Oil output dip, pipeline woes lead South Sudan economy to cliff edge

A months-long halt to South Sudanese crude exports due to a rupture on its export pipeline through war-torn Sudan is pushing the oil-dependent economy to the brink of collapse.

Landlocked South Sudan, which has a recent history of civil war, was producing 150,000 b/d of crude oil until February, when it declared force majeure on crude loadings from Port Sudan due to the pipeline outage. Some 90% of government revenues and most of its foreign exchange come from oil exports.

According to the Platts OPEC Survey from S&P Global Commodity Insights, output fell to 70,000 b/d in March and 60,000 b/d in April.

The rupture, which sources said was caused by a shortage of diesel required to heat the pipeline, followed months of intense fighting in neighboring Sudan between forces loyal to rival generals, which has already reduced demand for South Sudan's heavy, sour Dar and Nile Blend crudes, with some shippers unwilling to dock in Port Sudan.

Platts, part of Commodity Insights, last assessed Dar at a $3.65/b discount to Dated Brent on May 13, having recovered slightly from the largest discount in five years in November. April buyers of Sudanese and South Sudanese crude were Malaysia, Italy, China and Singapore, according to S&P Global Commodities at Sea data.

Now, a $12 billion cash-for-crude deal signed in December by South Sudan's recently-sacked finance minister and a member of the UAE's ruling family, stamped by ministries in the two countries and seen by Commodity Insights, has shone a light on the parlor state of South Sudan's public finances ahead of long-delayed elections later this year.

Controversial deal

A leaked copy of the agreement between South Sudan and the Dubai-based Hamdan Bin Khalifa Department of Projects, or HBK DOP, guarantees Juba $12 billion, almost twice the country's GDP, in three tranches subject to delivery of cargoes of South Sudanese crude, purchased at a $10/b discount to a Platts benchmark. It was signed by then-finance minister Bak Barnaba Chol.

Last week, Chol defended the deal on local television, arguing it would allow the government to invest in vital infrastructure and diversify its economy.

It was not clear whether the first $5 billion installment of the loan has been delivered, and the term sheet stipulates payments will be made into a UAE bank account. The deal has proven controversial in South Sudan due to its length.

It is not clear how the pipeline shut down will impact the deal, but South Sudanese officials said in May that the pipeline would be operational again within two months, even as sources told Commodity Insights there was no end in sight.

Representatives of South Sudan's oil ministry did not respond to requests for comment. HBK could not be reached. The UAE government has not commented on the agreement.

Meanwhile, the UAE has been accused of assisting the Rapid Support Forces -- run by General Hamdan "Hemedti" Dagalo -- in their battle against the Sudanese Armed Forces in neighboring Sudan through a remote airbase in Chad, which the UAE denies.

Last year, the RSF took key towns containing pumping stations along the export pipeline, chasing away engineers and forcing Juba into direct negotiations with the militia group, South Sudanese sources said at the time.

The apparent UAE bailout comes as South Sudan faces a deep economic crisis, exacerbated by declining oil revenues and a massive refugee influx from Sudan. According to the World Bank, the economy contracted by 0.4% in 2023. Economic malaise is seen as a key trigger for fighting in South Sudan. Meanwhile, elections that were earmarked for 2022 are expected to take place later this year.

Moment of flux

Promises to supply large quantities of crude to the UAE come at a moment of flux for South Sudan's oil sector, with Malaysia's Petronas in the process of selling the country's main upstream assets to London-listed Savannah Energy for $1.2 billion.

South Sudan holds Africa's third-largest oil reserves but has seen production fall dramatically from a peak of 350,000 b/d after independence from Sudan in 2011.

The Savannah deal -- initially expected to be completed in September 2023 -- would make the UK company a key stakeholder in Blocks 3/7, 1/2/4 and 5A, with a 40% stake in Dar Petroleum Operating Co., alongside CNPC with 41%, Sinpec with 6% and Nilepet with the remainder. The general manager position rotates between shareholders.

However, the deal has been repeatedly delayed, most recently on April 6, when Savannah announced the transaction would likely close in the late second quarter or early third quarter.

The UK firm, which last year had its assets in Chad nationalized by the country's government, is still awaiting key approvals from Juba.