields in Block 1, run by the Greater Nile Petroleum Operating Company, or GNPOC, and Tharjath in Block 5A, operated by SUDD Petroleum Operating Co. Ltd, or SPOC, have been at the epicenter of the conflict since violence erupted in Africa's newest country in 2013.



Rebels loyal to former Vice-President Riek Machar are still threatening any plan to restart the oilfields they shut in in January 2014. As a result, key player ONGC Videsh, the overseas arm of India's Oil and Natural Gas Corp., is said to be insisting on a new security protocol before its workers could return to the troubled region to resume production.

A November meeting between India's ambassador to South Sudan, Srikumar Menon, and South Sudan's oil minister, Ezekiel Lol Gatkuoth, in Juba set the tone for the resumption of the oil production by Indian companies. But security problems remain unresolved. Although details are sketchy at the moment, discussions are continuing between Juba and New Delhi.

ONGC Videsh has a 25% in the Greater Pioneer Operating Co., or GPOC, and a 25% stake in Tharjath oilfields.

OPEC QUESTION

It remains to be seen whether South Sudan's cabinet would approve the implementation of OPEC's December deal to cut production.

South Sudan's policy has always been to increase production to at least 500,000 b/d, the level produced in 2011, when the territory split off from the Sudan, and became an independent country. South Sudan was among the 11 non-OPEC members who agreed to cut a total 558,000 b/d for six months, starting on January 1. The exercise is renewable for another six months, with South Sudan's share accounting for an 8,000 b/d reduction. It could be argued that given that the oil industry is likely to struggle next year that the agreed cut is part of a probable natural decline anyway.

However, with the army consuming nearly 40% of the government budget, engaged in fighting a rebellion, the move to cut output would be interpreted as aimed at hurting a very important constituency -- the army -- in a country at war with itself.

The war has affected virtually every aspect of the society. South Sudan's economy is in ruins. A December 2016 IMF report said the country's income had declined by about 50% since 2013 and inflation had risen to about 500%.

SUDAN CHALLENGE

Fed up of the deteriorating economy, South Sudan's parliamentary committee for finance has called on the government to reconsider continued oil production. The committee has accused Sudan of taking a huge chunk of South Sudan's oil revenue without proper justification.

"The committee has observed with dismay that Sudan is taking 80.33% of the government's total oil revenue. And the government of the Republic of South Sudan is getting only 19.67% of its total oil revenue," complained the chairman for finance committee in parliament, Goc Makuac Mayol, during a 2016/2017 budget discussion in Juba in December 2016.

"South Sudan would be better off if it were to shut down oil production than continuing with the current arrangements with the Sudan," he said.

The dispute is rooted in a 2012 deal that allowed Juba to pay Khartoum $25/b for its crude to pass through the Sudan's pipelines to export facilities near the Red Sea port of Port Sudan. At that time crude oil fetched more than $100/b on the international market. Current lower oil prices have hit South Sudan, which depends on its exports for 97% of its budget, very hard. Mayol argued that payment to Sudan should not exceed 30% of the country's oil entitlement. South Sudan is facing a fiscal gap of 47% in its 2016/2017 budget.

Sudan, equally affected by falling oil prices, has accepted to review the 2012 agreement.

--Moyiga Nduru, newsdesk@spglobal.com
--Richard Rubin, richard.rubin@spglobal.com