Disruptions Likely Into 2014 As Conflict Endures

BMI View: The continuing violence between the military and rebel forces has begun to seriously affect South Sudan's oil industry. With the violence likely to escalate further, we see significant disruptions to production as increasingly likely. This will have economic consequences on the oil-dependent country, and could further discourage much-needed investment in the country's exploration and production (E&P) sector.

Former vice president and rebel leader Riek Machar has rejected President Salva Kiir's ceasefire offer made on December 27. Fighting has continued between the army and ethnic militias in South Sudan, leaving at least 1,000 dead according to Reuters. Although unverified, Machar stated that his forces have captured all of the Unity state and three quarters of the Upper Nile state, which together make up South Sudan's daily production of 245,000 barrels per day (b/d). Other reports highlight that in the Upper Nile state, the control of towns is split between government forces in the north and a mixture of rebel troops and armed civilians in the south. All in all, the increasing violence points towards the likelihood that production has already been significantly disrupted, and could eventually be entirely interrupted.

45,000 b/d Announced Outages, Larger Numbers More Likely

Oil Production Recovery Largely At Risk With Enduring Violence
Sudan/South Sudan Unplanned Supply Outages (b/d)

Disruptions Likely Into 2014 As Conflict Endures

BMI View: The continuing violence between the military and rebel forces has begun to seriously affect South Sudan's oil industry. With the violence likely to escalate further, we see significant disruptions to production as increasingly likely. This will have economic consequences on the oil-dependent country, and could further discourage much-needed investment in the country's exploration and production (E&P) sector.

Former vice president and rebel leader Riek Machar has rejected President Salva Kiir's ceasefire offer made on December 27. Fighting has continued between the army and ethnic militias in South Sudan, leaving at least 1,000 dead according to Reuters. Although unverified, Machar stated that his forces have captured all of the Unity state and three quarters of the Upper Nile state, which together make up South Sudan's daily production of 245,000 barrels per day (b/d). Other reports highlight that in the Upper Nile state, the control of towns is split between government forces in the north and a mixture of rebel troops and armed civilians in the south. All in all, the increasing violence points towards the likelihood that production has already been significantly disrupted, and could eventually be entirely interrupted.

45,000 b/d Announced Outages, Larger Numbers More Likely

The fighting has begun to seriously affect South Sudan's vital oil industry. With the violence occurring in the two oil-producing states, production has been affected and could be completely halted should violence endure. According to petroleum Minister Stephen Dhieu Dau, oil output in South Sudan has already fallen by about 45,000 barrels per day (b/d) to 200,000b/d in late December 2013, after the Unity state oilfields were shut down due to fighting.

However, we maintain that the outages are most likely to be much larger than the announced 45,000b/d. The evacuation of over 200 oil workers from oil companies such as ONGC Videsh, Petronas and China National Petroleum Corporation (CNPC) suggest that several oil fields are currently not operating at full capacity. A commander of the South Sudanese army in Unity state confirmed this on December 25, when he stated that production from most fields in the Unity state had to be halted due to a lack of staff remaining at the oil fields. This highlights the challenges to maintaining output as violence appears to be worsening.

The deteriorating situation could disrupt the progressive recovery of oil production in South Sudanand could increase the chances of seeing a complete interruption of production in the country. Oil production in South Sudan had already seen a number of major outages after going offline in January 2012 following a dispute with Sudan. However, supplies had begun to recover in recent months after coming back online in April 2013, as unplanned outages fell from a peak of 371,000 b/d in May 2012 to 130,000b/d in November 2013.

Oil Production Recovery Largely At Risk With Enduring Violence
Sudan/South Sudan Unplanned Supply Outages (b/d)

Bearish Long-term Outlook

As oil accounts for more than 95% of the country's revenues, any lengthy shut down would have grave consequences on its economy. In addition, the latest violence could discourage investor interest in E&P activities in South Sudan, causing the country to miss out on a wave of investment target at East Africa's onshore oil potential. Government officials had previously announced plans to open new blocks to bidding before the end of 2013 ( see, 'More Blocks, Same Problems,' October 31). However, the latest fighting will likely not only delay investments but could also significantly deter interest in any new blocks on offer. This is troubling when considering that the growing maturity of existing fields already point towards a troubling below-ground outlook.

Stemmed Long-term Growth
Sudan & South Sudan Oil Production (000b/d), Net Oil Exports (US$bn)
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