Various media sources, DEC/22/2014, SSN;
A looming economic disaster is predicted for the failing nation of South Sudan now enduring its second year of a national civil war and its oil is selling at what traders call the lowest oil prices IN THE WORLD, AT ONLY $20 TO $25 A BARREL.
The reasons are attributable obviously to the rapidly falling oil prices worldwide but also more importantly due to poorly conceived and what can best be called as short-sighted polices of the current president Salva Kiir’s government such as the unfavourable pipeline contracts with the Khartoum government and other oil contracts with foreign countries and companies or individuals.
South Sudan is surely to become one of the biggest casualties of the oil crunch. OPEC members specially led by Saudi Arabia as its biggest oil exporter, have decided to keep pumping oil at their current production levels as a way to counteract the United States shale oil boom, driving down oil prices.
Reportedly, 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.
Against the Brent, the North Sea benchmark selling at around $61, the extremely low realised price is partly due to the low quality of South Sudanese crude.
But most importantly, the South Sudanese oil is sold cheaply due to an ill-advised, ill-fated and hurriedly made decision that was agreed upon by Kiir’s government 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 government of president Salva Kiir agreed a fixed payment.
In effect, the government banked on oil staying at $100 or more 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.
“Developments in the oil sector in South Sudan constitute a quadruple whammy . . . the government of South Sudan is facing the severest of fiscal contractions,” said an international official who asked not to be named.
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.
“They are squeezed,” says the same international official.
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.
Unfortunately, at the never-concluding so-called peace talks between the Kiir government and Machar’s rebels, the government has been accused of borrowing heavily to execute the current civil war and against the future well-being of future generations of South Sudanese.
This accusations came from the rebels after the government refused to to disclose its national debt or how much it owes to investors and foreign countries. Billions of dollars have allegedly been borrowed by the Kiir government and with the prevailing rampant corruption in the country, most of these monies have allegedly ended in the private accounts of those in government and the military generals. END