Sudan separation fuels oil strife

Petroleum Review

In late January 2012, oil production and exports came to a halt in South Sudan over a transit pricing dispute with its former overlord north Sudan. With no compromise in sight, the newly independent African country is mulling other transport options. But even if production were to resume, it will be months – at least – before its oil sector gets back on its feet, writes Paul Cochrane in Beirut and Mohammed Yusuf in Nairobi.

O il has been a bone of contention between northern and southern Sudan for decades, with control of the precious resource a key factor in the devastating civil war that ended back in 2005. Under the peace agreement that followed, oil revenues were to be split evenly between the historically dominant north and the south, but with 75% of the united Sudan’s 500,000 b/d in the landlocked south – and the entire pipeline, refining and export capabilities in the north – the agreement was always precarious.

So, when southern Sudan held a referendum to form a new country – the Republic of South Sudan – in July 2011, the split in oil revenues ended, and negotiations got underway to hammer out transit fees and compensation for the north for the inevitable loss in oil income. However, with no agreement forthcoming amid border disputes and heated rhetoric between the governments in the capital of the south, Juba, and in Khartoum in the north, analysts said it was only a matter of time before the situation reached a tipping point. This came to pass when Khartoum imposed an initial pipeline usage fee of $22.80/b at the beginning of the year (which soon escalated to $32/b; and then $36/b) while Juba wanted to pay the international norm of $1/b or less.

Finally, on 28 January, at an African Union summit in Addis Ababa, South Sudan announced it would be halting all oil production and exports. ‘$1/b is a reasonable rate to transport a barrel, but $36/b is preposterous. What Khartoum didn’t count on was the South shutting down oil production. The question now is will they back down?’ says Eric Reeves, a Sudan researcher and analyst at Smith College in the US. Sudan has been confiscating oil from its neighbour since December of last year, over what it claims to be ‘unpaid transit fees’, while Juba is accusing Khartoum of taking oil worth more than $815mn over a two-month period. South Sudan Oil Minister Stephen Dhieu Dau told Petroleum Review that his government had offered northern Sudan money to help with budgetary issues, on top of paying the standard transportation charges. In the meantime, ‘we have also been paying for the operation costs of the pipeline and the marine terminal,’ he added. Dau claimed Khartoum’s actions showed it had not really recognised the sovereignty of South Sudan: ‘They are still looking down to South Sudan as a national government, just as they used to do – utilising and exploiting the people and resources of South Sudan to build the north.’

Dau also noted that the Khartoum government has been imposing punitive and discriminatory oil movement fees against South Sudan, which he said was a penalty for its secession. A further issue is that Khartoum is demanding $15bn in compensation for the loss of its southern provinces, a bid which (wholly unsurprisingly) Juba has opposed. In talks held under the auspices of the African Union and former South African President Thabo Mbeki, a proposal has been put forward for $5bn to be paid to the north over five years. ‘South Sudan won’t agree to Mbeki’s latest plan and there are lots of other issues, from border demarcation to debt and compensation that makes negotiations on oil even harder,’ noted Marc Mercer, an East Africa specialist at risk consultancy Eurasia Group in London.

‘With the two sides so polarised, with different expectations, and operating on principle rather than pragmatism, it is difficult to negotiate. I don’t hold up much hope for current talks to lead to a quick agreement.’ 

Uncertain futures

Kathelijne Schenkel, an official at the European Coalition on Oil in Sudan (ECOS) said that with no deal, she predicts Khartoum retaliating hard on South Sudan for the current military strife in the northern border states of South Kordofan and Blue Nile, which the north blames on the Southern People’s Liberation Army North (SPLA-N) group. This group used to be part of the military alliance that won independence for South Sudan. The boundary between northern Sudan and South Sudan is not fully demarcated, and both sides have failed to resolve ongoing border disputes, with the oil-rich Abyei

area (part of South Kordofan) being a particular flashpoint. ‘For the north, Abyei it is not strategically important and does not carry the same political or symbolic value as it does for the south. This allows the Sudanese authorities to use the issue as a bargaining chip in negotiations, and this is why the north invaded and took control of Abyei last year,’ said Jean- Baptiste Gallopin, a South Sudan analyst at global consultancy firm Control Risks.

‘The referendum to determine whether Abyei belongs to the north or the south is not likely to take place any time soon, and the status of the district is now only likely to be solved as part of a broader bilateral agreement on key issues such as border delineation and oil,’ he said. Schenkel added that these oil disputes, and the risk of military instability along the new frontier, have made international oil companies (IOCs) reluctant to make extra investments in the region. The dominant operating companies in both northern and South Sudan are currently the China National Petroleum Corporation, Malaysia’s Petronas and India’s Oil and Natural Gas Corporation. In theory, western players could try and grab a piece of this pie – especially given that the US lifted its sanctions on South Sudan’s oil industry back in December 2011, which had been imposed when they were under the control of the northern Sudanese. ‘I think facilitating the entry of western companies was the objective behind the US’ decision to lift sanctions, but from a practical point of view we’ve seen little interest in South Sudan from large new players so far,’ said Gallopin. ‘I think the reasons for that is major uncertainty of the future of bilateral relations, major uncertainty on oil export routes in the coming years and the continued lack of a regulatory environment for the oil sector in South Sudan. The government has yet to pass a petroleum law that was initially drafted two years ago, and there is still no clarity on tax rates and customs rates, so the environment is very unclear from the point of view of investors.’

Juba’s decision to stop production is hitting the country hard, as oil accounts for 98% of government revenues. According to Mercer, South Sudan has just three months of hard currency left and is in desperate need of cash. Indeed, Dau admitted he knew the shutdown would hurt his country but stressed that this was a necessary response to Sudan’s unilateral confiscating of South Sudanese crude oil. ‘We choose from those two [options]: you want us to allow our crude oil to be produced and give to Sudan 100%, or we shut down and all of us get zero?’

To re-start exports, Juba has signed agreements with Kenya and Djibouti for two pipelines, but the move is being seen as unrealistic. ‘I don’t take the agreement with Kenya seriously – it was political positioning on Juba’s part with the north,’ said Mercer. ‘It is unrealistic for pipelines [to go] through Kenya, Uganda or Ethiopia. And the South Sudanese authorities said it would take 11 months to build; but in the current political, security and economic climate this would be near impossible. Is it even

viable, as oil production is declining at a rapid pace, and production fizzling out by 2025?’ According to estimates by ECOS, output will decline to 200,000 b/d by 2016 and even further by 2018, to 160,000 b/d.

In the immediate future, even if there is an agreement between the two sides and oil production starts again, it is expected to take months for exports to re-start, given the composition of the heavy sweet Nile Blend crude. ‘Because the make-up of the oil is very waxy, there will be technical issues with the pipeline because it was shut down,’ said Mercer. ‘Estimates vary from impossible to get up and running to others that say a lot of work will be required, even replacing parts of the pipeline – so this puts oil production restarting from anywhere from one to six months.

Photos by Jihad Samhat