When Risk Becomes Reality
AOP talks to Managing Director of UAP Old Mutual South Sudan Kris K. Mbaya about the risks of doing business in South Sudan, as well as the capacity of local banks in the oil and gas sector.
How does the internal conflict in some areas of South Sudan complicate the insuring of oil and gas operations?
Currently we cover the general insurance risks for Dar Petroleum Operating Company (DPOC), Greater Pioneer Operating Company (GPOC) and Sudd Petroleum Operating Company (SPOC). Part of the impact of the conflict since 2013 has been that GPOC and SPOC have not been able to access the oilfields and for this reason aren’t producing as anticipated. This in turn means that they are constrained financially, with the insurable interest reducing significantly.
In the current conflict, it is difficult for reinsurance partners to support political and terrorism covers, as essentially these are not risks, but realities. From an insurance perspective, the country has been in conflict for the last three years, making it a great challenge for insurers to develop covers that have acceptable risk profiles. Additionally, part of the risk that we provide for is business interruption to the companies we cover. In the current conflict scenario the above-average probability of occurrence complicates our function by exposing the business to undue risk. In this state of continued conflict and flare-ups in different locations, the business is challenged in pricing the products with precise projections. From a long-term view, conflict has a profound ripple effect on the economy. Considering that 95 percent of the country’s budget is financed by oil revenues, the impact of the diminished production that conflict triggers significantly reduces the revenues streaming into the economy.
What results then is a total collapse of the financial system, with corporates lacking access to hard currency. This impacts the efficacy we strive towards in meeting our business obligations. These are some of the challenges we face regarding risk and the current climate. Insecurity has also directly affected our operations, where some of our branches have had to close down and our evaluators are unable to go out into the field to precisely assess the risk.
Do national banks have the capacity to support oil and gas developments?
South Sudan does not have a stock exchange nor an active capital market. This translates into very limited sources of raising capital. Additionally, we have few government instruments that can provide a reasonable return on investment. Prior to the conflict, national banks were able to lend to both individuals and corporate entities, but the credit risk, hyperinflation and lack of foreign direct investments has shrunk lending capability.
However, some of the existing banks are subsidiaries of larger groups within the region and have the capacity to structure investments in any sector in the country, including oil and gas. Such investments would function best under an effective regulatory environment and an efficient capital market that ensure reduced investor risk and secured returns.
In your opinion, what do investors need to hear from the government?
Certainly the most sought after news is the message that conflict is over and there is peace in South Sudan. Whilst we have indeed been doing business, the opportunities that exist are mammoth and we are ready to do more with a more predictable environment. We encourage other investors to come to South Sudan because the business community needs a strong ecosystem to support the players. We serve in the service industry and without the support of other aspects of the economy, this impacts us directly. Over the last four months, the government has been taking positive steps toward securing the capital city and its environs. This has given confidence to investors to keep their operations going.
We believe the strongest message the government can give the investors is that their businesses are secure. Lawyers, banks, entrepreneurs, professional associations and so on will take the next steps in terms of developing the market in this country when there is assurance of security. Despite the conflict, UAP’s outlook for the country is positive and promising looking at the current state of the economy as well as the government efforts in securing peace. We are prepared to realize all the potential a peaceful environment will enable and will be ready when the market picks up.
This interview excerpt is part of the Africa Energy Series: South Sudan 2017 book, which will be released at Africa Oil & Power in Cape Town from June 5-7. The full interview with Managing Director Kris K. Mbaya will be available in the Africa Energy Series publication.
Photo courtesy: The Washington Post