South Sudan's Oil Impasse

5 MINS READJun 4, 2012 | 09:58 GMT
South Sudan's Oil Impasse
South Sudan's chief negotiator Pagan Amum in Addis Ababa on May 29

South Sudanese and Sudanese officials met May 29 in Ethiopia for African Union-led talks over a settlement that would allow South Sudan to resume oil exports through Sudan. Juba has a small window during which it can continue to keep oil production offline while it seeks alternative export routes to Sudan's oil pipeline. If South Sudan cannot find such an alternative, it will have to reach a settlement with its northern neighbor.

As a landlocked oil-exporting country, South Sudan must bring its oil to market via pipeline through another state. Sudan filled this role until a tariff dispute with South Sudan led Khartoum to suspend exports.

Prior to 2011, Sudan's oil sector accounted for 40 percent of Khartoum's total revenue under an agreement whereby South Sudan (semi-autonomous at the time) and Sudan split oil revenue equally. But South Sudan's secession left Sudan holding 25 percent of previously shared oil reserves. When Juba offered less than $1 dollar per barrel for access to Sudanese pipelines, Khartoum received only 25 percent of combined oil revenues, reducing its total revenues by 20 percent. Khartoum countered with a fee of $36, which would have kept its total revenues close to pre-secession levels. When the south did not pay this fee, Sudan seized crude worth $815 million. South Sudan responded by shutting off its oil production. 

South Sudan's Financial Dilemma

Oil exports accounted for 71 percent of South Sudan's $13 billion gross domestic product in 2011. Oil exports also provide 98 percent of its revenues. Without this income, Juba has tried to survive on foreign aid and its foreign exchange reserves. But it does not receive sufficient loans from the West or China to sustain it, and its foreign exchange reserves are dwindling.

In February 2012, South Sudan began implementing austerity measures to maintain its foreign reserves. Despite these measures, the World Bank expects South Sudanese foreign reserves to run out by July 2013; further cuts will only delay their total depletion until December 2013. Even if South Sudan were able to triple its non-oil revenue, insolvency would still loom.

Foreign investment in South Sudan's oil sector could provide another source of income. If South Sudan could secure foreign financing, it could build a pipeline through Kenya or another country. This in turn could foment more investment in its oil sector once foreigners saw a way to get crude to market

But China, which imported the majority of South Sudanese oil, already has rejected Juba's request for additional funding for a crude oil pipeline through Kenya. Meanwhile, Western interest in South Sudan's oil sector is low after years of sanctions on united Sudan, making significant Western investment unlikely.

Israel is one of South Sudan's most likely sources for foreign money. Shared tensions with Khartoum make them natural allies. Before South Sudan's independence, Israel was one of the strongest backers of the Sudan People's Liberation Movement, South Sudan's present army. But Israel typically has provided only arms and military training, and it alone is not likely to close South Sudan's fiscal gap. 

Israeli arms would prove most welcome, however, since a quarter of South Sudan's budget goes toward security. South Sudan cannot reduce the money it allocates to arms if it is to continue pressuring Sudan on their shared border

Foreign aid typically must be spent on health, education and infrastructure, which does not directly help South Sudan militarily. Any reduction in South Sudan's military budget would make it easier for the stronger Sudan to wrest control of more disputed oil fields along the border. And while South Sudan's informal economy, in which the majority of the country's citizens are involved, might remain unaffected, the government would cease to be able to project military power on the border.

A Negotiated Solution

South Sudan's fiscal challenges make a compromise with Sudan look more appealing, hence Juba's willingness to participate in the May 29 African Union-led talks. To further enhance the appeal of a compromise, the U.N. Security Council threatened sanctions against both countries May 4 if they did not cease fighting and return to negotiations. (Sudan, which cannot afford sanctions, capitulated and pulled out its troops from the disputed Abyei border region.) 

Sudan has the advantage in these negotiations. If Juba pays the higher tariffs, then Khartoum benefits greatly. If Juba does not pay them, the south is cut off from its primary source of revenue, strengthening Khartoum's position.

Khartoum can therefore afford to wait until the government of South Sudan loses strength and caves in or until it is sufficiently weakened for Sudan to strike militarily. In the meantime, Khartoum will half-heartedly negotiate with Juba, but nothing will emerge from the talks until Juba accedes to Sudan's wishes. Since South Sudan cannot afford to wait forever, it most likely will yield — unless a foreign backer can come to Juba's aid.

A Foreign Benefactor?

A consortium of investors led by billionaire Rubar Sandi of the Sandi Group reportedly have meet with South Sudanese Vice President Riek Machar in Juba twice in the past three months, promising increased investment into South Sudan. The group also wants to buy at least 5 million barrels of oil from South Sudan — roughly half the country's yearly production — and would be responsible for transportation. 

The Sandi Group is a logistics contractor and development group that works in developing countries wracked by violence. It often hires its own security personnel to protect its investments. In Iraq, the Sandi Group once boasted it was the war-torn country's largest private employer. It eventually amassed 7,000 personnel there, including security personnel and logistics experts. Such experience in logistics in Iraq as well as Afghanistan positions the group to secure oil fields in contested regions along the Sudanese-South Sudanese border. It could then reach an agreement with Khartoum, or possibly export oil by truck through another country like Kenya, relieving South Sudan's financial pressures in the process.

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