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Sudan’s oil sector impasse amid sanctions

Nobody’s a winner as deadlock between north and south over oil-revenue sharing and pipeline access, and onerous sanctions leave Sudanese oil production in limbo, writes Anthea Pitt

THE US says it will not remove Sudan from its list of state sponsors of terrorism, dashing the Khartoum government’s hopes, following a six-month US monitoring and inspection programme in the country. Officials in Khartoum – including foreign minister, Ali Karti – had been quietly confident Sudan would be struck from the list.

Last year, the US pledged to de-list Sudan by mid-2011 in return for government co-operation with January’s southern independence referendum. South Sudan seceded from Sudan on 9 July.

Voicing the frustrations of many within the government, Ibrahim Ghandour, a senior member of Omar al-Bashir’s ruling National Congress Party, said: "There is a general view in Sudan that the US is not up to its commitments and is just buying time to put pressure on the government. Many politicians here feel regime change is still at the forefront of the US political plan."

"There is a general view in Sudan that the US is not up to its commitments and is just buying time to put pressure on the government. Many politicians here feel regime change is still at the forefront of the US political plan"

Inclusion on its state-sponsors of terrorism list prevents a country receiving US arms exports, controls the sale of items with both military and civilian applications and, crucially, both limits US aid and requires the government to vote against loans from international financial institutions. While it remains on the list, US and UN sanctions, which have hobbled Sudan’s already fragile economy, are unlikely to ease.

But removal from the US’ blacklist does not automatically mean sanctions against Sudan would be eased, or lifted. While an International Criminal Court warrant for Bashir’s arrest on charges of genocide, crimes against humanity and war crimes remains outstanding, it is doubtful the international community would willingly ease the pressure.

The US rebuff is, in some quarters, seen as punishment for the Bashir regime’s military incursion into Abyei in May; the continuing conflict in South Kordofan; renewed fighting in Darfur; and support for rebel militias operating in South Sudan. But the move does not only keep Bashir’s government politically and economically isolated; it may very well affect South Sudan.

As long as US and UN sanctions against Sudan remain, South Sudan’s oil sector is, in the short term, at an impasse. While the bulk of pre-independence Sudan’s oilfields lie in the south, the only export pipeline and refineries are in the north.

Total claims it has not resumed operations in South Sudan because of the possible legal implications arising from using Sudanese export infrastructure. The major, which holds Block B in Jonglei state’s prospective Bor basin, is reluctant to commence exploration until the effect of sanctions on South Sudan’s energy sector are clarified. While it admits security concerns have also prevented it starting work – Jonglei has seen significant unrest – its main concern is sanctions.

"Should a revenue-sharing arrangement between Sudan and the new state result in the government of the new state making payments to Sudan from the sale of Southern Sudanese petroleum, US persons generally could not engage in transactions involving the oil industry"

The Office of Foreign Assets Control (Ofac), which oversees US sanctions, said the measures in place apply only to Sudan, not South Sudan. The US imposed economic and trade sanctions in 1997. These were strengthened in 2006 and 2007 over the government’s role in the Darfur conflict.

But Ofac admits sanctions may affect South Sudan if properties or interests held by the government of Sudan are involved. "The Sudan Sanctions Regulations prohibit a US company, unless authorised by Ofac, providing services to the petroleum industry in the new state if those services would benefit the government of Sudan, or relate to the petroleum industry in Sudan, or from transporting exports of petroleum or petrochemical products through Sudan," a spokesman said.

"Further, should a revenue-sharing arrangement between Sudan and the new state result in the government of the new state making payments to Sudan from the sale of Southern Sudanese petroleum, US persons generally could not engage in transactions involving the oil industry in the new state unless authorised by Ofac".

It is likely that sending oil produced in South Sudan to Khartoum for refining and from there to Port Sudan through the country’s export pipeline contravenes sanctions, whether revenues are shared with the north or pays it a transport tariff.

For Bashir’s regime, removal from the terror list would be significant, especially as Sudan is struggling to put its faltering, oil-dependent economy back on track. South Sudan’s independence saw the north lose 75% of its pre-secession output of 500,000 barrels a day overnight – and with it, income of about $40 million a day.

Although the 2005 Comprehensive Peace Agreement, which ended the second Sudanese civil war, set out a 50:50 oil revenue-sharing agreement between north and south, the agreement expired on 9 July and an alternative has not yet been agreed.

"South Sudan should pay fees for using the pipeline in the manner determined by the government in Khartoum; it has no other option for export"

Talks aimed at establishing a new mechanism for the transport of South Sudanese production to market broke down without resolution just before independence. Since then, a war of words has broken out between north and south. Sudan has threatened to shut in the Port Sudan pipeline, effectively stranding South Sudan’s oil; it then backed down, but demanded a transport tariff of $32 a barrel, which was rejected by the government in Juba.

Sudan’s minister, of minerals Abdel Bagi Al Jailani Ahmed, said: "South Sudan should pay fees for using the pipeline in the manner determined by the government in Khartoum; it has no other option for export."

No export alternative

South Sudan is prepared to pay what it believes is a fair market price for pipeline access – experts say this could range from $0.41/b, the fee charged for access to the Chad-Cameroon pipeline, to about $5/b. But the north is sticking to its $32/b demand, prompting South Sudan to threaten to shut in its section of the oil export link. The sides are preparing to meet again in Addis Ababa, Ethiopia, within the next few weeks, but a resolution is still some way off.

The IMF estimates that southern secession will see Sudan lose about $5.2 billion in oil revenue between now and 2015. Deep cuts have already been made to spending as part of an austerity budget unveiled on 11 July, but the government has not yet managed to rein in spiralling inflation – around 17% – or deal with its estimated $38 billion foreign-debt burden. Access to international financial help and the opportunities that would arise should sanctions loosen would be a lifeline for Sudan’s economy.

Bashir’s regime is not without friends, however. China – Sudan’s largest trade partner, as well as one of the biggest buyers of Sudanese oil – is still firm in its commitment to doing business with the north. During a two-day visit to Khartoum in early August, Chinese foreign minister Yang Jiechi reiterated the political and economic support. "China is ready to help Sudan in developing its existing oilfields and production ... and develop our co-operation in agriculture and other sectors," said Yang.

Speaking at the same press conference, Karti claimed China had offered Sudan a $15.5 million interest-free loan. He added: "President Bashir has granted China National Petroleum Corporation three promising new petroleum blocks and offered a partnership with national oil company Sudapet in the fields where it operates."

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