Sudan and South Sudan are once again at loggerheads over how to share hydrocarbon resources after some false starts to agreements, reports Emran Hussain
Ever since the two countries went their separate ways in July 2011, the relationship between Sudan and South Sudan has been marred by mutual mistrust and sporadic armed skirmishes along their shared border.
The situation appears to have worsened further since Pipeline last reported on the region in January last year. From the perspective of Sudan in the north, the secession of the South can be likened to the loss of a vital organ, with the vast majority of oil reserves located over the border. Conversely, the government in the South blames Khartoum for cutting them off from foreign export markets, particularly Asia, with the new nation’s economy depending on oil exports for 98 per cent of its revenue.
Highlighting the tension, both sides have been amassing their troops along their border and in hotly-contested areas such as Abyei and the oilfields of Heglig.
However, some small signs of optimism were apparent in a recent speech delivered by South Sudanese President Salva Kiir, who praised the work of an African Union committee that has worked with both sides on the various issues.
“It should be recalled that the relationship between the two countries had deteriorated to the extent of war. But with the help of this Union, calm was restored through dialogue and negotiation facilitated by the AUHIP,” he said in a January address to the Assembly of the African Union.
“Your Excellencies, our challenge is the honouring and implementation of agreements once they have been signed,” he added.
Foreign oil interests
According to Alasdair Reid, Sub-Saharan Africa analyst for security firm AKE, the uncertainty surrounding the various disputes is also having a negative impact on international oil companies.
“There are security concerns, reputational concerns, uncertainty over the future political risk environment and more practical concerns over how they are going to export oil and gather revenue.
“Political violence and physical damage to oil and gas infrastructure is also a concern,” he says.
The oil industry of both Sudan and South Sudan continue to be in a state of flux. South Sudan’s independence saw Juba take the lion’s share of the previously-unified nation’s oil reserves overnight. Khartoum currently retains control of the midstream infrastructure – a vital chokepoint that has led to an ongoing stalemate and the stagnation of both economies.
Reid says that despite holding much of the oil reserves, South Sudan so far has very little to show for it in terms of economic growth. “A large contraction of the economy, of approximately 50 per cent, was reported in 2012,” he explains, pointing out that attempts have been made to diversify revenue sources into other areas, such as timber.
In addition to the government also splitting and selling oil and gas blocks for exploration, South Sudan is also in the process of attempting to join the East African Community (EAC) in order to improve regional trade links. “The outcome of this application is still uncertain and has been deferred by the EAC. It will still struggle to diversify given the lack of a well-established, skilled workforce,” says Reid.
Foreign oil interest in both Sudans, which are said to hold little or no gas reserves, is dominated by Asian players such as China’s CNPC, Malaysia’s Petronas and India’s ONGC Videsh. However, working in the upstream sector in either country is a tricky affair. Among the main challenges are the ongoing disruptions to exploration and production as a result of the South’s secession and government interference in the industry.
While firms that manage to withstand these pressures are rewarded with good access to the leadership of both countries during such difficult times, Reid warns this can easily lead to detrimental complications caused by a blurring of the line between business and political interests.
“The CNPC, Sinopec and Petronas have influence over both sides of the dispute so their involvement could potentially be positive, but they are not necessarily viewed as neutral or interested in resolving the crisis to the political benefit of one party or another,” he says. One key example of this occurred in February last year (2012), when South Sudan expelled a senior executive of Petrodar (CNPC and Petronas) from the country amid accusations he was working for the Sudanese.
Various commentators have suggested that if a lasting settlement were to be reached by both sides, new investment could potentially flood into South Sudan’s oil sector, not only from its traditional Asian partners but more crucially from technologically-superior western investors. Conversely, Khartoum would find it difficult to meet ambitious reserves and production goals due to ongoing sanctions that still dissuade involvement from all but a handful of independents and NOCs.
“Interest in Sudan’s latest licensing round was hardly overwhelming,” stated a fourth-quarter 2012 report from Business Monitor International (BMI), issued before the current impasse. Winners of 12 licences were announced in July 2012, with Canadian independent Statesman Resources and unnamed Chinese, Nigerian, Australian, Brazilian and French companies thought to be given concessions. Petroleum Minister Ishaq Adam Gamaa told Reuters that the companies had committed to investment totalling US$1 billion.
