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      • South Sudan-Kenya pipeline unlikely to see light of day

South Sudan-Kenya pipeline unlikely to see light of day

A proposal by South Sudan to build an oil pipeline to Kenya and end dependence on North Sudan to export its crude has little prospect of becoming viable in the foreseeable future, because it requires fresh oil finds and an end to widespread violence.

 

Landlocked South Sudan took two-thirds of Sudan's 500,000 barrels a day of oil production when it became independent in July, but it is now locked in a row with Khartoum over the use of the northern pipeline to the Red Sea.

 

The South, which produces around 300,000 bpd but has no refinery or pipeline, has accused its former civil war foe of waging an economic war by demanding a fee of $32 per barrel to use the northern pipeline.

 

To end its dependence, South Sudan has held talks with Toyota Kenya over a pipeline to Lamu, where Kenya wants to build a port and refinery. Southern officials have also talked to other firms about connecting to an existing Kenyan pipeline from Eldoret to the port of Mombasa.

 

But analysts and diplomats say a Kenya pipeline would not be viable based on current reserve estimates, because output would be rapidly declining by the time it is completed.

 

A solution is more likely to come if China exerts pressure on both sides to reach agreement, removing the need for a new pipeline.

 

Oil industry sources say Khartoum overpumped some fields in recent years to get maximum revenue before the South broke away.

 

Southern output will decline to 200,000 bpd by 2016 and to 160,000 by 2018 before falling even further, according to estimates by the European Coalition on Oil in Sudan, comprising research groups, non-governmental organisations and activists.

 

"The pipeline is not viable currently because of the lack of certainty over the South Sudan's reserve base. Perhaps it would be viable if one day significant oil discoveries are made in South Sudan's underexplored blocks," said independent analyst Adrian J. Browne.

 

South Sudan said the Lamu pipeline would cost around $1.5 billion, but analysts say construction would be a challenge because it must cross the Sudd swamp, one of the world's largest wetlands, and mountains to reach the Indian Ocean.

 

"If, as many analysts have suggested, oil production is set to peak in the next year, the construction of an additional pipeline doesn't make fiscal sense for a country facing so many development needs," said Dana Wilkins from Global Witness, which has done extensive research on South Sudan's oil economy.

 

SECURITY, NEW DISCOVERIES?

 

A pipeline would also require a large security force, because it would cross regions in South Sudan prone to tribal and rebel violence and the bandit-ridden terrain of northern Kenya.

 

South Sudan, a poor country struggling to set up efficient state institutions, has been unable to contain violence in its main oil state of Unity and other regions, which has led to 3,000 deaths this year.

 

"From an investor's perspective, given the political climate and the threat of possible insurgent attacks on a pipeline, which is an easy target, there is going to be a very serious insurance premium to protect the pipeline," said Harry Verhoeven, a PhD candidate focussing on Sudan's economy at Oxford University.

 

Analysts say only significant new discoveries in the underexplored Block B area in Jonglei state -- where France's Total holds a license -- would build a case for a pipeline.

 

"Perhaps it would be viable if one day significant oil discoveries are made ... in Block B, and if these could be tied in with future finds in Kenya's northern Lake Turkana blocks," said analyst Browne.

 

"However, in the former Total has been unable to recommence exploration due to insecurity, and in the latter Tullow Oil is only just about to begin drilling," he said.

 

The government also hopes for big oil discoveries in the Central and Eastern Equatoria states, but based on the little mapping that has been done in the remote area, there is much uncertainty, said Wilkins from Global Witness.

 

"All bets are on Total," said Kathelijne Schenkel from the European Coalition on Oil in Sudan. "Only with substantial new finds will (a new pipeline) be worthwhile."

 

Analysts say repeated statements by southern officials about a new pipeline may be a bargaining tactic as Juba wrangles with Khartoum over the fee to use the northern pipeline to Port Sudan on the Red Sea.

 

The African Union has been trying to reach a deal, but talks stalled after Khartoum demanded $32 a barrel, which officials in Juba considered launching economic war. The fee is about a third of the South's export prices, around $90 in August.

 

Southern officials also hope for road projects to Kenya to reduce its dependency on the North for passage of its imports, which come mostly via the Nile.

 

A closure of the joint border by the north for several months has led to a scarcity of food and fuel, driving up inflation to 57 percent in August.

 

Diplomats say China, the main buyer of Sudanese oil and trading partner with both sides, could help broker an agreement.

 

China sent its foreign minister in August to north and south to expand ties as it tries to end tensions and remove the need for a Kenya pipeline after having funded the Red Sea pipeline.

 

"China is the one who could settle the dispute between north and south. They built much of the Sudanese oil industry to secure oil supplies," a diplomat said.

 

"Most of the loans granted by China have not been paid back, so they are in a very strong position," she said.  

 

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