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AFRICAENERGYFRONTIERS

SOUTH SUDAN

MINISTRY OF PETROLEUM AND MININGMinister Stephen Dhieu Dau Ayik

NILE PETROLEUM CORPORATION (NILEPET)

ENERGY FRONTIERS A mature oil producer with extensive underdeveloped acreage, potential for enhanced recovery implementation, infrastruc-ture and power deficits provide opportunities for investors

PETROLEUM LEGISLATIONPetroleum Act of July 2012

South Sudanin ProfileSouth Sudan is the world’s newest nation, having gained its independence from Sudan in 2011. A mature oil producer with great re-maining potential, South Sudan is Africa’s sixth largest country by oil reserves, but has been crippled by decades of war. If peace prevails, the nation could be a leader in the growing East African oil industry.

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OVERVIEWANDBACKGROUNDSouth Sudan has a long history of oil and gas activity. Two years after the 1972 Addis Ababa peace accord that ended the first civil war in Sudan, the government signed a concession agreement with Chevron. The operator mapped out the Muglat and Melut basins and discovered the Unity oilfield in 1978. The Heglig field to the northwest was discovered shortly afterwards.

The peace agreement of 1972 contained few provisions for oil and gas production, since the region had no history of petroleum activity outside of exploration attempts. The discovery of Unity and Heglig sparked protests in the south over concerns that most jobs would go to the north if exports were refined there and shipped from the northern city of Port Sudan. After the central government revoked southern autonomy in 1983, civil war re-sumed that year and continued until 2005, when the Comprehensive Peace Agreement (CPA) was signed.

Central government forces displaced people in the oil regions and fighting made continued operations difficult. Chevron pulled out in 1984 and part of its concession (blocks 1, 2 and 4) was sold in 1992 to Arakis Energy of Can-ada. Arakis sold 75 percent of its interest to CNPC, Petronas and Sudan’s national oil company Sudapet, and the four companies formed the Greater Nile Petroleum Operating Company (GNPOC) consortium. Talisman Ener-gy acquired Arakis in 1998, and sold its 25 percent stake in the blocks to India’s ONGC. In 1999 GNPOC completed a 1,540-kilometer pipeline to the Red Sea coast that would enable crude exports.

The shaky peace agreement of 2005 allowed increased oil and gas activity. From 1999 to 2006 the GNPOC consortium operated the only producing project in Sudan, in blocks 1,2 and 4. Blocks 3 and 7 began producing in 2006, along with block 5A and block 6. Some of these producing areas straddle the border of the present-day states of Sudan and South Sudan. A second export pipeline was also commissioned. By this time, Sudan was Africa’s fifth largest oil producer.

The CPA culminated in a referendum in 2011, where the people of South Sudan voted for independence. Under the agreement, oil revenue was to be shared 50:50 between Sudan and South Sudan, and border areas demar-cated. Five areas are still disputed, including the oil region of Abyei.

South Sudan’s economy at independence was completely dependent on oil revenue (98 percent of total revenue) and it has to pipe all its oil through Sudan for export. In January 2012, a dispute over transit fees caused the government of the south to halt production for most of that year. Conflict caused a partial production shut down at the end of 2013. From a combined total of almost 490,000 barrels per day production in 2010, South Sudan's output declined to around 260,000 bpd in the first half of 2014 and around 160,000 bpd in the first half of 2015. The production decline is driven by continued fighting, despite the signing of a new peace agreement in August 2015. This has forced operators to withdraw some personnel.

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Oil and gas activities in South Sudan are governed by the Petroleum Act of July 2012 and the distribution of funds reg-ulated by the Petroleum Revenue Management Act of 2013.

LEGALFRAMEWORK

Two key pieces of legislation, the Petroleum Act of 2012 and the Petroleum Revenue Man-agement Act of 2013, are in place to govern the oil and gas sector in South Sudan. While these laws have been passed, they remain unenforced and barely implemented. Never-theless, as South Sudan's government nego-tiates peace within its territory and sets up the institutions to manage its economy and civil society, these laws would be more widely ob-served and applied.

