South Sudan oil field becomes battleground in civil war as economy reels

5/26/2015

ILYA GRIDNEFF

NAIROBI (Bloomberg) -- After 17 months of civil war spanning a swathe of South Sudan bigger than Syria, President Salva Kiir’s survival may hinge on the fate of a single oil field. Paloch in Upper Nile state, the only region still pumping crude in a nation with sub-Saharan Africa’s third-largest reserves, has re-emerged as the rebels’ prime target.

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The Petrodar Operating Co. oil processing facility is seen near Melut, in the Upper Nile, Sudan.

While the insurgents probably couldn’t find a market for its oil, the facilities’ capture or damage could spell disaster for a government that’s battling surging inflation and a slumping currency, and which depends on crude for about 90% of its income, according to analysts including Alex de Waal, executive director of the World Peace Foundation at the Fletcher School in Massachusetts.

“The outcome of the war will be determined by who is able to sustain sufficient spending to keep their political-military coalitions functional,” de Waal said by e-mail. “The current financial collapse in South Sudan is indicative that the government is losing badly on this front.”

State-owned China National Petroleum Corp. is the biggest operator in South Sudan, while Japanese buyers prize the country’s low-sulfur crude as a clean-burning fuel for generating power. While the seizure of Paloch could deliver a fatal blow to Kiir’s presidency, rivalries within the armed opposition prevent a smooth transition of power and could prolong violence that has already killed tens of thousands of people.

Political Spending

“Oil is South Sudan’s bread and butter,” Luke Patey, who researches the industry at the Danish Institute for International Studies in Copenhagen, said by e-mail. It’s “vital for President Kiir in maintaining the last fragments of political cohesion.”

Fighting that began in December 2013 has slashed oil output by at least a third to about 165,000 bopd, the Oil Ministry said last week. Unity, the only other crude-producing state, has been out of action since the war erupted. In January, Frontier Economics, based in London, estimated the war could cost the economy as much as $28 billion if it continues for the next five years, with neighboring countries facing even bigger losses.

Before the conflict, CNPC, Malaysia’s Petroliam Nasional Bhd. and India’s Oil & Natural Gas Corp. pumped most of the oil. A 40% slump in global crude prices over the past year has also reduced South Sudan’s revenue.

 

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