War-torn South Sudan under economic attack from fall in oil price

War-torn South Sudan is receiving what traders say is arguably the lowest oil price in the world, $20-$25 a barrel, because of falling prices and unfavourable pipeline contracts.

The poverty-stricken country, which became independent in 2011 and is battling a year-long civil war, could become one of the biggest victims of the oil crunch after the Opec cartel decided to battle the US shale oil boom by maintaining production levels, driving down prices. Brent crude, the North Sea benchmark, closed at $61.38 on Friday.

Oil companies in some new shale regions in the US and the tar sands in Canada are also realising prices significantly below international benchmarks because of a lack of pipeline or rail capacity to transport their production. But traders said none were making as little as South Sudan.

The extremely low realised price is partly due to the low quality of South Sudanese crude, which is sold at a discount to Brent.

But it is chiefly because of an ill-fated decision to introduce a fixed payment for the use of a pipeline that runs north through neighbouring Sudan, rather than a sliding scale linked to global prices, as the industry favoured.

"The lack of a sliding scale is a big mistake," says a South Sudan-based oil executive. "They are making a very small amount of money."

In 2012, the governments in Juba, in the south, and Khartoum, in the north, signed a deal for the use of the pipeline running from southern oilfields to Port Sudan on the Red Sea after months of negotiation to secure South Sudan's independence.

Against the advice of the industry and despite the memory of an oil price crash in 2008-09, during the global financial crisis, Juba agreed a fixed payment.

In effect, the government banked on oil staying at $100 a barrel and pledged to pay $11 per barrel for the use of the pipeline plus another $15 a barrel as compensation to Sudan for the loss of oil income after independence.

The package was seen as an expensive political necessity to secure independence from the Khartoum regime after decades of war. But international officials say the decision to back a fixed fee, rather a sliding one linked to prevailing international price, "is now unravelling".

The International Monetary Fund estimates that oil accounts for 95 per cent of the South Sudanese government revenue and forecast that the African country's fiscal deficit will balloon to 12 per cent of its gross domestic product next year.

"Developments in the oil sector in South Sudan constitute a quadruple whammy . . . the government of South Sudan is facing the severest of fiscal contractions," said an international official who asked not to be named.

South Sudanese revenues have now fallen to about $100m a month, equal to an oil price of about $20.5 per barrel based on output of 160,000 barrels a day.

"They are squeezed," says the same international official.

Oil executives believe South Sudan could become an example of how falling oil prices can exacerbate political risk as countries are forced to slash budgets.

The US Department of Energy said: "Geopolitical risk may also be elevated because of lower government spending".

Oil production in the world's youngest country has more than halved since civil war broke out last December. Oil executives and diplomats say a return to full production is unlikely without a peace deal between the warring factions.

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