S.Sudan, Kenya plan pipeline, analysts skeptical

JUBA (Reuters) - South Sudan aims to export its crude via Kenya rather than going through neighbouring Sudan under a deal which analysts said faced security and financial challenges that could prove difficult to overcome.

Landlocked South Sudan has long sought an export route through Kenya and its announcement late on Tuesday comes amid a row with Sudan over payments to use Khartoum's pipeline and Red Sea port.

Juba has started to shut down its output of 350,000 barrels a day after Khartoum seized southern oil as compensation for what it calls unpaid transit fees. Analysts say Sudan's demands are far in excess of international norms.

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

"They will start as soon as possible," she said, adding that 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.

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

"The pipeline will be developed through Kenyan territory and will be built and owned by South Sudan," the Kenyan government said in a statement without giving details.

ANALYSTS SCEPTICAL

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 over pumped fields could further complicate the argument for the project.

"It would be really difficult," said Dana Wilkins at Global Witness, who had done extensive research on South Sudan's oil industry. "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."

A route from oil blocks 3 and 7 in Upper Nile run by a consortium of mainly Chinese firms which produce 250,000 bpd would mean a pipeline of about 500 kilometres while one from Juba to Lamu would run to 1,260 km, Wilkins said.

The project would also require building two central processing facilities for fields in the Unity and Upper Nile states since the existing one is on the Sudan side of the border, she said.

SUPPLY OUTLOOK

Oil insiders 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 efforts 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 which has killed hundreds in the past few weeks alone.

"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.

POLITICAL FACTOR

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 agreement that ended decades of civil war, noted 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.

Still, a deal with Khartoum over transit fees to use its pipeline could be reached, he added.

Since gaining independence, South Sudan's government has been struggling to assert control and end rebel and tribal violence in a country roughly of the size of France.

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.