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Both Sudans pay high price for output shut-in

In a bid to force Sudan's hand in talks over oil infrastructure access, in February South Sudan halted all its production. The shut-in is still in place and both countries are suffering as revenues dry up

Nearly six months into an oil production shutdown by South Sudan, there is still no indication of when production could resume, despite the economic hardship the shut-in is causing both in Africa's newest state and in Sudan, the northern state it seceded from last year.

Around three-quarters of production of 500,000 barrels a day (b/d) from the former united Sudan came from provinces which became part of the new state of South Sudan in July last year. Until independence on 9 July, oil revenues were split evenly between north and south. That deal ended with independence. Since then, the African Union (AU) has been attempting to broker an agreement between the two.

However the government of Sudan has insisted on a $32 a barrel transit fee for carrying oil produced in South Sudan along the 900 km pipeline to Port Sudan, on the Red Sea. Despite the pipeline being the only export route for South Sudan's oil, officials in Juba have refused to pay the $32/b (a levy which would earn Khartoum an estimated $4.4 billion annually - almost exactly the amount of oil revenue it lost with South Sudan's secession). Instead, South Sudan would prefer an agreement closer to international norms. Negotiators have cited the $0.41/b fee levied for access to the Chad-Cameroon pipeline as suitable. For a time, South Sudan paid a split fee: $4/b for production from existing fields and $7/b for output from new fields.

However, in February, frustrated by the lack of progress over an infrastructure access deal, South Sudan raised the stakes - it closed in all its oil production.

Oil revenues play a critical role in bankrolling both governments: for Khartoum, around 70% of its revenues are derived from oil, while South Sudan's are nearer 98%. Now, officials in South Sudan are mounting a major anti-corruption campaign and urging citizens to go back to the land. In Sudan, which has been under great economic stress since South Sudanese independence, protests at the removal of fuel subsidies broke out in Khartoum on 16 June. As Petroleum Economist went to press, these showed every sign of spreading.

While AU-sponsored negotiations between the two sides continue in neighbouring Ethiopia, international oil executives and South Sudan officials said they could not predict when production could return to pre-shutdown levels, even if political agreement were reached and output resumed quickly.

"It could be three to five months at least," said one Asian executive. Although international companies have also been carrying out maintenance checks in South Sudan's Unity and Upper Nile states, where the fields lie, executives said because of the speed of the decision to shut down they also could not guarantee the state of the reservoirs.

Meanwhile, speculation continues to be feverish in South Sudan around alternative routes south for a pipeline to the Indian Ocean, with a route to the Kenyan port of Lamu being the most touted. The project, part of a larger East African infrastructure development which would include a highway through South Sudan and across Kenya, has received top-level public backing from the two countries, plus Ethiopia, which would also be involved. The presidents of South Sudan, Kenya and Ethiopia attended a ribbon-cutting ceremony at Lamu in March.

Tullow Oil's plans to develop its Ugandan oil discoveries, and its announcement of significant shows in Turkanaland in northeastern Kenya, which could both feed into such a pipeline, have only added to the heat around East Africa, embracing South Sudan, as the world's fastest rising oil province. But estimates both for the cost of an alternative pipeline and the amount of time it would take to complete vary from $2bn to $5bn and from 18 months to five years.

The lower estimates seem to rest on comparison with Sudan's first pipeline, built from Unity State up to Port Sudan by China National Petroleum Corporation (CNPC) at the end of the 1990s. But there are significant differences of terrain and geo-politics in a southern route, which must cross both significant areas of seasonal wetlands, mountains and at least one international border.

Meanwhile, shut down or no shut down, South Sudan is busy building institutional apparatus for an industry it inherited from the north.

"This company should be able to operate an oilfield completely autonomously within five years," said Paul Adong, managing director of NilePet, South Sudan's national oil company. NilePet took over the stakes in the producing fields formerly owned by Sudapet, the oil company owned by the Khartoum government. Juba signed successor agreements with CNPC, Malaysia's Petronas and Indian firm Oil and Natural Gas Corporation, the main international players operating in the country. Adong was keen to stress that exploration, principally by Total, had not been affected by the shutdown in production.

The international companies, meanwhile, have complied with Juba's demand that their South Sudanese operations be run out of Juba, moving many executives from Khartoum in the past 12 months.

But the production shut-in has bitten South Sudan hard. In June, President Salva Kiir Mayardit wrote to some 70 current and ex-officials asking them to return $4bn of public funds that have gone missing. Inflation has hit the country hard in recent months, but particularly the northern belt. Roads around Bentiu were almost empty last month as petrol hit $20 per gallon, while the price of basic foods had also soared.

Nevertheless, it is in the north that the consequences of the oil impasse are being most keenly felt. After months of prevarication, the government in mid-June announced drastic cuts in subsidies to fuel products across Sudan, sparking protests. Inflation on basic goods had already hit between 50% and 100% in the first half of the year and the rise in fuel prices was thought likely to lead to sharp rises across most staple goods.

State media have been full of "oil substitute" stories in recent months, reports of production in the north rising from 110,000 b/d in the rump fields left after southern secession to 195,000 b/d by the end of the year, or even of gold production doubling in 2012, to earn the government $2bn in taxes and help plug the yawning deficit. A government-sponsored gold rush in the last few years has sent some quarter of a million Sudanese into the northern deserts to prospect, often using basic chemicals and equipment.

But the spectre of bankruptcy looms for the government in Khartoum. With local fuel consumption at about 110,000 b/d, South Sudan's independence turned Sudan into a net energy importer. In June, Finance Minister Ali Mahmoud described Sudan as "bankrupt".

Opinions vary on where this could lead. On the one hand, an experienced European diplomat says his informal soundings of ordinary Sudanese suggest most see no alternative to the regime of President Omar Hassan al-Bashir and the National Congress Party, in power now for nearly a quarter of a century, and deeply entrenched across Sudanese society. On the other, a former finance minister from the time of Sudan's last democratic government of Sadeq al-Mahdi, says the numbers only lead one way. "The political economy has run on petrodollars for the last decade. It's been the sole source of legitimacy of a government which is otherwise deeply unpopular among its people," he said.

Johnny West is founder of OpenOil, a consultancy that advises the UN on the public-policy implications of the oil industry in the Middle East, and seeks market solutions to resource-curse issues. He has published on energy for Reuters, the EITI, Transparency International, Iraq Oil Report and the Center for Global Development.

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