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Oil remains source of conflict for the Sudans

Oil could bind the two Sudans together. For now, it remains another source of conflict between them

Oil lies at the heart of the relationship between Sudan and South Sudan. It was key to the two Sudanese civil wars, fought between 1952 and 2005. Access to oil fuelled and prolonged the conflicts. Oil was crucial to the 2005 Comprehensive Peace Agreement (CPA), which ended the second civil war; the commodity is central to government budgets, north and south. Oil continues to bind the Sudans together.

Since the south declared independence, the Sudanese have been locked in a struggle over oil. On independence day – 9 July 2011 – South Sudan gained 75% of Sudan’s total oil production; 350,000 barrels a day (b/d), worth $35 million to $40m daily.

Sudan’s northern rump was left with output of 150,000 b/d, foreign debt of $38 billion and an economy strangled by sanctions imposed after the International Criminal Court’s 2009 indictment of president Omar al-Bashir for war crimes, crimes against humanity and genocide committed during the conflict in Darfur.

Pipeline control

While independence granted South Sudan a swathe of upstream assets, Khartoum retained control of critical mid- and downstream infrastructure: the main export pipeline network, as well as refineries and the Port Sudan oil export terminal. This division created an unstable interdependency. For substantial volumes of South Sudanese oil to get to market, it must travel via Sudanese infrastructure; Sudan’s faltering economy needs the revenue derived from granting such access.

Crucially, no firm agreement on oil revenues and transit had been agreed by independence. The CPA made no provision for a post-independence oil-sharing mechanism or transit fees, stipulating instead that a 50:50 revenue split would remain in force until independence. It was an interim measure, designed to ease Sudanese dependence on crude receipts and insulate it from a post-independence oil shock. Along with agreements on border demarcation, as well as territorial disputes, an oil settlement, it was thought, could be agreed after independence.

The absence of a deal has pushed the fragile relationship between Khartoum and Juba to breaking point. Negotiations, sponsored by the African Union, struggled to reach a workable compromise. Khartoum’s representatives initially pushed for an extension of the CPA deal. Sudan’s position was understandable.

Oil accounts for half of its revenue and 90% of Sudan’s export earnings. In early 2011, Khartoum’s CPA oil revenue was about $285m a month. Southern negotiators, however, refused to extend the CPA mechanism. Khartoum later proposed a $32 a barrel pipeline-transit fee, as well as compensation – $9bn was initially sought – for the loss of southern oil revenue. South Sudan countered that while the north was entitled to levy a per-barrel transit fee, the tariff should comply with international norms of less than $1/b. The south also offered to issue a loan instead of compensation. Khartoum rebuffed the offer.

As talks failed to make headway, relations between the two, already fractious, deteriorated further. In late 2011, Khartoum seized 3.5m barrels of South Sudanese oil, valued at $815m, in lieu of “unpaid transit fees”. In January 2012, South Sudan retaliated, shutting in all its oil output. Its fields remained shut in for 16 months.

South Sudan survived in part thanks to loans taken out on future oil production. Much of the country is prospective and unexplored, and those explorers present in the country – mostly Chinese, Malaysian and Indian firms – are committed to remain. The shut-in hampered development, but observers agree that South Sudan can recover.

The consequences for Sudan are more severe. Sanctions have left it reliant on oil revenue and loans from its major foreign partner, China. The loss of oil income had an immediate impact. Despite swingeing austerity measures put in place in 2011, inflation soared from 11% in 2009 to an estimated 23.2% in 2012. GDP has gone into free fall. The IMF estimated 2010 GDP at $53bn, and calculates that real GDP growth has plunged since South Sudan’s independence. In 2010, IMF figures put real GDP growth at 4.5%. In 2011, it was -3.9%, falling to -7.3% in 2012. Public debt has surged, increasing from 73.1% of GDP in 2011 to 109% of GDP in 2012.

The economic crisis and an escalating military confrontation over the Heglig oilfield, which brought the countries to the brink of all-out war, pushed Khartoum back to the negotiating table. An interim agreement, due to expire in 2015, came into force in March, allowing South Sudanese oil production to resume in April.

Under the terms of the deal, South Sudan will pay Sudan $11/b for volumes moved through facilities of the Greater Nile Petroleum Operating Company, a Chinese-Malaysian consortium with fields in Unity state. For volumes moved through facilities operated by Petrodar, also a Chinese-Malaysian consortium active in Upper Nile state, South Sudan will pay Sudan $9.10/b. South Sudan also agreed to pay Sudan $3.028bn in a “transitional financial arrangement”.

Equal opportunity

The agreement should have offered both countries the opportunity to repair the damage done by the 16-month shut-in. Observers believed that Sudan’s failing economy, coupled with armed insurgencies in Darfur and South Kordorfan, growing civil unrest and its international isolation would combine to force Bashir, who has said he will step down in 2015, to implement reforms. Rather, Bashir, who has held power for 29 years, was emboldened.

Shortly before Petroleum Economist went to press, Bashir threatened – again – to shut in export pipelines, claiming South Sudan’s alleged support for rebel militias forced the decision. The shutdown has been averted, for now, after South Sudan’s vice president Riek Machar flew to Khartoum for emergency talks on 1 July.

Machar and his Sudanese counterpart Ali Osman Taha later issued a joint communique saying they had agreed not to support rebels in each other’s territory. They made no mention of oil transit.

For Bashir, oil remains the strongest weapon he has to wring concessions from South Sudan and retain his grip on power. When – and if – Bashir loses power, oil will be critical to Sudan’s future. When – and if – a lasting oil deal is reached between the two Sudanese, oil will continue to bind the two together. 

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