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Subdued Optimism as Sudan's Cut Oil Transit Deal

By Jen Alic | Mon, 06 August 2012 22:10 | 0

Sudan and South Sudan reached an agreement on oil transit fees over the weekend, and while unresolved security and border issues will continue to hinder peace, South Sudan has strengthened its negotiating position based on optimism that a massive new pipeline to Kenya will be up and running in a few years, cutting Khartoum out of the picture.

In January, South Sudan shut down oil production over a transit fee dispute with Khartoum after the latter had seized oil shipments in lieu of earlier unpaid transit fees. The absence of the 350,000 barrels of a day is not economically sustainable for either Juba or Khartoum. This was followed by months of military confrontations, with South Sudan in April seizing the disputed oil-producing town of Heglig on the border area.

The deal struck by the two sides covers transit of South Sudan’s oil through Sudan’s pipelines and the distribution of oil revenues. The agreement sets a transit fee of $9.48-$11 per barrel for South Sudan, down from Khartoum’s earlier demand for $36 per barrel transited through its territory. The 3.5-year agreement covers transit through two pipelines, one transporting crude for export and the second transporting light crude to a refinery and then onwards for export.

Significantly, South Sudan will also pay the North a one-time fee of $3.028 billion in compensation for Khartoum’s loss of revenue when South Sudan became independent and took with it some 80% of Sudan’s oil wealth.

Ethiopia is hosting the Juba-Khartoum negotiations, led by the African Union and former South African president Thabo Mbeki. The talks are scheduled to conclude officially on 22 September.

In Ethiopia, the announcement that an oil transit fee deal had been clinched was welcomed with more optimism than is warranted. The optimism stems from the fact that Ethiopia will be refining South Sudan’s oil once a major regional infrastructure plan, which includes a pipeline running from South Sudan to Kenya with a branch to Ethiopia, is up and running. The LAPSSET (Lamu Port-South Sudan-Ethiopia Transit Corridor) will open up East Africa’s market, throw a transport lifeline to landlocked Ethiopia and provide South Sudan with an alternative to oil transport through Khartoum.

The agreement was set at 3.5 years specifically because South Sudan is optimistic that the LAPSSET pipeline will be up and running by then and Juba will no longer need to transit oil through Sudan. It will refine in Ethiopia and transport to Lamu Port in Kenya.

South Sudan’s negotiating power in part lies in the prospect of LAPSSET. But official estimations of the pipeline’s completion are overly optimistic, and three years does not seem feasible, both in terms of financing and logistics and geopolitical dynamics.

So far, while a feasibility study for the Kenya portion of the pipeline has been completed, feasibility studies have yet to be conducted for the rest of the pipeline, including the Ethiopian and Djibouti branches and the end point in South Sudan. 

Khartoum is clearly hoping that the new deal, if it is even implemented, will be perceived as a gesture of good will on its part and slow the rush to get LAPSSET off the ground. While the talks are being led by Mbeki and the African Union, the agreement itself is likely the result of Chinese influence. China has been playing both sides in this struggle rather effectively so far, arming one and investing in the other but doing its best to convince both to keep conflict from getting out of control.

If the deal is actually to be implemented, Khartoum will have to be convinced that it will not be cut off entirely from South Sudan’s oil wealth once LAPSSET is up and running. In the backrooms on the sidelines of the AU-led talks in Ethiopia, Khartoum is being promised something.

By. Jen Alic of Oilprice.com

Jen Alic is a geopolitical analyst, co-founder of ISA Intel in Sarajevo and Tel Aviv, and the former editor-in-chief of ISN Security Watch in Zurich.

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