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Sudan’s oil war intensifies six months after independence

South Sudan is again locked in conflict with its former rulers in Khartoum. This time, oil is the weapon of choice for both

When South Sudan celebrated its hard-won independence, just six months ago, hopes ran high. After 50 years of civil conflict, the south severed its ties with the north and was free to decide its own destiny. The country, handicapped by decades of deliberate under-development, would shake off its reliance on international aid. And oil money, flowing from the new nation’s 375,000 barrels a day (b/d) of output, and from discoveries yet to be made, would provide a solid foundation. Or so the optimists believed.

But relations between Sudan and South Sudan remain strained. Some of the ties that bound the two nations together were untangled with relative ease. Many – the status of the disputed territory of Abyei and border demarcation, for instance – proved less simple. But the tightest and most crucial of those links – oil and access to export infrastructure – has proved a Gordian knot.

South Sudan has only one export option for its oil production: a pipeline that crosses Sudan, to Port Sudan on the Red Sea. Its refinery options are also limited to facilities in Sudan. Plans for an export link to Kenya have been mooted: Total said recently that it was considering building a pipeline from its South Sudan block to Kenya through Uganda. But it stressed the proposal was "just thoughts". Besides, building a new pipeline will take time, something South Sudan doesn’t have. Until it has pipeline infrastructure – both domestic and export – and a refinery of its own, it is reliant on Sudan.

 

And here’s the problem. The dispute over the terms of South Sudan’s access to energy infrastructure has brought Sudan and its southern neighbour to the edge of an abyss. Tit-for-tat verbal exchanges have taken a more serious turn. In mid-January, Sudan started impounding South Sudanese crude in lieu of pipeline transit fees, prompting South Sudan, on 23 January, to order a total production halt.

The markets can absorb the loss of South Sudan’s output, mostly exported to China, in the short-term. But a sustained halt, coupled with the EU’s Iranian oil embargo and underlying unease over the health of the global economy, may have wider implications. Carsten Fritsch, an energy analyst with Commerzbank, warned: "Any prolonged discontinuation of South Sudan’s oil production, combined with a partial shortfall in Iranian exports, could lead to a tightening of supply … and cause prices to rise still further."

Repercussions

There will be repercussions – potentially severe – closer to home, too. With South Sudan’s secession, the north, already suffering tough economic sanctions, saw its oil output slashed by almost 75%, to around 140,000 b/d. Sudan’s economy has floundered without the estimated $290 million a month it earned from oil under a temporary 50:50 revenue-sharing deal with the south. That agreement expired at independence; an alternative has yet to be agreed. Despite swingeing cuts to government spending since mid-July, Sudan is struggling to stabilise its economy. And inflation is rising, hovering at just over 18%.

Little wonder Sudan has taken a hard line in African Union-sponsored talks with South Sudan over infrastructure access. But its insistence on a $32/b transit fee, a payment of $1 billion in lieu of fees for transit since independence, and for South Sudan to share the north’s $38 billion national debt is unacceptable, says the south. South Sudan’s counter-offer has been rejected – a $0.41/b fee, on a par with transit fees charged for the Chad-Cameroon pipeline, and a possible one-off payment, put at several hundred million dollars.

For South Sudan, securing the best commercial deal is vital. It relies on oil for about 98% of its income; the remainder comes from international aid. Without oil income, South Sudan’s development is effectively stymied. The oil shut-in – government spokesman Barnaba Marial Benjamin confirmed the move – is an act born of desperation.

A source close to the government said: "It is the only leverage it has left to force Khartoum to negotiate." Other sources agreed, saying the shut-ins were designed to force concessions from Sudan. An interim arrangement could be agreed at a meeting – brokered by Kenya – between Sudan’s President Omar al-Bashir and South Sudan’s Salva Kiir Mayardit at late January’s African Union summit in Addis Ababa. But any such deal would sidestep immediate difficulties. It would not provide a permanent solution to an increasingly intractable problem.

Indeed, what such an interim deal would involve is difficult to judge, given that Sudan has dismissed a raft of alternatives, including the one-time cash payment, as well as a three-month allowance of 25,000 b/d to be deducted from any future agreement. South Sudan may also find it difficult to back down from its increasingly strident rhetoric.

In November, Sudan threatened to take 23% of the South Sudanese volumes carried through its export pipeline as payment in kind for transit. Then reports emerged that a number of tankers carrying South Sudanese crude were prevented from leaving Port Sudan. Sudan’s foreign ministry said 650,000 barrels of South Sudanese crude were prevented from sailing in December. The reason given was "non-payment of port fees". South Sudan’s oil minister Stephen Dhieu Dau detailed nine incidents where vessels carrying South Sudanese crude were prevented from leaving port, or their cargoes were confiscated.

When Sudan confirmed, on 15 January, that it had been "confiscating" southern crude, Kiir hit out. The president alleged Sudan had "stolen" oil valued at an estimated $815 million. South Sudan has threatened to sue companies buying oil from the north, has called for the return of the confiscated oil and for a fair, market-based transit fee.

As the dispute has escalated, so too has disquiet among producers active in both countries. China, an important donor and ally of both nations, has called for calm – its national oil companies (NOCs) dominate both countries’ energy sectors. Following South Sudan’s production shutdown, China’s foreign ministry spoke out: "We urge the two sides to remain calm and restrained, avoid taking extreme action and … resolve their dispute. We hope the two governments will fulfil their commitment to protecting the legal rights of Chinese enterprises and those of other partners."

The US, a staunch ally of the south, added its voice to China’s calls for calm. The State Department said the resumption of oil shipments was critical to stabilise the economies of both countries. "[This crisis] threatens not only the flow of oil, but also long-term damage to infrastructure. An agreement … is in the interests of both countries."

China and the US are right. The row is damaging to both nations. Not just financially, although neither is economically robust. The real damage will be to their oil industries. Both rely on oil, and continued inward investment. While the sectors of both are mostly the preserve of Chinese, Indian and Malaysian NOCs, it may not always be so. But all producers, state-controlled or privately held, need a stable political and economic environment in which to operate.

Perhaps Bashir and Kiir will agree an interim arrangement in Addis Ababa. And perhaps that deal could spur further talks and a definitive, amicable settlement. But a meaningful resolution will require the north to reduce its excessive demands and for the south to swallow its pride – both must compromise. If they continue to steer their present course, there can be no winners.

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