The Petroleum Act establishes the Nation-al Petroleum and Gas Commission of South Sudan to devise policy, approve agreements on behalf of the government and co-ordinate between different government agencies. The Ministry of Petroleum and Mining signs petro-leum agreements and implements the policies of the commission.

The Act also mandated the creation of the Na-tional Petroleum and Gas Corporation, "which shall participate in the upstream, midstream and downstream activities of the petroleum and gas sector." It would hold interests in con-sortia of contractors. The description of this body exactly fits the function of the national oil company Nilepet, and it is unclear how much progress has been made in setting up the new corporation.

Reconnaissance licences are non-exclusive and allow contractors to collect data (in-cluding seismic activities) in a given area. If required, the government can issue an open tender for an exclusive reconnaissance li-cence in an area that is not already covered by an agreement.

Petroleum agreements (in the form of produc-tion sharing contracts) give a contractor the ex-clusive right to explore for hydrocarbons, and if a commercial discovery is made, to develop and produce petroleum. The area covered by an agreement "may comprise one or more blocks or parts of blocks".

Entities entering into a petroleum agreement in South Sudan shall be incorporated and reg-istered in the country, and shall have an office there, under the Act. Contractor groups may be required to form an operating company to undertake petroleum activities. If an oper-ating company is not required to be formed, the group shall nominate an operator. If a con-tractor decides to dispose of an acreage or part thereof, the National Petroleum and Gas Corporation has right of first refusal to buy the interest.

Petroleum agreements are valid for a maximum of 25 years. If all obligations are met and pro-duction will extend beyond the 25-year time-frame, the ministry can approve an extension period of up to 10 years.

Exploration periods last a maximum of six years, including a first commitment period and up to two optional periods thereafter. If and when the contractor enters the first optional pe-riod, the licence area is reduced by 25 percent. In the second optional period it is reduced by an additional 50 percent.

If there is no declaration of commercial discov-ery before the end of the exploration period, the area is relinquished. Declarations must be made within 90 days of a discovery.

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SOUTH SUDAN RANKS VERY LOW ON INDICES FOR THE PERFORMANCE AND MANAGEMENT OF ITS OIL INDUSTRY, BUT IT DOES BENEFIT FROM A MODERN LEGISLATIVE FRAMEWORK THAT AIMS TO MAKE THE SECTOR MORE TRANSPARENT. THE COUNTRY HAS EXPRESSED AN INTEREST IN JOINING THE EITI INITIATIVE.

ENERGYSECTORORGANIZATION

State regulation and actorsThe Ministry of Petroleum and Mining oversees the sector, headed by Minister for Petroleum and Mining Stephen Dhieu Dau. Licences are approved by the Na-tional Petroleum and Gas Commission, which also pro-vides strategic policy advice and whose members are appointed by the president.

Nile Petroleum Corporation (Nilepet) is the national oil company, and took over the properties of Sudapet (Su-dan’s state oil company) upon independence. It was in-corporated in 20019 under the country's new Companies Act of 2003. Nilepet is an integrated national oil company with shares in the operating companies SPOC, DPOC and GPOC that produce all of South Sudan's oil. In April 2016 the CEO was fired, ostensibly because of fuel shortages in the country, and replaced by a new team of executives and advisors.

Because of the decades of fighting in the country, and lack of basic infrastructure, the reserves potential of many areas has not been established. The Ministry of Petroleum and Mining has stated its intention to launch a bidding round, but no date has been publicized.

Upstream activitiesAsian national oil companies dominate South Sudan’s oil sector. While proved reserves stand at 3.5 billion bar-rels of oil, producing assets have entered decline and no major fields are due to enter production. However, because most exploration has been carried out around the border region and in central South Sudan, a lot of the country is under-explored.

Three operating companies on blocks 1 (including the Unity, Toma and Munga fields), 3 and 7 (Palogue and Adar-Yale fields), and 5A (Mala and Thar Jath fields) are producing oil. Associated gas is reinject-ed. Blocks A, B, 5B and E are being explored.

