CNPC provides $400 million short-term loan for the Government of South Sudan to meet its outstanding debt obligations and pay for general operating expenses

CNPC provides $400 million short-term loan for the Government of South Sudan to meet its outstanding debt obligations and pay for general operating expenses In 2014, China National Petroleum Corporation (CNPC) -- a Chinese state-owned enterprise -- and the Government of South Sudan signed a $400 million loan facility agreement.

The proceeds from this loan facility (which provides cash advances in exchange for future oil sales) were used by the authorities to meet their outstanding debt obligations and pay for general operating expenses, including those related to the Army and the so-called Organized Forces (Police, Prisons, Wildlife, and Fire Services).

Under the arrangement, funds were advanced to the Government of South Sudan in a forward oil-swap deal where the Government of South Sudan repays in 45 days at a negotiated interest rate of 3 percent.

The lead arranger in the oil advance deal is the Ministry of Petroleum and Mining, while the Ministry of Finance and Planning (MOFEP) is the primary obligor. The loan’s outstanding amount was $256 million as of June 25, 2014.

The Government of South Sudan's decision to enter into oil prepayment facility agreements (also known as oil advances, forward oil-swaps, PXF facilities, and pre-sales oil contracts) eventually created significant cash flow problems. In April 2019, a Panel of Experts on South Sudan submitted a report to the United Nations Security Council.

It concluded that ‘[t]he Government of South Sudan, however, pre-sells almost all of its oil, meaning that it takes advance payment for oil that it will deliver in the future, usually within a number of months.

Companies receive a discount in exchange for making an advance payment and charge significant interest on the amount they have prepaid.

Given that the number and terms of these pre-purchase agreements are not disclosed and revenues can be generated well in advance of actual production, the oversight of revenue flows is impeded.

Agreements of this kind also have the effect of saddling future Governments with debts and obligations, including the Revitalized Transitional Government of National Unity scheduled for appointment in May 2019.’ Then, in June 2019, the Government of South Sudan announced that ‘[t]he president directed that all pre-sales [oil] contract[s] should be suspended.

These pre-sales [oil] contracts are not healthy and they are actually destroying the economy […] When you sell to a specific company without competition, definitely you agree on certain rates but when it is free competition you give to the highest bidder’.

Nearly two years later, in April 2021, another Panel of Experts on South Sudan submitted another report to the United Nations Security Council.

It reviewed four oil prepayment facility agreements and concluded that these agreements had led to a 24% reduction in potential revenue for the Government of South Sudan.