The world’s newest, and Africa’s 54th nation, South Sudan, proclaimed independence on 9 July 2011, the result of an internationally observed referendum embodied in the 2005 Comprehensive Peace Agreement (CPA), signed between the Sudanese government and the Sudan Peoples Liberation Movement, which had been fighting for independence since 1983.
Like most divorces, this one was messy.
When South Sudan seceded in July 2011, it took with it 75 percent of the Sudan's oil production, which heavily depleted Sudan’s revenue stream. The two have wrangled over oil transit fees ever since.
The devil is in the details. The CPA did not set provisions on a post-independence oil sharing mechanism or transit fees, which subsequently saw Khartoum demanding transit fees of $32-36 per barrel, which South Sudan countered with an offer of with less than $1 per barrel, a rate more in line with international standards.
Gridlock, as on 20 January South Sudan announced that it would shut in production until a fair deal was reached on transit fees, or an alternative pipeline was built.
The impasse deeply unsettled China, as until July 2011 the former Sudanese unitary state’s daily oil output was approximately 500,000 barrels per day (bpd), the majority of which went to China.
So, what to do?
For South Sudan, the solution has been decided - build an alternative pipeline bypassing Sudan through Kenya to the Indian Ocean. Exploring its options, South Sudan signed non-binding memoranda of understanding with both the Kenya and Ethiopia on proposals to build two pipelines through both countries. The proposed pipeline through Ethiopia would end at Djibouti port, but now the Kenyan option has surged to the forefront. The pipeline through Kenya, if built, will terminate at Kenya’s Lamu port on the Indian Ocean.
South Sudan’s proposed 600 mile-long pipeline to Lamu would have a capacity of an estimated 700,000 – 1,000,000 bpd capacity and become operational within 18 months. Many analysts remain skeptical and believe that if the South Sudan-Kenya pipeline is eventually constructed, it would take at least 2-3 years to complete, given the general logistics, lack of roads, and security concerns surrounding the pipeline route.
In the interim, South Sudan has agreed to pay Sudan just over $9 per barrel to transport oil to its ports. Furthermore, Sudan will receive $3 billion as compensation for revenue lost after South Sudan stopped oil production in January.
Sudan and South Sudan countries have an interest in oil revenue, as it plays a major role in the economies of both. The International Monetary Fund estimates that oil income is responsible over half of government revenue and 90 percent of export earnings for Sudan, while in South Sudan, oil accounts for a staggering 98 percent of the government’s total revenues. Seeing the shift of income as a source of future potential conflict, the IMF estimates that, aside from the oil transit closure, the July 2011 secession of South Sudan could cost Sudan more than $7.7 billion in lost revenues by 2016.
The proposed Djibouti pipeline had both advantages and disadvantages. Its biggest advantage is the presence of the U.S. military base Camp Lemonier.
Eritrea’s biggest disadvantage is that Eritrea is located on the Red Sea’s Bab el-Mandab Strait to sail perilously close to the Somalia coast, where pirates have been active for years.
In contrast, Kenya’s Lamu port opens directly onto the Indian Ocean.
So, in this happy hydrocarbon bypass, only three questions remain.
Who will pay for the South Sudan-Kenya pipeline, with an estimated cost of $3 billion?
After all, Kenya and South Sudan have already signed the agreement for the construction. South Sudan’s Minister for Petroleum and Mining Stephen Dhieu initialed the protocol with Kenyan Energy Minister Kiraitu Muriungi.
The second question is how much South Sudan oil Kenya will appropriate for its own indigenous use before sending the remainder onwards for export. While Dhieu said, “The agreement we have reached is important for beating the 2015 target when we expect the pipeline project to be complete. This is a project we are both relying on for the transportation of our crude oil to the port of Lamu,” Kiraitu said Kenya will only export its oil after meeting the domestic demand. “We are only going to export what we don’t need, fast tracking the construction of the pipeline would come in handy when looking at exporting the extra oil that we expect as we continue to discover more wells.”
And, of course, there remains the third and final question – how will Khartoum react to losing this revenue?
Watch this space.
By. John C.K. Daly of Oilprice.com