South Sudan’s oil minister has declared that improved relations with Sudan will help restore crude production to the levels it reached when it gained independence, lifting pressure on the two neighbours’ ailing economies.
The tone of co-operation marks a stark turnround for two states that fought a decades-long war, signalling a potential boost for big Asian oil companies that invested heavily in South Sudan only to see production disrupted by instability.
Ezekiel Lol Gatkuoth, South Sudan’s minister of petroleum, told the Financial Times he and his counterparts in Khartoum, the Sudanese capital, have been instructed by their respective leaders to work as closely as possible to resume and increase production.
“Relations between South Sudan and Sudan are at their best,” Mr Gatkuoth said in an interview in Juba, the capital of South Sudan. “We are being strictly instructed by the two leaders,” he said.
South Sudan fought a 20-year war for independence with Sudan, seceding in 2011, but the fate of the two economies remains closely tied. With its independence, South Sudan took about three-quarters of Sudan’s proven oil reserves — some 350,000 barrels a day — but remains dependent on two 1,000-mile Sudanese pipelines to export the crude via the Red Sea.
In 2012, relations between the neighbours deteriorated to the point that South Sudan shut production following a failure to agree fees for the use of the pipeline. South Sudan agreed to pay Sudan $24.10 per barrel — approximately 39 per cent of the current price of its crude — in transit fees, pipeline fees and compensation under a transitional financial arrangement.
Production restarted in 2013 but was disrupted soon after when South Sudan descended into its own civil conflict, which halved output at some oilfields and ceased production at others.
Reduced oil revenues have had a dramatic effect on both sides of the border, but particularly in Sudan where the value of the Sudanese pound fell by as much as 85 per cent last year, ultimately sparking the anti-government protests that are threatening President Omar al-Bashir’s 30-year grip on power.
The decision to rebuild relations and let oil flow, analysts say, is a direct response to that threat and the primary reason that Mr Bashir emerged as a surprise mediator to bring South Sudan’s warring sides to a peace deal last year.
“Mr Bashir begged the region to let him mediate as he desperately needed South Sudan’s oil payments to come back on line,” said James Okuk, a researcher with the Center for Strategic and Policy Studies in Juba.
Following the peace negotiations, Mr Gatkuoth, the country’s oil minister, said he and his Sudanese counterpart, Azhari Abdalla, were instructed to work on the resumption of production in parallel.
Improved cross-border relations have already seen output begin to rise and will be a relief for China National Petroleum Company, Malaysia’s Petronas and India’s Oil and Natural Gas Corporation that operate South Sudan’s oil-producing fields through two joint ventures.
The companies initially hoped to double output to 260,000 barrels a day by the end of 2018, but operational delays have meant that total daily output remains at 170,000 barrels, Mr Gatkuoth said.
A plan to restart production at the Mala oilfield in May should add a further 20,000 barrels in the hope of restoring total daily production to 350,000 barrels by the end of the year, he said.
Progress of that scale would significantly exceed industry estimates. Research firm Wood Mackenzie forecasts that production is unlikely to exceed 170,000 barrels before 2020 without significant investment, which operators may be wary of making before long-term political stability is assured.
“We remain cautiously optimistic about the outlook for South Sudan, however, output will take time to ramp up,” said Mansur Mohammed, research manager for the upstream oil industry in sub Saharan Africa. “Security will be the main concern for operators in South Sudan. The peace deal needs to hold.”
Political uncertainty in Sudan, where the under-pressure Mr Bashir in February declared a state of emergency and dissolved his government, is another risk to the new-found alignment between Juba and Khartoum.
Mr Gatkuoth, who previously served as ambassador to Washington and the UN, said the Sudanese protests are yet to impact to his relationship with the government in Khartoum and insists that investor interest in South Sudan is reviving.
“My role as the Minister of Petroleum here in the Republic of South Sudan is to make sure that the resources of the country are used now and not tomorrow,” he said.