Oil and State Building in South Sudan

Published: 
July 8, 2011
By: 
Jill Shankleman

In a new country whose budget will rely almost entirely on oil for revenue, South Sudan must school up on the state of its existing reserves and the obstacles facing future oil exploration.

Summary

  • Oil started being produced in Sudan in the 1990s and has become the mainstay of the economies of the north and south. Most, but not all, of the oilfields are in South Sudan, but the export pipelines, Red Sea export terminal, and refineries are in the north. Agreement to share control over oil resources and revenues was a central part of the 2005 Comprehensive Peace Agreement, but up to the eve of South Sudan’s secession, north and south had not resolved how to divide the industry or its revenues.
  • The Republic of South Sudan starts independence facing huge challenges in using its oil wealth to jump-start development in the country, where over 50 percent of its people live below the poverty line and over 80 percent are illiterate. Without new investment to increase output, or successful exploration that finds additional resources, South Sudan faces declining oil production from 2015—too little time under any circumstances to diversify the economy and develop alternative sources of government revenue. As the most oil-dependent state in the world, the government of South Sudan faces the certainty that its income will fluctuate from year to year with global oil prices, a circumstance known to make sound macroeconomic management difficult.
  • The Government of South Sudan (GoSS) should have three priorities for the oil sector. First, in the short term, it should focus on developing a detailed understanding of what it now owns and what the long-term prospects are for its oil industry. Second, it needs to maximize revenues from the existing industry. Third, it must make the best use of its revenues for development.
  • Information on the potential for, and barriers to, increasing production and incentivizing new exploration is essential to developing a realistic oil industry strategy. This requires a technical and economic reserves evaluation study and disclosure of data by the oil companies—to which the new government will be entitled as a partner in production sharing contracts. To overcome the problem of revenue fluctuations, the government should explore working with donors to use aid to help moderate variations in government income and consider the possibility of oil-backed loans, that is, obtaining immediate funds for infrastructure to be paid with future oil production.
  • To secure new oil investment, South Sudan needs to overcome the toxic reputation of Sudan’s oil industry by committing immediately to joining the Extractive Industries Transparency Initiative, the international program for oil sector transparency, and allow its industry’s environmental and human rights performance to be audited against current international standards, developing a remediation program as needed. The government also should be ready to consider offering incentive terms to good-quality oil companies to secure their investment in enhanced oil recovery and exploration.
  • Most important of all, as violent conflict has emerged in some of the oil areas in the months preceding independence, South Sudan and the international community must ensure security for oil workers and installations so that the new state gets the oil income it depends on.

About the Report

This is one of a series of USIP special reports on state building in the Republic of South Sudan following its creation on July 9, 2011. Each report analyzes a different aspect of the state-building challenge in the new country and recommends priorities for the government of South Sudan within the sector under analysis. This report focuses on South Sudan’s substantial oil reserves and how they can be used to build and support the new nation. Subsequent reports will focus on gender, youth, education, and nationality, among other topics.

About the Author

Jill Shankleman, a former senior fellow at USIP, is a consultant with extensive experience of advising the petroleum industry, governments, and nongovernmental organizations on the social and environmental effects of oil and gas investment in emerging countries. Since 2009 her work has included serving as a consultant to USIP analyzing various aspects of the oil industry in Sudan. She is also a senior scholar at the Woodrow Wilson International Center for Scholars, Washington, DC.

July 8, 2011