“Even if all of that does materialise, it is unlikely to be enough to reverse Sudan’s fortunes,” the report added.
One step forward, two steps back
An oil agreement drawn up and signed by the chief negotiators of both Sudans during a presidential summit in Addis Ababa at the end of September 2012, is currently in stasis, with no prospect of a resolution any time soon, even after several high level deliberations in January this year.
Despite the impasse, observers have said that given the alternatives, any agreement is better that none at all. “One of the main obstacles is a lack of trust on both sides,” says Reid. “A number of positive agreements were reached between [Sudanese President Omar al-] Bashir and Salva Kiir in September last year but the key points haven’t been implemented.”
Either way, about 350,000 bpd (and potentially over 500,000 bpd) of South Sudan crude output hangs in the balance, which the South has said will not be brought back online until the latest dispute over border security, which flared up this January, is resolved.
Latest estimates of the combined output from both Sudans are less than glowing, with 2012 output said to have dropped to just 141,000 bpd from 420,000 bpd in 2011, according to BMI.
Landlocked South Sudan was due to restart exporting oil in January through the only international pipeline it has – the 1,600km Greater Nile Oil Pipeline controlled by Sudan, which stretches from the south to the Port of Sudan on the Red Sea coast. In the event that any resolution is achieved by both sides, the resumption of production – and therefore exports – has been pushed back to the middle of March or even April, according to South Sudan’s Oil Minister, Stephen Dhieu Dau.
"You have 90 days for the whole procedure, from marketing to lifting and then collection of the proceeds," he told Reuters in early January, adding that the government would not get any oil revenues until April.
If implemented, the September agreement would have seen an amicable understanding on such crucial cross border issues as future discoveries of new shared oil and gas reservoirs, at least for the three-and-a-half-year period for which it was valid.
Pipeline fees are the most crucial consideration in the agreement, with the treaty indicating South Sudan would be expected to pay Sudan between US$24 and just over $26 per barrel to process and transport the oil to Port Sudan. These figures include a ‘payoff’ to Sudan known as a ‘Transitional Financial Arrangement’, designed to compensate Khartoum around $3 billion annually for the three-quarter drop in its oil revenue following South Sudan’s independence.
In addition to the almost unprecedented scale of these fees, some analysts have suggested that even in light of the agreement’s expiry date, there is little to stop Sudan extending or even upping the fees in the future.
“The relationship can be characterised as one of mutual mistrust. Progress is difficult given allegations from both sides of the border that proxy rebel groups are being financed and supported,” says Reid, explaining that each country accuses the other of stoking internal tensions, further weakening the chance of any oil-related agreement.
Further agreements are becoming even less likely than they were six months ago, with February 13 set as the date of the next round of talks between Sudan and South Sudan, however these have been delayed indefinitely according to local media sources.
“This is indicative of declining willpower between the two parties but also a decline in international attention,” says Reid. “The African Union appears to have lost patience with the situation and its agenda has shifted to other pressing issues such as Mali and the Democratic Republic of Congo.”
Outside pressure needed
Reid suggests that more international support would be useful, as would increased pressure from the energy companies involved in the region, “as they arguably hold more leverage over Khartoum and Juba than anyone else.”
“There is also very little access to the disputed areas, which makes it difficult to verify exactly what is happening, which in turn makes it difficult for international actors to plan appropriate policy,” he adds.
Sudan and South Sudan exist in a relationship of reluctant co-dependence. If South Sudan were to restart oil production, in addition to bringing desperately needed currency back into its economy, Juba would be better positioned to seriously consider an alternative export pipeline.
Amid suggestions of a pipeline from the South Sudanese capital to the Kenyan port of Lamu, AKE’s Reid says that this is not the only option: “A German engineering firm was drafted in to conduct feasibility studies this month (February) for a pipeline via Ethiopia to Djibouti. Other potential routes could include linking up with a pipeline from Uganda.
“The Lamu line looks like the most feasible option currently but this is also dependent on continued stability along the Somali border, something that currently looks positive but may of course shift in the coming years.”
With mutual distrust and oil-linked border tensions continuing to marr attempts to find a settlement between the Sudans in recent months, the fate of millions of citizens of both countries continues to hang in the balance.