The Oil Dispute between Sudan and South Sudan ... some analysis

I received this information today about the current oil crisis between the North and the South. Thought it was a rather interesting summary of what's going on.


Current Issues 

There is a major deadlock between Government of Sudan (GoS) and Government of South Sudan (GoSS) over oil revenue sharing (fees, exports and pipeline).  Both governments met a few days ago in Addis Ababa at a meeting chaired by the African Union High Level Panel (AUHLP) to address this deadlock but a negotiated settlement remains elusive. Both sides have been escalating the situation, taking unilateral decisions and actions to guarantee their access to, and control of oil revenue.

GoS has been accused of seizing oil worth $185m and has prevented the sale of almost $630m (preventing eight ships from either docking or leaving Port Sudan), and requesting a high transit fee of $32.2 per barrel - which is 300% over the international rate, estimated at 0.7 cents. (Jacqui: RIDICULOUS). 

GoS has also been responsible for blocking trade with South Sudan and has escalated its military campaign in the border area (Jacqui: ie bombing! hence the big problems with refugees in Upper Nile). It is thought that a grab for the oil fields is also on the cards, maybe even utilizing the ‘support’ of  rebel groups within South Sudan e.g. SSIM. 

GoSS in turn has nationalized Sudapet (Sudan State Oil Co.) assets, expelling Sudanese employees without compensation. Sudan apparently derives a high income from this co. On 20^th January, GoSS also announced it would 'switch off' oil supplies in South Sudan, which is seen as an effort by GoSS to assure its independence and also force the acquiescence of Sudan; two of three oil fields are already being closed. Apparently, closing an oil field is complicated and if incorrectly or partially done will threaten future productive capacity of existing pipelines. AU mediators have advised that there be a 30 day transitional period; to ensure some oil flow but still buy time to come to an economically beneficial settlement.  

Games of brinkmanship are not uncommon for Sudan - South Sudan relations, but this time the consequences are severe enough to tilt both towards some sort of state collapse.

In South Sudan this means ….  

• escalation of inter-state military action or outright war; 
• stoking internal civil unrest and escalating violent competition between rebel groups and state;  
• hyper-inflation, deepening poverty and worsening the humanitarian situation; and  
• retardation of overall recovery and development.   

The Multi-Donor Trust Fund runs out soon and infrastructure projects in South Sudan may not be completed. New construction (i.e. much-needed roads!) would be compromised, as GoSS needs to divert funds to maintain core functions – administration, military spend etc.  Donors will also need to rethink the transition of aid funding from donors to GoSS.  

GoSS is 98% reliant on oil revenues. So if it longer has access to oil, how will it keep the economy going? GoSS has recognized that it needs to drastically its budget and is presently preparing an austerity package. Government 2011 budget is rumoured to be SSP 4.2bn. GoSS seems confident that even with drastic budget cuts that it can maintain core functions. Some international donors are a little more skeptical.  

In the absence of oil revenues GoSS may be able to utilize the following funds: 

Foreign Exchange: It is estimated that this is anything from $900m-$1,800m if mobilised this means that the economy at current spend levels can be maintained for 3-6 months, no more.   

Non-Oil Revenue: this amounts to something in the region of $100m.  This is not enough to even shore up the economy in the short run that is mostly salary (military and civil) spend. 

Request large loans against future oil revenue: Some donors are responding to this; e.g. Norway and maybe the Chinese (but the latter only derive 5% of their oil from South Sudan so not clear how much risk they are willing to take). While some offers are on the table no-one has yet committed funds. The UK Government has unofficially indicated that it will not provide any more funds other than that already committed to South Sudan. It is also expecting lower returns on existing development spend which will very unpalatable to the British taxpayer. 

Options for a South Sudan pipeline: the Goverment of South Sudan has indicated a strong interest in having its own oil infrastructure - refineries, pipelines etc. This however is immensely costly and cannot not be put in place quickly. Options for these pipelines are Juba- Kenya (Lamu Port), Juba – Uganda- Kenya, Juba- Kenya- Ethiopia, and Juba- Ethiopia- Djibouti.  

On 24th January, GoSS and Kenya signed an MoU to start building a pipeline to Kenya, so it appears this will be the option of choice. Juba-Lamu is the shortest route but will take almost 2 years to complete (above the 10 months that the Ministry of MEM projects) and cost anything in the region of $1.5bn - $4bn. A lot of new refineries will need to be built in South Sudan to manage different blends of oil (Dar and Nile), new infrastructure in Lamu and the pipeline has to navigate the Rift Valley on its route to Lamu. Two years of infrastructural development means that oil will for the time being still keep flowing north ... with little resolution of the problems.


Sources: Briefing of EU Economic Adviser to JDT, Email correspondence with ECOS Rep, and Global Witness report in Sudan Tribune 21 Jan.