Juba should seek other routes for oil
By George Wachira (email the author)
An oil well in South Sudan. Juba depends on the North to use the only cross-border pipeline to the Red Sea outlet of Port Sudan to sell its oil. File
As anticipated, the use by South Sudan of oil export facilities owned by Khartoum appears to have generated some heat in recent weeks. This is one of several unresolved oil related issues which should have been dealt with within the framework of the Comprehensive Peace Agreement.
Whereas prior to the July 9 separation the oil revenue sharing formula was 50/50 between the two sides, now South Sudan owns about 75 per cent of the total production which currently stands at about 500,000 barrels per day. This shift in oil ownership will translate into an inevitable loss of revenue for the Khartoum government
It is also a fact that the oil logistics facilities ( pipelines, export terminals and refineries ) are all located in Sudan which means that in the near to medium term South Sudan will remain fully dependent on Khartoum for exporting its crude oil and also for supplying refined products.
Transit fees
What is eagerly awaited is how the two nations will hammer out a fair and commercial arrangement that will allow South Sudan to obtain full benefits from its crude oil exports, while Sudan benefits from a fair and commercial return on its oil export infrastructure.
The test incident happened in the past few weeks when the Khartoum government temporarily prevented an export of oil belonging to South Sudan until there was agreement on the transit fees to be paid by Juba.
Khartoum had decreed an oil export transit fee of about US$ 32 per barrel to be paid by South Sudan for using its logistics facilities. According to the Juba administration, the fee was unrealistically punitive.
By any global measure this transit fee was unrealistic and not commercially viable, considering that in practice one would expect to see transit fees lower than US$ 10 per barrel. The two nations have turned to the African Union to arbitrate on the correct transit fee to be paid for handling South Sudanese oil.
In the oil game between the two countries, we have Chinese companies which are deeply involved in production and logistics infrastructure.
The Chinese stand to lose a lot of oil revenues if the stalemate between the two neighbouring states interrupts oil production and exports. It would therefore be expected that the Chinese government with so much at stake , will proactively take diplomatic initiatives and engage the two states so that mutually workable arrangements are arrived at sooner than later. What is needed is a win/win solution for the two countries and also for the Chinese, Indian and Malaysian investors.
What is not lost on observers of recent happenings is that South Sudan will soon have to start making arrangements for alternative routes for their crude oil exports and also alternative sources for their oil needs.
Such arrangements would greatly enhance South Sudan political and economic negotiating leverage with Sudan, and may have the effect of increasing mutual respect and understanding.
Indeed South Sudan has been discussing with Kenya about an alternative oil pipeline routing to export crude oil through the proposed port of Lamu.
If and when Kenya and South Sudan sign the necessary protocols on the pipeline project, it will open up avenues for private investors to start taking definite interest in the project, which we understand is already attracting interest from Japanese investors.
But it should be noted that such a large project would take no less than four years to complete, and this is why it is important that bridging agreements for oil exports and products supply are soberly negotiated between Sudan and South Sudan.
Perhaps a pipeline to the Indian Ocean will assume more urgency when the French company Total commences oil exploration on their large Block B, which is more to the southeast of South Sudan and nearer the Kenyan border.
Near the border in Turkana we have ongoing oil exploration by the Tullow consortium.
A joint pipeline transporting crude oil from the South Sudan and Kenya will have increased economic justification.
It is also understood that the South Sudan government has been planning a new refinery within their territory (nearer Juba) to meet their domestic requirements and thus reduce dependence on imports from Sudan and East Africa.
South Sudan, as expected, will initially face the daunting task of human capacity development to enable it manage its oil resources.
Investment in a refinery is a natural progression for a country which owns crude oil and which has a definite and growing demand for petroleum products.
Oil deals
However, being thrown into the “deep end” as early as is now happening, is in itself an inevitable step towards gaining experience. As long as there is demonstrated commitment and steadfastness by South Sudan to obtain the best oil deals for their country, international support will readily emerge to assist with expertise where and when needed.
While still on the subject of petroleum infrastructure, it appears that the Ugandan government is still intent on proceeding with investment in a refinery located in the vicinity of the crude oil production area near Lake Albert.
The same Norwegians who financed the refinery feasibility study had last month gone to tender for the second stage consultancy for a petroleum products distribution infrastructure from the refinery into the region which would probably cover the EAC countries, DRC and of course South Sudan.
It is still not too late for the EAC countries to jointly come up with a common strategy for the most optimum petroleum products supply infrastructure for the region.
Currently each country appears to be doing their own studies and proposing projects which may end up duplicating investments across the region.
Mr Wachira is the Director, Petroleum Focus Consultants wachira
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