Six years after South Sudan seceded from Sudan, Sudan may regain some of its influence over the south’s oil industry after the two countries agreed to cooperate in order to boost production.
South Sudan broke from Sudan in 2011 and took with it around 350,000 bpd in oil production. Although production is now mostly in landlocked South Sudan, the export outlet of all the oil lies in its northern neighbor on the Red Sea.
Earlier this year, Sudan and South Sudan agreed to open direct trade along the border and restart production in the oil fields in South Sudan that are currently not functioning, in a deal that will serve as an economic lifeline to both countries. South Sudan gets oil export revenues, while Sudan gets transit fees for the pipeline that its southern neighbor uses to export the oil. And oil income is the majority of foreign hard currency revenues for both countries.
Sudan has now gone one step further by offering safe lodgings for oil workers, electricity, and building materials. Sudan’s gain from this is a $25 per barrel fee that South Sudan pays to use Sudan’s pipeline to ship the oil to the Red Sea. Sudan’s offer to help its southern neighbor could also be a strategy to discourage it from looking at alternative export routes—for example, via proposed pipelines in Kenya, Uganda, and Tanzania to the Indian Ocean, according to Bloomberg.
After South Sudan’s secession from Sudan, the two countries have been mutually dependent on oil revenues, with the south owning 75 percent of the oil reserves, while the north owns the only current transport route for the oil to international markets. After the secession, a dispute over the transit fees for using Sudan’s pipelines for South Sudan’s production led to a shutdown of the production and transportation of oil. In 2012, South Sudan and Sudan reached an agreement that allowed South Sudan to resume its oil exports via Sudan. Related: IEA Dashes Bullish Sentiment In Oil
A civil war then broke out in South Sudan in 2013, further complicating oil production issues. And the oil price crash the following year lowered oil income for the ravaged economies of both countries.
South Sudan is now studying the benefits of joining OPEC, with the aim of doubling its oil production in 12 months from the current 135,000 bpd, South Sudan Oil Minister Ezekiel Lol Gatkuoth said last month. With the help of Sudan, South Sudan will seek to restart production in the Unity oil producing region early next year, and total production will return to its 2011 peak within a year.
Sudan’s Information Minister Ahmed Bilal Osman explained Sudan’s stance to Bloomberg, claiming that “When [South Sudan] need our assistance, we have to give them and in this way both countries will benefit when this oil begins flowing again,”.
Analysts see the mutually dependent oil relationship as now yielding more power and leverage for Sudan over South Sudan.
“Sudan is adding an extra layer of dependence for South Sudan,” Luke Patey, a researcher at the Danish Institute for International Studies (DIIS), told Bloomberg.
“To a certain degree, it is a reversal of the economic independence South Sudan won after separating from Sudan in July 2011,” Patey noted.
In a paper published by the Oxford Institute for Energy Studies in May 2017, Patey said that after the latest pipeline transit agreement expires at the end of 2019, “South Sudan’s oil production will very likely have rebounded, and it will be in a difficult bargaining position against Sudan.”
“Khartoum may very well try to extract further political or economic concessions from the advantageous position its oil infrastructure offers,” Patey wrote.
South Sudan’s chances of using other pipeline routes (that are currently in planning stages only) are slim, according to Alex de Waal, executive director of the World Peace Foundation at Tufts University in Massachusetts.
“South Sudan would like an alternative arrangement, but doesn’t have the money or clout with oil companies for it to be a realistic prospect,” de Waal told Bloomberg.
It looks like the most realistic prospect is that Sudan and South Sudan will continue to be mutually dependent on oil reserves for their hard currency incomes.
By Tsvetana Paraskova for Oilprice.com
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