The ministry has established goals to increase exploration and production activity. These include improving the recovery factor to 40 percent and looking at new prospects in producing blocks. To improve efficiency, the ministry encourages full field review studies and enhanced oil recovery techniques for producing assets.

Midstream South Sudan is landlocked and must export its oil via pipeline through Sudan at a fee. Two export pipelines carry the country’s oil production to the Bashayer terminal, around 25 kilometers south of Port Sudan. South Sudan has no refineries or gas processing facilities. Crude oil is marketed by Petro-Nile, a joint venture between Glencore and Nilepet.

GNPOC pipeline: This was Sudan’s first pipeline, and carries block 1 (South Sudan), 2 and 4 (Su-dan) oil from the Heglig facilities in Sudan to the Bashayer terminal. The 1,540-kilometer 28-inch pipeline can transport 450,000 bpd of Nile blend crude, and was completed in 1999. Another pipe-line belonging to the Sudd Petroleum Operating Company connects block 5A to the Heglig facilities.

DPOC pipeline: The south’s second pipeline, also known as the Petrodar pipeline, was completed in 2005. Owned and operated by Dar Petroleum Op-

erating Company, the 1,380-kilometer 32-inch pipeline has a capacity of 500,000 bpd. It evacuates Dar blend crude from South Sudan’s highest producing blocks, 3 and 7, to the Bashayer terminal.

Disputes over transit fees levied by the Sudanese gov-ernment led to production shutdowns in South Sudan in 2012 and 2013. These incidents are extremely damag-ing to both countries’ economies. South Sudan has pro-posed two new export pipeline routes. One would cross Ethiopia to Djibouti. Another would cross Kenya and end at an export terminal in Lamu. The government in Juba has signed MoUs with Kenya and Ethiopia for the pipe-lines.

The South-Sudan-Lamu pipeline would be part of the Lamu Port Southern Sudan-Ethiopia Transport (LAPS-SET) project, a transport corridor that would link a new port at Lamu with South Sudan, Ethiopia and possibly northern Uganda. Toyota Tsusho has completed a feasi-bility study for the $3-billion, 2,000-kilometer oil pipeline.

In addition to the pipelines, the government seeks invest-ment in refineries and storage.

ContractsPetroleum agreements under the 2012 Act can not exceed 25 years. An exploration term should not exceed six years. The act contains local content and environmental provi-sions and is valid under the Transitional Constitution.

Agreements take the form of production sharing contracts (PSC). The current PSCs in South Sudan date from the pre-independence era, notwithstanding negotiations to di-vide the block B and E concessions.

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Taxes and fees for petroleum activities are defined by the Petroleum Act of 2012 and the relevant pe-troleum agreement; and the Investment Promo-tion Act of 2009.

A contractor is liable for surface rental fees, royal-ties, bonuses and corporate income tax. Compa-nies with turnover of up to 1 million South Suda-nese pounds (SSP) incur tax of 10 percent. If they have turnover of up to 75 million SSP, their income tax rate is 15 percent. Companies with over 75 mil-lion SSP turnover incur tax of 20 percent.

Exploration costs can be deducted over an asset’s lifetime and losses from oil and gas operations can be carried forward five years but not carried back. Investors are obliged to set up a community development fund and training schemes.

The Ministry of Finance and Economic Planning, under the Investment Promotion Act of 2009 (passed before independence), provides invest-ment incentives in the form of allowances. These are applicable for capital (20-100 percent of ex-penditure), annual deductibles (20-40 percent) and depreciation (8-10 percent).

South Sudan has no VAT, but it uses a sales tax of 5 percent on good and services (15 percent during austerity periods when no oil is produced).

TAX ANDFISCAL REGIME

POWERSECTOR

Decades of conflict have left the power sector in ruins, with only 1 percent of the population able to access electricity. South Sudan generates 20 MW of electricity for a population of over 11 million.

The power sector is overseen by the Ministry of Electricity and Dams, headed by Minister David Deng Athorbei.

The largest power plant is the 12 MW oil-fuelled Warsila plant in Juba. In December 2013, the Afri-can Development Bank announced it would grant the country $26 million to build electricity net-works. South Sudan is looking to hydropower for generation capacity growth.

