South Sudan Shakes Up Oil Sector - Wall Street Journal

By NICHOLAS BARIYO

KAMPALA, Uganda—South Sudan Friday issued the biggest revision of its oil-exploration rights yet, seizing a giant license area long held by Total SA and slicing it into three as the newly independent nation attempts to hasten crude production and secure much-needed revenue.

The move is South Sudan's latest attempt to remove itself from oil deals signed before its secession from Sudan. It comes amid renewed tensions with its northern neighbor over who should control the oil-rich regions that straddle their border.

South Sudan said its decision was prompted in part by Total's failure to expedite exploration in the block, which it received more than 30 years ago.

International tenders for two parts of the roughly 74,000-square-mile block, located in South Sudan's restive Jonglei state, are expected to be issued in the next few days as the country seeks to attract more investors to its oil sector, said Information Minister Barnaba Benjamin. Total will keep one of the three sections.

"This is a new country, we are not bound by Total's agreement with Sudan" Mr. Benjamin said, adding that the government had already reached an agreement with Total to split the block.

South Sudan's oil law passed late last year stipulates that it isn't bound to deals agreed with the Khartoum government. Earlier this year, South Sudan renegotiated and signed a new contract with Petrodar, a consortium involving Chinese and Malaysian oil companies.

When asked whether South Sudan would compensate Total for the loss of two-thirds of its license, he suggested that it wouldn't, reiterating that the government wasn't party to the previous deal.

Mr. Benjamin said the government had lost patience with the French oil company, citing its lack of activity in the region even after the civil war ended in 2005. Total halted exploration activities in the block in the mid-1980s amid civil unrest between Sudan and South Sudan.

"We need new players now, we gave Total enough time to start work in the block, which they have not utilized" Mr. Benjamin said.

Total declined to comment on the issue.

Meanwhile, a top official in South Sudan's national oil company said Exxon Mobil Corp. and Kuwait Petroleum Corp.'s Kufpec have "agreed in principal" to take over the other parts of the block long held by Total.

"The block will be given to these three companies," he said. "They have accepted in principal." Exxon said in a statement that it doesn't comment on potential opportunities or commercial decisions.

The continuing standoff between the erstwhile foes prevents the South from exporting its oil through the North, meaning South Sudan is under pressure to reverse years of declining crude output with fresh discoveries.

Luke Patey, a researcher on Sudan for the Danish Institute of International Studies, said the shake-up of South Sudan's oil blocks is a way for the government to put pressure on Total to restart exploration.

"On the one hand, [Sudan's ruling party] the SPLM was upset that Total maintained contact and a contract with Khartoum during the civil war, and on the other hand, the SPLM realizes that Total is an oil major and can make things happen," Mr. Patey said.

"This is balancing those interests by keeping Total, but trying to put pressure on them to do something and reinvigorate the oil industry there."

South Sudan is encouraging more exploration activities to bolster its oil reserves, which are under threat after years of limited exploration due to the insecurity. The country's 350,000 barrels-a-day oil output is expected to plummet sharply in coming years, according to analysts.

Despite the end of formal hostilities, border areas like Jonglei state, where the block is located, remain unstable. The area remains infested with cattle rustlers and armed tribal militias, which South Sudan claims are backed by Sudan.

Since South Sudan's secession from Sudan in July last year, tensions over a range of disputes have remained. The armies of the two countries were embroiled in a spate of clashes along the poorly marked 1,120-mile-long border early this year, threatening to culminate in an all-out war.

The two countries face United Nations sanctions if they don't resolve their feud by Sept. 22.

In the most recent spat, South Sudan Friday accused Sudan of using war planes to violate its airspace in two oil-rich border states, as crunch talks aimed at resolving the border impasse continue in Ethiopia. Sudan denied the accusations. A deal in Ethiopia would allow land locked South Sudan to resume exporting its oil through Sudanese pipelines.

Transit crude shipments were halted in January, after the feud flared up over much the south should pay for using Sudanese pipelines and ports, throwing the economies of both states into turmoil.