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Oil (petroleum) issues

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About this article

This article is by Michael Medley.

Other authors are invited to help develop the topics introduced here. The present article should be treated as an overview of issues related to oil. It is already a bit too long, so further development should probably involve taking some of the sections and expanding them as separate articles. Drafts for such articles may be emailed to editor@SouthSudanCivics.info. Smaller suggested amendments should be mentioned in the comments section, available to registered users on this page.

Oil (petroleum) is a very important factor in South Sudan's economy and society. Without its oil reserves South Sudan would not have become an independent state, or at least would have developed in a very different way. Set against the benefits of income-flow are a range of drawbacks which for many countries have been described as a 'resource curse' (ref). This article outlines some of the main issues.

 

Location and quantity

The oil is being extracted commercially, mainly in the states of Unity and Upper Nile. Exploration has been taking place in Warrap, Lakes and Jonglei. (See article on Oil blocks and concession-holding companies.)

At its peak, in 2010, South(ern) Sudan was producing about 130 million barrels per year, valued at USD 9.4 billion (ref). This was less than 0.5 percent of worldwide oil production, but a huge phenomenon in the context of South(ern) Sudan. It accounted for over 70 per cent of the calculated Gross Domestic Product and about 99% of recorded exports (ref). Moreover, government revenues from the oil accounted for about 98 per cent of GOSS's income (ref). Conflict, production shutdowns, and other developments have altered the picture since then, but South Sudan's finance still comes overwhelmingly from oil, if indirectly.

 

Unreliability of government revenues

Oil revenues fluctuate from year to year, sometimes stop suddenly (see section on conflict with Sudan below), and will decline (though possibly with occasional upswings) at an unknown rate. GOSS's overwhelming dependence on oil revenues means that this price instability poses a big challege for the way it manages public spending.

  • The effect of year-to-year fluctuations in the oil price are most clearly exemplified by what happened in 2008-2009. There was a surge in unplanned GOSS spending in 2008 when revenues were high, followed by severe funding difficulties and crisis actions in 2009 when they plunged (ref).
  • When South Sudan's oil production was shut off completely, from early 2012 to April 2013, due to its disputes with Sudan, it was forced into sudden cutbacks again. It had to turn to running up government debt, and selling oil and mining concessions (ref) on terms which would have to be negotiated from a position of weakness.
  • Looking at the medium or long term, the finance ministry has used a projection that government oil revenues may halve from 2011 to 2019 and cease by 2035 (ref. See a more detailed version of the same projection here). But this was based on various assumptions, which included continuous extraction, and no major new oil finds or technologies.

Policies which could counteract the unreliability of oil include:

  • expanding non-oil revenues (see the SSCinfo article on tax and revenues)
  • energetically developing the non-oil sectors of economy
  • setting up one or more savings and/or stabilization funds.

In the transitional period before Independence, there was an Oil Revenue Stabilization Account (ORSA), administered under the Sudan Government of National Unity. Its workings were not transparent (ref), and SSCinfo does not know the balance available to South Sudan at Independence. But this probably provided the SSP one billion of reserves money which GOSS called on to help fill the deficit in the Austerity Budget for 2012-2013 (ref). A 2012 draft law for petroleum management has proposed to re-institute the ORSA for South Sudan, and add a Future Generation Fund (FGF). All revenues not required for the annual budget would be paid into the ORSA until it contained half as much money as the annual budget. When the ORSA reached that level, the excess revenues would be paid into the FGF. The FGF would be used to fund projects which increase the country's productive capital. This draft law is subject to further debate.

Different versions of the savings/stabilization fund idea would be possible. One potential model is from the US state of Alaska, where the oil money feeds a Permanent Fund from which the state's residents individually receive an annual dividend. The rationale is partly to express the people's ownership of the natural resource, partly to encourage citizen concern with the management of that resource, partly to combat poverty and inequality, and partly to stimulate local economies. Jason Hikel argues that such an arrangement should be adopted in South Sudan, along with other fixed rules for budget spending (ref).

 

Harm and benefit to other parts of the economy

Oil revenues provide a means for government to invest in infrastructure and other initiatives to help non-oil economic activities. However, since the establishment of GOSS and its access to oil revenues in 2005, GOSS has sometimes been criticized for failing to invest enough in the general economy, and spending too much instead on the army, government salaries, and corrupt payments (e.g. ref, ref).

The oil industry creates some direct benefits by employing people, developing their skills, and buying goods and services in the local economy. There is scope for these benefits to increase. In 2012 it was reported that fewer than ten percent of oil company employees in South Sudan were South Sudanese (ref).

