Challenges Remain For Sudans Despite North-South Oil Deal

After reaching a deal with Sudan on 3 August over the contentious issue of oil transit fees, South Sudan has revealed it hopes to restart oil production as soon as next month, with the initial focus being on the fields in the Upper Nile and Unity states. Sudan has however warned that an agreement on border security would be needed before Southern oil would again be allowed to flow through the North. This, some fear, could prove to be the �deal-breaker.� Nader Itayim reports. 

�We have been informed by our oil companies that 80% of our [oil wells] in Unity state will be able to resume by September,� South Sudan�s chief negotiator Pagan Amum said in a statement on 6 August. In an interview with Reuters the following day, he reiterated this position before adding that production from fields in neighboring Upper Nile state should also come on stream in the coming few weeks. Concerning when the country was expecting to return to full capacity however, Mr Amum remained cagey. �We expect, of course to develop the capacity over time. It will not be an automatic thing. It will take time to open one well after the other,� he said. �The production will begin from 150,000 b/d�and within three, four months it would go to 180,000-190,000 b/d, and then it will go to the (old) level, and possibly higher than the time (before shutdown).� South Sudan has the capacity to produce 350,000 b/d, but is thought to have been producing closer to 300,000 b/d at the turn of the year.

South Sudan�s Unity And Upper Nile States

Source: MEES.

The division of oil revenues was one of the key issues left unresolved when the South broke away from Sudan in July 2011, taking with it around 75% of Sudan�s historical oil reserves (MEES, 9 July 2011). The two sides had since been locked in a bitter dispute, which came to a head in late January when Juba shut down all its output after Khartoum began seizing some of the South�s oil as it flowed through the North and on to Port Sudan for export. This, Sudan said, was being done as a form of �payment in kind� for oil transit fees it said were unpaid.

The 3 August deal stipulates that Juba will pay Sudan $9.48/B on average for the use of its oil infrastructure in the North � some way below the $36/B Sudan was originally demanding. �According to the agreement, South Sudan will pay a fee of $11/B to use the Nile Blend (GNPOC) pipeline, and $9.10/B to use the Dar Blend (PetroDar) pipeline. These fees include all transportation, processing and marine terminal costs associated with transporting crude oil through Sudan�s pipeline infrastructure,� South Sudan�s Minister of Petroleum and Mining Stephen Dhieu Dau said on 7 August, adding that they would last for only 3.5 years. Further to this, South Sudan offered $3.028bn in direct transitional financial assistance over the same period, the equivalent of an additional $11.90/B presuming average 200,000 b/d shipments.

GNPOC � a joint venture oil exploration and production company comprising China�s CNPC (40%), Malaysia�s Petronas (30%), India�s ONGC (25%) and Sudan�s state-owned Sudapet (5%) � operates the country�s main export pipeline linking Block 5A in the South to Port Sudan on the Red Sea. PetroDar � a consortium made up of CNPC (41%), Petronas (40%), Sudapet (8%), China�s Sinopec (6%) and Cairo-based Tri-Ocean Energy (5%) � operates the pipeline linking Blocks 3 and 7, which produce around 80% of the South�s oil, to the refinery and export terminal at Port Sudan.

Despite the agreement, industry sources believe a restart in production by next month may prove too soon. �The whole system has been left unattended for some time now. We don�t know if any damage has been inflicted on the system during that period,� a source tells MEES. �Two months is possible, but I think it�s on the optimistic side given that it is Sudan, and the difficulties they are expected to face,� he continued. Another source appeared more confident about the two-month target, saying: �I believe they will do it� As long as nothing is clogging the pipe and it is not corroded, once they drain the water out, they will pump the oil into it.� The pipelines are known to have been filled with water so as to avoid gelling.  

Loose Ends Remain

What Sudan has been always been stressing however is that �no agreement will be signed� until a deal can be reached on all security issues along the disputed North-South border. �Any agreement on oil shall be subject to the implementation of a full and final agreement on security matters,� spokesman for the Sudan�s negotiating team in Ethiopia Mutrif Siddiq said on 5 August. The Government of South Sudan continues to accuse Khartoum of calling in airstrikes on its territories, while Khartoum accuses the South of continuing to support armed attacks on Sudanese forces in the border states of Blue Nile and South Kordofan.

It is the fact that the resumption of oil production in the South is linked to the progress on security issues that left observers feeling last week�s agreement on oil transit fees was more symbolic than anything else. �I think this [prerequisite] is a deal breaker,� Sudan�s former State Minister for Finance 'Abda Yahia al-Mahdi told MEES. �Both sides were desperate of course for this oil deal to go through, and this is why we expected it to be the first one to be agreed upon. However, whether I think the two sides will actually agree on suitable security arrangements easily? I�m not so sure,� she continued.

Renewed Hope For Sudanese Economy

Losing around three-quarters of its oil revenues to the South in July last year plunged Sudan�s already ailing economy into a crisis, which day-by-day is getting worse. The lost oil reserves accounted for more than 85% of Khartoum�s export earnings, which according to the World Bank hit $7.5bn in 1H11. This loss of hard currency � with which Sudan would pay for imports � resulted in high inflation, and saw the value of the Sudanese pound plummet on account of government efforts to increase exports of gold and other non-oil products. In June, Sudan�s Minister of Finance 'Ali Mahmud estimated the country�s budget deficit at around $2.4bn, prompting a raft of austerity measures to help plug the gap (MEES, 2 July). Among other measures, subsidies on fuel were being reduced; taxes on consumer goods and imports were being raised; and the exchange rate for the pound worsening.  

So, while the $3.028bn coming in as part of the deal would no doubt boost government coffers, its impact on the country�s economic crisis will largely depend on the authorities� ability to both cut costs, and direct the funds to where it is most needed. �If it [the oil deal] does come through�it will help the economic situation greatly,� Ms Mahdi said. �We need to consider however that the economic situation in the country today is really down to the misallocation of resources. More resources do not necessarily mean the economic crisis will be alleviated,� she cautioned.

© Copyright MEES 2012.