Thursday, April 17, 2014

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Oil in Sudan: An Independent Problem?

Even after secession and the 2005 Comprehensive Peace Agreement, oil disputes still rage on.
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Courtesy of Enough Project

In spite of the clean break that the succession of South Sudan from Sudan in July promised, disagreement between the recently divided states over how to share oil revenue remains unresolved. Both sides have been reliant on the income generated from oil since the CPA agreement in 2005, and for the past six years Khartoum has been giving the South 50% of oil profits made from exporting oil elsewhere. They must now come to an agreement on how to continue sharing oil resources and wealth in spite of their recent divorce.

Sharing oil profits: a difficult transition

The two states are currently arguing over the North’s proposal to charge transit fees of $32 per barrel (p/b), way above the international averages of $0.5 - $2 p/b. With Khartoum’s 2011 budget foreseeing a $6.5 billion income against a $7.5 billion expenditure, such high transit fees are necessary to support the economically challenged state. Facing high inflation and weakening currency, Khartoum will suffer if their share of oil profits decreases. Yet, with gold exports increasing by 45% in the first quarter of 2011, Khartoum could also look into harnessing alternative modes of income. By already building the extortionate sum into their budget it appears the North are attempting to manipulate the South, who themselves rely on oil for 95% of their revenue.

Divorced but dependent

The dispute has occurred partly because of the practicalities, and ensuing mutual dependence, arising from the location of the oil. Whilst the majority of oil sources are based in South Sudan, the infrastructure for extracting and exporting South Sudan’s oil is based in Port Sudan, on the Red Sea. This means that whilst Juba is reliant on Khartoum to transport the oil and share the profits, Khartoum is reliant on South Sudan for most of its oil exports and since the split has lost 75% of its oil production sources. Even after South Sudan’s succession, the two countries remain interdependent. Whilst ongoing meetings between presidents Omar al Bashir and Salva Kiir are a positive step towards diplomatically solving the complex dispute, and it appears hopeful that an agreement will be made soon, the question remains of how the two states can resolve this issue and continue peaceful co-existence.

A way to wage economic war?

There is some evidence that the Khartoum government uses their position as producers of the oil to exploit the South; continuing to wage an economic, if not military, war. According to a recent Global Witness report, in 2009 Omar al Bashir’s government cited oil production figures significantly lower than those given by the China National Petroleum Corporation (CNPC), the company they sold the oil to. This raised suspicions that the North was not revealing its full oil figures, and therefore not giving the South what should have been a 50% share of the profits gained. More recently, Khartoum’s expectation that they will continue to receive $2.6 billion profits from oil in 2011 suggests an attempt to pressurise the South into accepting the high transit fees. Until attitudes and approaches change, it will remain difficult to come to an agreement.

New independence: new pipeline?

Equally, as a depleted, newly independent state, with high potential for corruption, there are question marks over how successfully South Sudan can harness the oil wealth. Their threat to build their own pipeline, ending dependence on Khartoum for oil production, shows a tactical effort to pressurise the North to relent. Even if the suggestion is seriously intended, it is both an economically and politically questionable solution, which would hinder more than help. The pipeline would have to cross unsuitable, conflict-stricken terrain.  And with other more pressing development and infrastructure needs such as roads and electricity, a new pipeline is not, and should not be, a priority.

No more oil...

This is compounded by the reality that oil in South Sudan is a resource with a limited life span. It is predicted to be at its peak productivity between 2011 and 2012 and will begin to sharply decline from 2015. This brings into question the feasibility of relying on oil at all, let alone investing vast amounts of money in new infrastructure to extract it. Admittedly, French oil company Total have been looking in the unsearched area of Block B for more oil deposits, giving a glimmer of hope that there is more oil, and wealth, to be extracted. However, if nothing is found, in less than 30 years time oil will no longer be the curse or blessing it is made out to be.

A positive change?

The changes in oil sharing resulting from the South’s independence are not all negative. Compared to the system of halving oil profits, the plan for Khartoum to charge the South transit fees for every barrel of oil the North produces for them is a positive step, which increases transparency. Meanwhile, in spite of the disagreement South Sudan has sold 22 million barrels of oil to international buyers since July, with Khartoum charging transit fees at the international standard.  Although an apparently insoluble problem, the transit fee dispute has not, as yet, reached a crisis point.

Diplomacy: China as a mediator?

With neither side willing (or perhaps able) to back down on their demands, China, as a major buyer of Sudanese oil and trading partner with both, is likely to be influential in solving the disputes. With a history of investment in Sudan in spite of human rights abuses, China has a serious self-interest in keeping Sudan’s oil flowing effectively. It is likely to support any measures that ensure oil production is not disrupted, even if it damages their relations with Bashir. With Bashir pushing for a solution to the problem by the end of October, it seems the dispute will soon be forced to a conclusion.

An oil-free future?

Not only is the oil dispute indicative of the struggles of two countries recently divorced and still co-dependent, but one that shows China’s increased influence in African politics. More than this, it is a problem which masks an even bigger uncertainty, of what Sudan and South Sudan will do once the oil runs out. So, as well as trying to solve the oil disputes, both governments urgently need to look into other sources of revenue and development such as agriculture and industry. Focusing on tying up the past rather than looking to the future could leave both sides facing a decline as rapid as the dwindling oil reserves.

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