But the oil industry is also harming other parts of the economy in some ways. Countries with a large oil industry have experience a phenomenon known as Dutch disease. Oil exports underpin a relatively high exchange rate for the local currency (because there is more demand for changing hard currency into local currency),  and a high exchange rate makes locally-produced goods less competetive for export. Although this effect is probably large, SSCinfo does not know of a detailed assessment of the scale and particular characteristics of Dutch disease in South Sudan.

One way to limit Dutch disease is to keep oil revenues in the form of hard currency savings. So it adds to the stability argument in favour of something like a Future Generation Fund.

 

Conflict and agreements with Sudan

The desire of Southern Sudanese to control the oil in their territory was one of the motivations of the 1983–2005 war (ref), and negotiations for sharing the oil wealth were a major component of the peace process leading to South Sudan's independence (ref). But the Comprehensive Peace Agreement of 2005 in many places only specified principles and procedures for continuing to negotiate on wealth shares and other disputes: it did not specify the exact terms of the final settlement. At the moment of South Sudan's independence many matters remained unclear. These included the demarcation of the border with Sudan in the oil-bearing areas, and the transit and usage fees which South Sudan would have to pay Sudan in order to export its oil in the only immediately practical way: using the pipeline and other infrastructure in Sudan.

After Independence, the disputes on these matters quickly escalated. Unwilling to pay the fees of USD 36 per barrel demanded by Sudan, GOSS decided to shut down oil production in South Sudan on 20th January 2012. Border fighting between the armies on both sides intensified, culminating in the SPLA's occupation for several days in April 2012 of the oil facilities at Heglig/Panthou previously and subsequently held by Sudan. The UN Security Council and the African Union then pressurized both sides to reduce hostilities and begin a new phase of negotiations. This led to a bilateral agreement in August – which became part of a wider set of agreements signed in Addis Ababa on 27 September – that South Sudan would pay Sudan fees averaging about USD 10 per barrel transported, plus a one-off payment of USD 3 billion (ref). This agreement only applied for three and a half years, and left many matters still unresolved, including:

  • the transportation, processing and transit fees to be paid to Sudan by oil companies operating in South Sudan (as opposed to the fees paid by GOSS for its share of the exported oil)
  • compensation to the Sudan-owned company Sudapet for transfer of its assets in South Sudan to the GOSS-owned company Nilepet
  • oil matters dependent on the ongoing territorial dispute between the two counties.

Nevertheless, the agreement opened the way for a gradual resumption of oil production in South Sudan beginning in April 2013. But in mid-2013 Sudan threatened to stop the transportation again, on the grounds that South Sudan was still assisting rebel groups in Sudan (ref), showing that oil could be tool of conflict even when not a direct cause of it.

In order to reduce its vulnerability to such action, GOSS has decided in principle to have a southern pipeline outlet, through Kenya or Ethiopia (ref). Many have argued that such a scheme would be economically wasteful, and – by reducing the interdependence of Sudan and South Sudan – increase the likelihood of future conflict (ref, ref). But sentiment in South Sudan for independence in this regard seems to be strong. The idea has taken much longer to materialize than GOSS originally suggested, but by September 2013 plans appeared to be solidifying around a scheme for a pipeline linking both South Sudan and Uganda to the Kenyan Port of Lamu, to be built and managed by Toyota Tsusho of Japan (ref, ref).

 

Civic cohesion and conflict risks

Sudan has been accused of helping rebel groups in South Sudan, but such rebellions are not solely driven by any such support. Worldwide there is evidence that a country's risk of conflict is substantially increased by dependence on primary commodity exports (ref). In South Sudan one can well imagine that oil installations could become targets of rebel attacks, and that such a threat tends to increase the security presence in oil-producing areas, at a cost of public funds as well as oil company overheads, and with implications for social dynamics in those areas.

More broadly, the centralization of resource revenues has been seen as undermining any social contract between government and people. In the idea of the social contract, a government's imposition of authority on the people is accepted by them if they can see that it brings fair benefits back to them. So they are more likely to accept the government's control of the country's natural oil wealth the more clearly they can see that this wealth is coming back to do them good. Moreover, personal taxation can be a healthier way of raising government revenues than the government's taking of a natural resource. This is because personal taxation represents the direct obligation of the government to each citizen. In theory it should make citizens more active in monitoring government performance and holding it accountable.

One suggestion is that GOSS should return part of the oil wealth as a regular cash payment to each citizen. In the US State of Alaska, this has been done in the form of a dividend from a permanent fund like the one mentioned above (ref). The widespread money system that would be required for implementing this – though very hard to create – and the personal liquidity brought about – might also help to make general personal taxation a practicality.

