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Independence for oil-rich South Sudan has brought about numerous opportunities for growth, but has also highlighted the challenges that limit cross-border trade. Shannon Manders reports.

Future prospects in South Sudan’s oil industry continue to reveal themselves, with the country shipping its first independently-sold oil cargo in mid-July, and mandating Glencore as a partner to market its oil even before it declared its independence.

A lot of investment has already been made in the South Sudanese oil industry by the Chinese, Indians and Malaysians. While it is no secret that the oil is being produced, it’s now a question of what further investment can be made.

“The expectation that something will happen in South Sudan is interesting for foreign investors and traders,” says Adrian Lewers, head of political risk and contingency at Beazley. “But the risk environment is still pretty difficult. There’s still quite a way to go before people will be comfortable enough to actually put money on the table.” Banks too remain hesitant to initiate any formal coverage in the newly-formed country, though many agree that it is only a matter of time before they will step in.

“Our door isn’t open, but it’s ajar; we’re listening to people,” says a banker familiar with the East African market. “We have to keep it on our radar. We have to be the fi rst to move on this – we need to be there.”

Risks and fears

South Sudan’s security situation is hampering the country’s economic development, which in turn is deterring potential investors. Outside the capital of Juba there is significant insecurity due to widespread communal tensions that are at risk of erupting into full scale violence.There is also the issue of corruption.

“From a political point of view, the main continuing issue is the overall lack of institutionalisation, which affects the business environment and the awarding of licenses; it is prone to politicisation,” says Jean-Baptiste Gallopin, analyst at risk consultancy Control Risks, adding that this also creates an environment that may lend itself to bribes.

“It’s a challenging environment to do business in,” he says, listing poor infrastructure and a high cost of doing business as factors that impede operations in the new republic. Control Risks is advising oil and gas clients to entertain “good relationships” with South Sudan’s government to protect their interests.

“That is a key element of the transition that a few companies are undergoing at the moment,” Gallopin says. Until such time as the two Sudans agree on border demarcations, oil pipeline utilisation and other economic issues, there is a real risk of military action in the border region.

Should that happen, there is concern that South Sudan may delay the establishment of a suitable political mechanism for its development, or worse still, result in a lost opportunity, and even a failed state.

“There’s a real risk of that happening; that the security situation on the ground becomes too difficult for South Sudan to resolve on its own, and governments and organisations that might be able to help are distracted by bigger events elsewhere – whether it’s US debt, eurozone problems or political unrest in North Africa and the Middle East,” says Beazley’s Lewers.

Such a situation would discourage new investors from exploring the country’s upstream potential, and dissuade those already present from stepping up their current business.

New opportunities

South Sudan yields about 375,000 barrels per day of oil, produced mainly by China National Petroleum Corp (CNPC), Malaysia’s Petronas and India’s Oil & Natural Gas Corporation (ONGC).

The majority of oil-producing fields lie in landlocked South Sudan, while the north is home to the refineries, two export pipelines and the export terminal, Port Sudan, on the Red Sea. In the past, north and south shared revenues from oil produced in the south approximately 50-50, but the two Sudans have yet to agree on a revenue-sharing formula for future exports.

It is believed that Sudan’s demands for oil revenue will be in excess of what the south will pay. Determined to forge ahead, South Sudan is keen to find new oil markets, and new ways to reach them.

In the same week that South Sudan declared its independence, Nilepet, the country’s state-owned oil producer, struck a deal with Glencore to form a joint venture to market South Sudanese crude oil.

The joint venture, called Petronile International, will “help the Republic of South Sudan develop its national oil company through skills transfer and training and will be responsible for marketing the crude oil from July 9 onwards”, Nilepet stated in its press release.

“We are delighted to have formed this partnership with a strong and capable international partner such as Glencore, who has also committed to investing in the oil infrastructure of South Sudan and to raise international fi nancing for the benefit of the Republic of South Sudan,” the release continued.

To further solidify the south’s independence from the north, the country has rumoured plans to build a refinery at Gemeza, north of Juba, and to connect to a pipeline in Kenya. But such measures are years away and are hampered by the country’s lack of basic infrastructure.

The reality

In the past, Sudan’s access to western capital has been limited by sanctions. And until the south establishes a policy and security regime to facilitate cross-border trade, both banks and investors will remain hesitant to venture into its lucrative oil industry.

“We’ve been speaking to a lot of traders about what they’re doing there,” says a London-based source.

“We’re looking at it [South Sudan], but we haven’t done anything yet.” It has been suggested that it will take some time and much international attention and pressure to get South Sudan’s development plans on track.

“This will then result in some of these opportunities – whether it’s in oil or in other natural resources – being realised,” says Beazley’s Lewers. The IMF has already pledged its economic assistance to South Sudan, at the fledgling country’s request.

“The IMF will continue this engagement by providing technical assistance and training in the areas of macroeconomic, fiscal, monetary and financial policies, and related statistical fields,” the organisation said in a statement.

“The IMF will also be providing assistance in view of strengthening the legal and administrative framework in these core areas and in relation to South Sudan’s application for fund membership.”

International commodities trader Glencore’s involvement in the country’s future may also help to encourage international interest, and the subsequent fi nancing that will be necessary for the development of the new nation.

While electricity transmission and distribution, communication and transportation networks will be high on the agenda, it is likely that new oil infrastructure will be the top priority.

The agricultural and mining sectors have been cited as sectors into which the country may need to diversify into to move away from a mono-product economy. Nevertheless, it is likely that oil will remain as crucial to South Sudan’s future as it was to its past. GTR