UPDATE 3-S.Sudan halves oil output, signs pipeline deal

Wed Jan 25, 2012 12:20pm EST

Related Topics

* South Sudan and Sudan in row over transit fees

* Project would cross areas of tribal violence, bandits

* South Sudan oil supply seen falling (Adds South Sudan negotiator's comments)

By Hereward Holland and Aaron Maasho

By Aaron Maasho and Hereward Holland

ADDIS ABABA/JUBA, Jan 25 (Reuters) - South Sudan's oil output is on track to be more than halved as it moves toward a full shutdown, an official said on Wednesday, one day after the country signed a deal to build a new export pipeline through Kenya rather than its old civil war foe Sudan.

Landlocked South Sudan - which seceded from Sudan last July under a 2005 peace accord - has long sought an export route through East Africa but analysts say the project faces security and financial challenges that could prove difficult to overcome.

The announcement of the pipeline agreement late on Tuesday comes amid an increasingly bitter row with Sudan over how much South Sudan should pay to use Khartoum's pipeline and Red Sea port which the new nation depends on to export its oil.

Sudan began confiscating some oil exports from South Sudan this month to make up for what it called unpaid transit fees. On Jan. 20, Juba said it would shut down its output of roughly 350,000 barrels per day (bpd) within two weeks.

"The government of South Sudan is making good progress with the shutdown of all oil wells in its producing fields," South Sudan's top negotiator Pagan Amum told reporters in Addis Ababa, where the two sides are meeting for talks.

"The volume of oil production will have been gradually reduced from 275,000 barrels per day to 135,000 barrels per day," he said.

All 55 wells in Block 5A, operated by the White Nile Petroleum Operating Company, as well as all 274 wells in Blocks 1, 2 and 4 have been fully shut down, and the shutdown of other wells was going smoothly, Amum added.

More than 600 wells in Blocks 3 and 7 had reached a "reduced production stage," he said.

Amum said South Sudan would resume production if Sudan immediately paid the value of "stolen or confiscated" oil at the sales price contracted to purchasers, agreed not to block vessels coming to load oil, and met other conditions.

There have been few public signs of progress toward a deal. Analysts say Sudan's stated demands of about $36 per barrel as a transit fee have been far in excess of international norms. South Sudan has said it wants to pay under a dollar per barrel.

ANALYSTS SCEPTICAL ON PIPELINE

South Sudan's deputy petroleum and mining minister Elizabeth James Bol told Reuters it would take around 11 months to build the new pipeline to the Kenyan port of Lamu on the Indian Ocean.

"They will start as soon as possible," she said, adding the company which has won the contract will be announced this week.

South Sudan has held talks with Toyota Kenya over a pipeline to Lamu, where Kenya wants to build a port and refinery. Amum, the negotiator, said officials also approached Ethiopia to discuss a pipeline that would pass to Djibouti.

Officials have also talked to other firms about connecting to an existing Kenyan pipeline from Eldoret to the port of Mombasa.

Analysts said a Kenya pipeline would be difficult to build across rough terrain hit by tribal violence and also passing through bandit-stricken regions in western Kenya.

South Sudan has said it would cost around $1.5 billion, but analysts say a hefty insurance premium would have to be added because of the security concerns.

Forecasts for dwindling supply from overpumped fields could further complicate the argument for the project.

"It would be really difficult," said Dana Wilkins at Global Witness. "We're looking at least a year or two because of the length of the pipeline, the terrain it has to cover and security concerns in the region."

They said a route from blocks 3 and 7 in Upper Nile run by a consortium of mainly Chinese and Malaysian firms which produce 250,000 bpd would mean a pipeline of about 500 kilometres to Juba from where another line running 1,260 km could go to Lamu.

The project would also require building two central processing facilities for fields in the Unity and Upper Nile states since the existing ones are in Sudan, Wilkins said.

Oil experts have questioned the economic viability of a pipeline in the medium-term as output is expected to fall sharply in coming years because some fields were overpumped by Khartoum in the run-up to South Sudan's independence.

South Sudan output will decline to 200,000 bpd by 2016, to 160,000 by 2018 and further thereafter, according to estimates by the European Coalition on Oil in Sudan, which is comprised of research groups, non-governmental organisations and activists.

Some analysts say a pipeline would be viable only if new finds were made, but exploration in the vast Jonglei state have been hampered by tribal violence. France's Total holds a concession in Jonglei which is largely unused due to violence.

"Production in Upper Nile peaked in 2010, Unity in 2005. Even if major new fields were discovered today, it could be years before they come online in a real way," Wilkins said.

Yet there are powerful political motivations supporting the push for the pipeline by South Sudan, which broke away from Sudan last July under a 2005 peace deal that ended decades of civil war, said Zach Vertin at the International Crisis Group.

"Such a decision may not be taken on the grounds of economic rationality alone, but rather guided by a feeling that they won't realise full independence as long they're held financially hostage," Vertin said.

The biggest buyer of oil from the two countries is China which bought some 12.99 million barrels last year. That amounted to five percent of crude imports by China, which is also the top investor in South Sudan's oilfields. (Additional reporting and writing by Ulf Laessing and Alexander Dziadosz; editing by Jason Neely and James Jukwey)

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