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Oct 1, 2012 | 10:15 GMT

4 mins read

Sudan, South Sudan Reach an Oil Deal

Sudan, South Sudan Reach an Oil Deal
ASHRAF SHAZLY/AFP/GettyImages
Summary

Sudanese President Omar al Bashir and South Sudanese President Salva Kiir signed a deal late last week allowing South Sudan to resume oil exports, which had been cut off since January due to a dispute over transit and production fees. The agreement extends through 2015, and production is expected to begin in a few months before increasing to full capacity by mid- to late 2013.

Since South Sudan's secession from Sudan in July 2011, the two countries have found themselves in a mutually dependent economic relationship because South Sudan possesses 75 percent of the formerly shared oil reserves while Sudan controls the pipelines needed to export the oil to the international market. With each country's financial position growing increasingly difficult since the cutoff, they had little choice but to sign the deal to resume production. Though Khartoum will likely try to pressure Juba to sign a permanent deal while the new agreement is still in effect, South Sudan will continue to look for alternative export options that do not rely on its northern neighbor.

Prior to South Sudanese independence, Sudan split oil revenue equally with the semi-autonomous government in Juba. The terms of the current deal effectively extend this 50/50 ratio through a combination of grants offered by Juba and pipeline fees charged by Khartoum.

Sudan-South Sudan Border and Oil Fields

South Sudanese officials have said that crude production could begin as early as December, though the pipelines will need to be flushed before oil can begin flowing again. South Sudan's crude production will begin at about 150,000 barrels per day and will gradually increase to about 325,000 barrels per day, which was South Sudan's average peak production prior to the cutoff. This will provide essential revenue for the South Sudanese government, which relies on oil for 98 percent of its budget.

While both countries have an economic incentive to get oil flowing as soon as possible, certain oil fields are likely to begin production more quickly than others. South Sudan produces two blends of crude: the Dar blend and the Nile blend. A majority of South Sudanese crude is the Dar blend and this type will be the first to come back online. The Dar blend is a difficult-to-process high-arsenic crude that is typically sold at a discount. Dar is usually blended with other fuel oils by Chinese refineries to produce gasoline and other refined fuel products. Besides China, few refineries outside the United States, Japan and other Western countries have the specialized equipment to refine these types of crude, but many had not contracted for Sudanese oil since it had been subject to U.S. sanctions until late 2011 — essentially when the cutoff began. 

The Nile blend will take longer to come back online. A return to full production for the blend may not occur for 10 to 12 months as a result of the damage sustained by pipeline infrastructure during April border clashes in Unity state. The Nile blend is a higher quality, light sweet crude that has become increasingly purchased by Japan, where it is burned for electricity. Prior to the oil shutdown, Sudan and South Sudan had been Japan's second-largest supplier of sweet crude.

Barring any sort of military conflict that shuts down production again, the new agreement will help stabilize the economic situation for both countries through at least 2015. While this deal is in effect, Khartoum can be expected to pressure Juba on agreeing to a permanent arrangement, since Sudan depends on billions of dollars in oil-related revenue from South Sudan. Before it enacted budget cuts to account for the cutoff, about 20 percent of Khartoum's budget came from revenue generated by South Sudanese crude, with another 20 percent coming from its Sudan's own oil fields.

However, South Sudan is apprehensive about being wholly dependent on Sudan for exporting its oil, which is not surprising given the countries' antagonistic history. Consequently, Juba will likely continue to explore its options for exporting its oil. Khartoum does not want to remain dependent on Juba's oil knowing that eventually their share of revenue will decline, but decreasing its dependence will be a difficult long-term process. 

Proposed Juba-Lamu Pipeline

Among South Sudan's alternatives is a proposed pipeline that would run from Juba through Kenya to the port of Lamu on the Indian Ocean. South Sudan and Kenya reached an agreement in January to build the pipeline, which would be able to export 700,000 to 1 million barrels per day, or two to three times more crude than South Sudan can export through Sudan's present network. Construction on the pipeline is expected to begin in 2013 and take two years — precisely when the current deal between South Sudan and Sudan ends. It should be noted, however, that Juba has announced similar plans in the past that have failed to materialize, and Nairobi and Juba signing a deal does not guarantee the pipeline will ever be built. 

The pipeline, which will cost between $3 billion and $5 billion, is a part of a larger $30 billion project that includes road, rail, electrical and port infrastructure in South Sudan, Ethiopia and Kenya. Toyota Tsusho Corporation has offered to construct the project, but South Sudan and Kenya do not have the funds for such a project themselves, and securing financing for it will be difficult while oil is flowing through Sudan.

In the near term, South Sudan's recommitment to using Sudan's pipeline network may reduce the urgency for the Lamu pipeline. Still, Juba will not want to depend on Khartoum's pipeline network in perpetuity, which could provide a boost to the Lamu project when the end of the new agreement nears.

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