 

Corruption, transparency and accountability

Without oil, GOSS officials would not have been able to steal anything like as much as the USD 4 billion mentioned by President Kiir in his famous letter of 3rd May 2012 (ref). A much smaller government budget would necessarily have been watched much more carefully. The oil money has powered corruption in other sectors, but much of the wrongdoing has probably taken place in the oil sector itself. This is reasonable to suppose because of the huge values involved, and the dismaying lack of transparency in that sector (ref). Contracts and concessions have been awarded without public debate, clear process, or institutionalization of other strong checks and balances (ref, ref). So far as SSCinfo knows, none of the Exploration and Production Sharing Agreements (ESPAs) between GOSS and the oil companies has yet been made public. It is even thought that GOSS has not yet developed a way of checking the amounts of oil extracted from South Sudan (ref): a situation which creates a huge loophole for theft.

The 2013 Resource Governance Index ranked South Sudan 50th out of 58 resource-rich countries on the quality of its handling of those resources, giving it a 'failing' grade. Interestingly South Sudan's rating was relatively very high ('satisfactory') for the 'institutional and legal setting' component, but very low ('failing') for the other components: 'reporting practices'; 'safeguards and quality controls'; and 'enabling environment'. The high grade for 'institutional and legal setting' is due to the passing of the Petroleum Act 2012, which requires public access to contracts and data, as well as formal processes for competetive tendering. The low overall grade comes largely because these requirements have not been fulfilled. President Kiir announced in December 2011 that South Sudan would implement the  EITI (Extractive Industry Transparency Initiative) standard, a global standard for transparency of natural resource revenues (ref). But as of August 2013 the pledge had not been fulfilled to a level that would qualify South Sudan as an EITI country.

 

Questions to pursue

  • What is GOSS doing to develop non-oil sources of revenue?
  • What is the status of debate, amendment and adoption of the Oil Revenues Bill?
  • What, in more detail, have been the effects of Dutch disease?

  • What fees are being paid to Sudan for the share of oil retained by the oil companies (as opposed to the government) in South Sudan? How have negotiations on this impacted the companies' relationship with GOSS?
  • Has progress been made in negotiations on compensation for Sudapet?
  • Is the decision to build a southern pipeline irrevocable? What version is most likely to be realized? Is the process transparent?
  • What is the status of implementation of the Petroleum Act 2012, particularly regarding transparency and accountability?
  • What is the status of South Sudan's adherence to other requirements of the EITI standard?
  • What progress has been made toward transparent and fair processes of consultation between companies and populations in oil-producing areas?

Effects on environment and people in oil locations

The main areas of oil production are in the counties of Koch and Rubkotna in Unity State, and Maban and Melut in Upper Nile State.

During the 1983-2005 war, the Sudan government (often with the collusion of oil companies) subjected people in the oil-producing areas – especially Block 5A in Unity State – to frequent attacks and forced displacement as a means of protecting the oil infrastructure and continuing to benefit from its production (ref). Relations between oil managers and local communities have certainly improved since that time, but still involve many problems.

Some roads constructed to serve the oil institutions have brought about flooding, inhibiting movement of people and animals (ref, ref). There have also been allegations of deaths due to oil-related water contamination (ref, ref).

Control of land is still an issue. Many returnees after the Comprehensive Peace Agreement, were unable to recover their original lands (ref). Oil companies seem to have tried to manipulate processes of development – discouraging water-drilling in some areas, building health facilities in others – in order to persuade populations to move (ref, ref). Compulsory relocation is still practised, in conjunction with government authorities (ref).

The companies' corporate social responsibility (CSR) programmes have often involved providing services and infrastructure (for instance, schools and health centres) in an attempt to win goodwill from local populations, but these have sometime suffered from a perception of ulterior motives, and poor consultation with local people and authorities. Populations have sometimes demanded compensation for the land used in the projects (ref).

Processes of consultation and compensation have been becoming more formalized  but are still a matter of controversy and confusion (ibid.). Besides the companies, local populations and local government authorities, the National Security Service (NSS) tends to play an important role in the discussions (ref, ref): a factor which may hinder free discussion and transparency.

Comments


Need to mention the refineries being built at Tharjiath (Unity State) and Thiang-Rial (Upper Nile State) (see 'Oil refinery project in Unity state suspended', Sudan Tribune, 2013/10/01), and possibly the question of whether they were properly thought out (see 'Pipeline poker', The Economist, 2013/05/25).

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