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KEYPROJECTS

Block 1Block 1 is situated in the border region of north-cen-tral South Sudan. It contains the Unity field and may produce approx. 38,000 bpd. Pre-independence, block 1 was operated together with blocks 2 and 4 (now allocated to Sudan) by the Greater Nile Petro-leum Operating Company. Until 2006, this was the only producing project in the unified Sudan. The block is now operated by the Greater Pioneer Oper-ating Company (GPOC), a consortium of CNPC (40 percent), Petronas (30 percent), ONGC (25 percent) and Nilepet (5 percent).

Block 5ASudd Petroleum Operating Company (SPOC) oper-ates block 5A in north-central South Sudan, south of block 1. Production began in 2006 at 40,000 bpd and peaked at 54,000 bpd in 2009 under the operatorship of the White Nile Petroleum Operating Company. In 2014, the Ministry of Petroleum and Mining stated production was 4,500 bpd. SPOC is a consortium of NilePet (8 percent), Petronas (67.8 percent) and ONGC (24.2 percent).

Exploration acreageA number of relinquished areas and exploration frontiers could be highly prospective. Relinquished sections of blocks 1, 2 and 5A, as well as parts of blocks C and A, are available. All production has come from the Muglat and Melut basins to date. The Managalla and Yirol basins are new frontiers.

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Blocks 3 and 7These blocks, located in South Sudan’s north-east, pro-duce most of the nation’s oil output - up to 175,000 bpd, according to the ministry. Dar Petroleum Operating Com-pany (DPOC), the operator, is a consortium of CNPC (41 percent), Petronas (40 percent), NilePet (8 percent), Sino-pec (6 percent) and Egypt’s Tri-Ocean Energy (5 percent). Other blocks produce Nile blend crude but blocks 3 and 7 produce Dar blend.

4 blocks operated by 3 operating companies are producing oil.

LICENCES

Just 1 percent of the population of South Sudan has access to electricity.

PRODUCTION

Production is around 160,000 barrels per day dependent upon security

PEACE AGREEMENTS

The civil war of 1983-2005 was ended by the Comprehensive Peace Agreement signed January 9, 2005.

The 2005 deal, actually a series of agreements, paved the way for independence, declared in 2011.

Internal conflict restarted in December 2013 between the government and opposition forces, partly driven by ethnic divides.

A tentative peace agreement was signed in Addis Ababa in August 2015.

Landlocked South Sudan has to export all its oil by pipeline through Sudan, until new export routes are built.

The loss of oil revenue to Sudan after 2011 means its economy relies on transit fees from South Sudan.

A transit fee of $24.50 per barrel was in place under a 2013 agreement, meaning South Su-dan lost money on oil sales under this amount.

In early 2016 the north agreed to change the fee structure and have transit fees pegged to the oil price.

OIL EXPORTS

CONCLUSIONIndependence has not done much to improve the security and prosperity of South Sudan up to now, but the potential of this country as a hydrocarbons producer is undeniable. The Min-istry of Petroleum and Mining has indicated that it would like to hold a bidding round, and the sector has modern legislation to support its growth. Oil companies could take advantage of op-portunities to both explore new areas, and to apply new tech-nologies to blocks with proven reserves. In the power sector, South Sudan is starting from a low baseline with hydropower offering the biggest potential generation gains.

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South Sudan has proven oil reserves of 3.5 billion barrels

OILRESERVES POWER

OPERATORHISTORY DISCOVERY

CONFLICT

PARTNERS

Greater Pioneer Operating Company (GPOC) is the operator of Block 1

Until 2006, the Block 1, 2 and 4 area (inc. the Unity field) was the sole producing area in South Sudan

Unity was the first field to be discovered in Sudan and South Sudan, in 1978

Northern South Sudan has been the site of intense fighting since 2013, causing oil output to be interrupted

GPOC partners are CNPC (40%), Petronas (30%), ONGC (25%) and national oil co. Nilepet (8%)

UNITY FIELD

Juba

HegligField

UnityField

Pipeline to Red Sea terminal in Sudan