The oil détente
Saturday, 13 August 2011 13:18 By Matthew Stein and Lasuba Memo
Failure to find agreeable oil transit fee jeopardises economies and regional stability
Prior to southern independence, Rosie Sharpe, a campaigner with the internationally respected environmental watchdog Global Witness warned that “without a new, equitable oil deal between north and south, it is difficult to see how southern separation could pass off peacefully.”
Now, less than one month after South Sudan became an independent country, this stark warning is gradually threatening to become a reality. Although the south sold a shipment of 3.2 million barrels of oil in July at international prices without interference from the northern government in Khartoum, on August 4, for the first time, a shipment of 600,000 barrels of oil produced in South Sudan was impeded from leaving Port Sudan in the north for two days due to outstanding disagreements over an agreeable oil transport fee.
The secession of South Sudan, where three-quarters of Sudan’s 470,000 daily barrels per day of oil is produced, has created numerous economic challenges for the Khartoum government. According to the finance ministry an estimated 36.5 percent of its total revenues have since been cut, forcing the already cash-strapped government to announce that it will cut spending and widen the tax base as part of an emergency three-year economic program, including a 30 percent tax on telephone calls as.
However, in order to fulfil its revised budget for 2011, which was ratified by parliament on July 21 and envisages an income of $6.5 billion against government expenditure of $7.5 billion, oil revenue remains critical. The government has said that it expects oil transit and usage fees from the south to amount to $2.6 billion per year, and to generate this figure, which is roughly equal to the amount Sudan expects to lose in oil revenue after the south’s split, Khartoum has demanded a fee of $22.8 per barrel. The figure, which far supersedes international averages of $0.50 -$2 per barrel, has been described as “daylight robbery,” by southern officials. Moreover, once other fees and taxes are included, southern officials argue the final price is closer to $33 a barrel.
The dispute has created a standoff between the countries, where neither wants to be seen as giving into the other. On July 21, South Sudanese President Salva Kiir said that the south had fought for 21 years without oil and, “can still go for three years until we build our own oil infrastructure.” In Khartoum, Sudan’s Finance Minister Ali Mahmud confidently retorted that the north, “will reach the [$22.8] figure with the south through negotiations [because the south] has no way to export their oil, except through the north.”
The situation has prompted some creative thinking among southern authorities who are desperate to maintain a strong front even though 95 percent of their country’s revenue is derived from oil. “Why should we be threatened if you know I have the resources,” says David Loro, South Sudan’s undersecretary in the ministry of mining and energy. “I can borrow money from you or even from the World Bank. There are companies intending to put refineries and there are some trying to put up some pipelines. Yes we have them, we know them. There are South Koreans, Chinese, Russians, Israelis, a lot of them.”
In the oil-rich state of Unity, Governor Taban Deng Gai suggests that this dispute just confirms the south’s need to develop other industries and distance itself from Khartoum. “South Sudan, in terms of agriculture is very productive. So we should have to deal with agriculture,” he says echoing a recommendation made by the World Bank to the southern government in June. “We in South Sudan do not have any debts with the international community. We should seek credit from them especially from the IMF.”
But both Abyei and Deng Gai’s suggestions are long term solutions; constructing pipelines through Kenya or building refineries in the south itself would require years and immense capital. Moreover, according to Dirk-Jan Omtzigt, an economic adviser at the Joint Donor Team, “without additional discoveries, it is estimated that output will peak in the 2011-12 year and then gradually decline thereafter and is likely to run out in 20 to 30 years.” Any reserves the south may harbour are also likely to be situated in swampy or difficult terrain that will make it costly to extract.
How this feud will resolve itself is a guessing game at the moment, but situational factors are likely to push both sides into a compromise. Sudan oil expert Egbert Wesselink, director of the European Coalition on Oil in Sudan (ECOS), believes transport and user fees will eventually settle in the $12-$15 range. But, he says, it will be interesting to see, “who can suffer more pain,” in the interim.
According to Wesselink the north is likely to be the first to concede. The south, he says, has hardly any economy to speak of and the lost revenue from oil is likely to hit the southern army the hardest, but does not necessarily mean it will cease to exist. “Until 2005, the army functioned with very little money,” he says.
However, the situation in the north is very different, explains Wesselink because its economy is a lot larger and has long been teetering on bankruptcy. Moreover, inflation is at 18 percent and with a debt of $38 billion, the north cannot borrow from any international financial institution in the meantime. “The north needs the income too much to enforce a break,” he says.
To embolden their position northern officials have been quick to highlight the interest of outside parties such as the Gulf Petroleum Investment Company (GPI), a Kuwaiti shareholding company, in conducting oil-well drilling exploration activities in their country. Sudan claims that it has the resources, most notably in three areas of South Darfur state, to boost its barrel per day (bpd) oil output from the current 115,00 bpd to 170,000 bpd by 2012 and to 325,000 by 2018, according to Finance Minister Ali Mahmud.
But Wesselink is sceptical that Khartoum can even reach 200,000 bpd. “I think they’re bluffing,” he says. “The ruling National Congress Party (NCP) systematically overestimates its future and actual oil production.” Wesselink adds that it’s unlikely that the supposedly oil-rich Darfur region will yield many results. A Chinese company, he says, has been drilling along Darfur’s border with Kordofan, but the lack of activity has led them to close down a refinery in the area
The ongoing oil issue will only add to lingering tensions, which has been exacerbated in recent weeks by a disagreement over the introduction of new currencies in the two countries. The NCP claims that the south breached an understanding that the two sides would maintain one currency for an interim period of at least six months. The north then refused a request from the south to exchange old Sudanese pounds with foreign currency or for its allowance in bilateral trade. It is estimated that $700 million worth of old Sudanese pound is circulated in South Sudan and Khartoum has said it has taken measures to prevent the old notes from being sneaked in from their southern neighbor.
Negotiations on this issue in addition to the debate over oil concessions continue to be discussed under the auspices of an African Union (AU) panel headed by former South African president Thabo Mbeki in Addis Ababa, Ethiopia.
Since August 6, the day the south’s oil shipment was released from Port Sudan, neither side has clarified what price was paid for its release.
“We have made consultations with Khartoum and at the end of the day yesterday [Aug 5] the shipment that was detained sailed to its destination,” said South Sudan Energy and Mining Minister Garang Deng. The south had acknowledged days before that it could incur penalties if it missed the delivery date specified in the contract with the buyer.
http://www.independent.co.ug/News/regional-news/4485?task=view
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